How Trump’s obsession with China could turn America into Japan
As a real estate mogul in the 1980s, Donald Trump railed against Japanese economics. Now, to counter China, he is fatefully emulating them.
This analysis is being published by the South China Morning Post as part of a content partnership with POLITICO. It was written by William Pesek and originally appeared on politico.com on May 23, 2018.
Donald Trump’s plan to make the American economy great again is deceptively simple: wrestle jobs, market share and indeed the future back from China. But what if the U.S. president, in the process, morphs America into Japan?
Three decades ago, Trump the real estate mogul railed against Japan-style tariffs and a zero-sum view of economic relationships. Japan, in the midst of its own economic boom, had “systematically sucked the blood out of America” and American manufacturing, he said in a 1989 “Morton Downey Jr. Show” interview. “They have gotten away with murder. They have ended up winning the war.”
Now, it’s China that is “raping” America, in Trump’s telling. When Trump told “Good Morning America,” in November 2015, that the Chinese “want to take your throat out, they want to cut you apart,” his comments smacked of déjà vu to Japanologists. “It’s the greatest theft in the history of the world,” he said of Beijing’s trade barriers in May 2016. Just last month, he fired off a tweet, charging “STUPID TRADE” with China, and another one slamming Beijing for “playing the currency devaluation game.”
But ironically, as Trump girds for economic battle with China, he is making many of the same mistakes Japan made in the mid-1980s, leading to its current stagnation. Rather than opening the economy, embracing new ideas and technologies, and welcoming competition, Trump has pushed protectionist gimmicks, currency manipulation and tax cuts aimed at the 1 percent—an approach that risks walling off the United States from a global economy racing forward.
Becoming more like Japan might not sound so bad on the surface. With some of the highest living standards anywhere, ultralow crime, top-rate infrastructure and humankind’s longest lifespans, the country hardly seems a cautionary tale. Japan’s economy, though, is another story. Twenty years of negligible growth and deflation have shackled Japan with the world’s largest debt burden, some of the lowest interest rates and a stimulus addiction that is deadening innovation. More than anything, Japan’s economy today is stuck.
Japan, thankfully, has gotten a boost lately, due to buoyant demand from China, the United States and Europe; Japan‘s economy has grown about 1 percent, on average, over the past several months. But even as the country is still experiencing its longest expansion since the 1980s, wages have stagnated. That’s because for 20 years now, rather than lower trade barriers, increase productivity, and rekindle innovation by modernizing education and training, Japan has relied on the now-obsolete 1980s economic model that originally propelled it to top global status: yen devaluations, fiscal and monetary stimulus, bailouts for industries like banking and steel, lower taxes, higher tariffs and non-tariff barriers as well.
This, oddly, is the future Trumponomics is courting as it seeks to transport America back to a simpler time when upstarts like China weren’t reordering global trade. His strategy has three prongs. First, there is the $1.5 trillion tax cut Trump signed in December, which he argued would put more money back into the pockets of individuals and businesses. Second, on January 24, Treasury Secretary Steven Mnuchin declared dead Washington’s 23-year-old strong dollar policy. While Mnuchin tried to walk back his comments, they fit with Trump’s campaign-trail comments about a “too strong” dollar “killing us.” (Indeed, the yen’s 2 percent gain against the dollar this year suggests traders are bracing for a weaker dollar, and China’s yuan is up 2 percent this year.) Third, and most importantly, Trump is trying to siphon jobs and investment from China. In March, his administration rolled out tariffs on steel (25 percent) and aluminum (10 percent), announced about $150 billion in levies on Chinese goods and issued vague threats of more to come. Despite Mnuchin’s statement over the weekend that a trade war is “on hold” as negotiations continue, the administration’s next move is unclear, and Asia is still bracing for more hits to come—both in terms of tariffs and a weaker dollar.
For all his chest-thumping about low unemployment and stock gains, Trump isn’t getting under the hood of an economy being challenged by nimbler upstarts such as China, India and South Korea. None of Trump’s policies will increase U.S. productivity, reduce inequality or pressure executives to raise salaries. After Ronald Reagan’s tax cuts in the 1980s nor George W. Bush’s in the 2000s, companies prioritized share buybacks, dividends, paying down debt, and mergers and acquisitions—not wages—and Trump’s cuts offer no incentives for executives to fatten paychecks or move jobs to America. Moreover, none of Trump’s policies seeks to repair crumbling infrastructure, cap runaway government borrowing or stabilize health care markets. Washington isn’t doing much to invest in education, ensure that tech-heavy industries have their pick of global talent or prepare the workforce for the real threats to U.S. workers: automation and artificial intelligence. The jobs Trump seeks to claw back from China—lower-wage manufacturing slots that the workers can’t do competitively because of higher wage and benefit levels—are gone forever. To even try to get them back is futile.
