US-China trade relations: back to a Japanese future?

In July 1987 a group of Congressmen stood on the steps of the US Capitol and took turns demolishing a Toshiba portable radio with a sledgehammer, in a much-publicised gesture of furious frustration at what they considered to be Japan’s unfair competitive practices and its large and its stubborn bilateral trade surplus.

Like China today, Japan then was the target of a US trade offensive aimed at thwarting its inroads into American markets and at removing its barriers to US exports. And like president Donald Trump’s recent provisional settlement of his trade war with Beijing, temporary truces were procured by periodic Japanese agreement to buy more US goods and promises and to make—often largely cosmetic—policy changes.

Then, too, the main battleground was high technology products such as microchips and computers, in which Japan had rapidly acquired formidable strength that seriously threatened US industrial dominance. Furthermore, unlike China, Japan posed a growing challenge in other industries, such as machine tools and cars, at the expense of American competitors.

But the conflict was about far more than trade. Again, just as with China today, it was at root a battle between economic systems that pitted US free-market capitalism against a Japanese model that many Americans saw as relying on massive state planning and intervention orchestrated by the Ministry of International Trade and Industry—a body to which many in the west attributed superhuman powers—coupled with incestuous interlocking relationships that enabled companies to keep a largely closed domestic market to themselves.

A group of American authors, known as “revisionists,” argued, in books and articles, that the US could not compete with this system and that unless it found a way to fight back, it would become a mere colony of Japan. Their mood of near-hysterical defeatism was captured in Rising Sun, a best-selling novel by Michael Crichton, who wrote: “They haven't succeeded by doing things our way. Japan is not a Western industrial state; it is organized quite differently. And the Japanese have invented a new kind of trade--adversarial trade, trade like war, trade intended to wipe out the competition, which America has failed to understand for several decades.”

Nor were American fears of a Japanese takeover confined to business and commerce. They spilled over into the military sphere when it became known that the guidance systems of US cruise missiles relied on optical hardware produced in Japan.

The flames were fanned by essays entitled “The Japan that can say no,” penned by the boss of Sony and the right-wing nationalist mayor of Tokyo. They argued that the US economy was gravely weakened by flaws in its corporate system and that Japan should assert itself more vigorously and use its technological prowess as a weapon with which to contest American leadership.

Just as with China today, anguished American soul-searching was fuelled by a widespread feeling that the US had been caught napping because of its own critical foreign policy failures and misjudgments. In China’s case the error was summed up in former president Bill Clinton’s prediction that that, as the country opened up and grew richer, it would become “more like us.”

Japan, on the other hand, had long been beholden to the suzerainty of the US, which created its constitution and political system and to which Tokyo had sub-contracted its defence, security and much of its foreign policy. Suddenly, it seemed, this once meekly obedient pupil was threatening to become America’s master.

There was, however, an important difference between today’s China-bashers and the “revisionists” of the late 1980s. The latter, while decrying the threat they believed the Japanese model posed, also saw much to admire in it. Indeed, they argued that if the US could not beat the Japanese, its only hope was to copy their way of doing things.

One American commentator, a business school professor no less, went so far as to propose that the US should create its own version of keiretsu, Japan’s tightly knit financial and industrial conglomerates, by engineering a merger between IBM, Citicorp and Intel.

Ironically, just as the revisionists’ drum-beating was reaching a peak of frenzy, the Japanese model was crumbling from within. Vertiginous debt, serious capital misallocation, excess investment and the popping of a huge property bubble triggered a balance sheet recession and a string of corporate casualties, paving the way for persistent deflation and more than a lost decade of growth. The US, meanwhile, staged a dramatic economic and industrial recovery.

Many observers detect symptoms of Japan’s problems in China today, as it struggles to deleverage an economy and financial system bloated by an orgy of borrowing and an overheated property market while preventing a further slowdown in economic growth that depends heavily on continuing injections of debt to keep going.

Could it be that China will go the same way, suffering a severe crash that ravages its economy and blunts its advances om global markets, at the very moment when many in the west fear its industrial ascent to be unstoppable? It is impossible to know, though a number of commentators—in China as well as in the west—believe the risks of such an outcome are rising.

They should beware of what they wish for. While Japan’s lost decade sent it into retreat on the world stage, a serious reversal of fortunes in China seems unlikely to follow quite the same pattern.

The reason is that the Chinese Communist Party’s political legitimacy rests mainly on two legs: delivering steady improvements in living standards to the mass of the people and maintaining popular support through nationalist drum-beating. When the party’s capacity to achieve the former has been weakened, it has often raised the volume of the latter and turned a more aggressive face to the world.

If that happened again, China would be likely to become an even more difficult and unpredictable partner to deal with. Recent clashes over trade and industrial competition could prove to be only the prelude to far more turbulent times to come.