Trade war revisited: a US clash with China won’t be like its 1980s feud with Japan

Robert Boxwell says that US companies can benefit from a trade war, just as they did from the clash with Japan in the 1980s. The effects of this dispute, though, are likely to be more painful than they were 30 years ago

PUBLISHED : Sunday, 11 February, 2018, 10:34am
UPDATED : Friday, 23 March, 2018, 12:58pm

America’s last “trade war”, with Japan in the 1980s, was one of the best things that ever happened to American industry and consumers, because American businesspeople rose to the challenge of the time. Today’s looming trade war with China will be vastly different though, as will be how American industry responds. It’s coming soon to a theatre near you and may have a long run.

In the 1980s, Japanese companies were clobbering American competitors across a variety of industries, their success due to a mix of innovative business practices and products, US arrogance and a weak yen. The latter, tolerated by successive American administrations as a cost of helping post-war Japan, was largely solved as part of the 1985 Plaza Accord. 

By 1995, the yen approximately tripled in strength against the dollar. Japanese businesses, innovative and industrious, remained competitive, not a few by opening plants in United States, which were largely welcomed by Americans. There was little point in Tokyo giving a belligerent response. They were a military ally, not an adversary like Beijing. Perhaps more importantly, the Japanese were rich. Today, with US and Chinese militaries eyeing each other and millions of Chinese still poor, something closer to the opposite describes the situation.

The trade war with Japan had an upside for American industry: the quality movement that spread across the country, championed by Ronald Reagan’s Department of Commerce. 

For a government that’s not in the business of business, it was the closest thing to a national economic policy many Americans had seen. Businesspeople, previously outraged by the Japanese “stealing” trade secrets, decided to join the club and took to “benchmarking” on an industrial scale, often with Japanese companies as their targets. The benefits of all that attention to quality were large and durable for US businesses and consumers. In the end, the “war” wasn’t very destructive.

China-US trade and investment is thriving in pockets on the ground, despite the policy frictions

China came along around this time, a market US chief executives drooled over, though with one eye on their own government, which subjected Beijing’s trade privileges to an annual human rights review. Then president Bill Clinton, after campaigning as a human rights champion vis-à-vis China, did an about-face after taking office. Capitalism had defeated totalitarianism in the Soviet Union; it would do the same in China. He became the China-WTO champion. In early 2000, he said: “Economically, [bringing China into the World Trade Organisation] is the equivalent of a one-way street. It requires China to open its markets ... All we do is to agree to maintain the present access which China enjoys.”

Beijing is in no mood to back down in a trade dispute with Trump, whom the Chinese press portray as a buffoon 

When the House passed a bill two months later to extend permanent normal trade relations with China, he doubled down, citing the politics. “We will be exporting, however, more than our products. By this agreement, we will also export more of one of our most cherished values, economic freedom. Bringing China into the WTO and normalising trade will strengthen those who fight for the environment, for labour standards, for human rights, for the rule of law.”

The uncertainty of annual trade renewal gone, scores of American companies soon moved factories to China, with hundreds more to follow in the next decade. Many agreed, regretfully now, to transfer valuable technology in exchange for promises of access to China’s markets. Americans only gradually figured out what was happening to them. It was a one-way street all right – good thing Clinton wasn’t a bus driver.

It’s a matter of time before Trump and China embrace the TPP

The promise that political reform would follow economic reform was fatuity. Capitalism brought reform to the USSR by bankrupting the Soviets. How exactly was making China rich supposed to get the same result? Two decades after David Halberstam’s The Best and the Brightest recounted the story of elite-educated, clueless Americans misunderstanding an Asian adversary, America’s elite-educated president and his team did it again.

Beijing is in no mood to back down in a trade dispute with current American president Donald Trump, whom the Chinese press portray as a buffoon. Even if Chinese President Xi Jinping wanted to, it would be difficult, politically, to blink. But if he’s going to bring the Chinese dream to another half-billion Chinese, he has to find some way to keep investment flowing in and exports flowing out against an American tide flowing the other way.

China’s trade gap with US narrows, but Donald Trump is unlikely to be smiling about it

Trump can’t back down either. The trade problems with Beijing, accumulated over three administrations, were made salient by Xi’s assertiveness, and are not going away on their own. It’s hard to see Trump doing much different than fight the fight he campaigned on. It’s likely to cause economic suffering for people in both countries. Arguing which side has more to lose is pointless; both have much to lose.

Trump’s tariffs may hurt his Asian allies, along with the US

It’s overdramatic to say Americans came together during the trade war with Japan, but business collectively acknowledged poor American quality and Democrats didn’t fight a Republican-led initiative to improve it. But no matter where Trump leads, “the resistance” will scream, despite having no alternative solution. 

Arguing which side has more to lose is pointless; both have much to lose

That’s the nature of Washington today and economic “war” with Beijing will not pull them together.

There may or may not be much benefit to China from all this, but it’s possible there will be lasting benefits to the US, where business, ever resilient, will respond. Businesspeople know tariffs are an ephemeral palliative, providing cover while they make adjustments. Industries the Japanese were beating to death in the 1980s, like steel and autos, lowered costs and capacity, upgraded plants and technology, overhauled operations and revised labour agreements; the things for which capitalism is celebrated and always can do – if the playing field is level. 

American business will come out stronger one way or another. But getting there is likely to be a lot more painful than during the trade war with Japan.

Robert Boxwell is director of the consultancy Opera Advisors