Awakening America’s animal spirits to meeting China’s challenges requires bold structural change. Instead, Trump is following Japan’s playbook—in dangerous ways. He blames China for stagnant U.S. wages, not unlike how Japan has long blamed China. But draconian tariffs on China would ignore the scope of Washington’s 102 trade deficits with other economies around the globe. These many imbalances reflect inadequate domestic savings that will only grow more inadequate with America’s budget deficit thanks to the tax cuts passed in December. In the 1980s, Japan developed its own revenue-shortfall troubles, which, over time, left Japan with the world’s largest debt burden relative to the gross domestic product.
As U.S. debt imbalances grow, Trump’s protectionist turn could boost borrowing costs. That raises another lesson from Japan, notes Yale University’s Stephen Roach, a former chairman of Morgan Stanley Asia: the dangers of a country becoming “overly dependent on asset appreciation as the sustenance of growth.” Rather than creating growth from the ground up with startups and new higher-value-added industries, Trumponomics relies almost exclusively on an asset-appreciation scheme akin to Japan’s three decades ago, particularly via stock market gains. Trump has also dropped hints that the Federal Reserve should go easy on interest rate hikes. But in the 1980s, Japan’s easy-money policies fueled asset bubbles—which ultimately burst. Another Japan-like mistake Trump is making is bombarding an economy that doesn’t need it with short-term stimulants. Trump’s tax cuts toss a large burst of stimulus at an economy already at full employment. Overheating risks abound.
“The U.S. strategy is seriously flawed,” Roach warns.
Japan saw how similarly flawed policies could backfire, as its go-go 1980s ended with an epic crash. Tokyo’s so-called Minsky moment—when a debt-fueled boom comes to a nasty end—shocked fans of Harvard professor Ezra Vogel’s 1979 best-seller, Japan as Number One. By 1990, when then-Congresswoman Helen Bentley, a Maryland Republican, lamented that America was “rapidly becoming a colony of Japan,” the tide had already turned—Japan was entering its “lost decades.” By 1992—when Michael Crichton’s novel Rising Sun, about a shadowy network of Japanese chieftains asserting economic hegemony, was flying off bookshelves—Japan was reeling from bubbles gone awry, experiencing a sequel of deflation, massive stimulus and huge bank bailouts. By 2011, China had surpassed Japan to become the No. 2 economy after America.
Japan is still dealing with the manifestations of a two-decade economic funk, most obviously deflation. Since 2000, the Japanese government has treated falling consumer prices as the cause of weak consumer and business confidence, but it’s really a side effect. The end of Japan’s credit-fueled boom left companies bloated, overextended and unable to sustain the profit growth of the 1980s. As caution set in, investment and wage growth slowed markedly. A steady downshift in sentiment across economic sectors ate away at pricing power and consumption.
Even today, Japan remains Exhibit A for the limitations of the trickle-down ethos at the root of Trumponomics. In December 2012, Prime Minister Shinzo Abe rolled out his own three-pronged revival scheme. The first phase—ultralow interest rates—weakened the yen and propelled asset prices higher. Construction ahead of the 2020 Tokyo Olympics comprises the fiscal-loosening portion of Abe’s plan. But a deregulatory big bang, the third and by far most vital phase, has barely materialized. While Abe’s team has strengthened corporate governance, it has been glacial about moves to loosen labor markets, catalyze a startup boom, empower women in the workforce and slash bureaucracy. With history’s most aggressive monetary easing regime and a weaker yen, Abenomics boosted asset prices, making the wealthy richer as wages have stagnated.
As president, Trump appears to have merely replaced Beijing in the sinister role in which Trump himself cast Tokyo in the 1980s. In doing so, he risks doing more to make China great again—rather than America. The White House forgets that the United States is now a services economy; exchange rates aren’t the panacea they were more than 30 years ago. It ignores, too, how China is investing hundreds of billions of dollars in becoming the next Silicon Valley. President Xi Jinping is also striving to dominate renewable energy, AI, robots, software, fintech, self-driving vehicles and space exploration. Trump, by sharp contrast, is refocusing on coal, cutting emissions standards for Detroit and repelling foreign talent. He is punting on structural reforms, Japan-style, needed to step up America’s game against China.
Today, Japan muddles along, thanks to a high-savings culture and deep social safety nets. But could most U.S. households withstand 10 to 20 years of negligible growth and flat wages? The United States might have a hard time keeping it together in the event of a lost decade. Taxes have already been slashed, and there’s little scope to cut borrowing costs. The risks would seem less dire if Trump weren’t dragging America back to 1985 to beat a China gearing up for 2025. The way Trump is going, “great” is destined to refer to America’s debt burden, the magnitude of the asset-market correction to come, and the gap between the 1 percent and everyone else. We’ve seen this movie before. It doesn’t require Japanese subtitles to know it could end badly for Trump’s America.
William Pesek is a Tokyo-based author of Japanization: What the World Can Learn from Japan’s Lost Decades. He has been a columnist at Barron’s and Bloomberg.