China won’t repeat Japan’s Plaza Accord mistake
Atrade war is looming as US President Donald Trump signed an executive memorandum on March 22 that would impose tariffs on $60 billion in Chinese imports. When coming to the analysis of the trade conflict, some compare it with the situation in 1985, the year the Plaza Accord was clinched. Despite differences between Japan then and China now, Beijing can learn some experience from Tokyo.
The Breton Woods System was founded, soon after the end of World War II. The US, with its super economic power, put the blame on countries suffering from a trade deficit for causing trade imbalance. It was because the US was the largest trade surplus country. Decades later in the 1970s, massive capital outflow and migration of manufacturing turned the US into a trade deficit nation. Washington started to shift the blame to surplus countries.
The Plaza Accord was signed in September 1985 by the US, the UK, France, West Germany and Japan in a move to shrink Washington’s budget and trade deficit. Prior to the agreement, Japan had become the world’s biggest surplus and creditor country. Products made in Japan were seen everywhere across the world.
In that crucial year of 1985, the five countries – known as the G5 at that time – agreed to depreciate the US dollar in relation to the Japanese yen and German Deutsche Mark through interfering in currency markets. The adjustment prompted a sharp rise in the yen and consequently an economic downturn in Japan. The US, after shortterm relief, allowed parties involved to adjust their policies. Japan then lowered the interest rate. But given the overheated economy during the 1980s, the ultra-low interest rate ultimately led to an economic bubble two years later.
The US cannot take exchange action against China. China is now in an era of economic transition and tends to adopt a stable interest rate policy. Therefore Washington can hardly wage a trade war with Beijing as it once did with the Plaza Accord.
The structural differences between China and Japan also make it difficult for the US to strike China with tariffs. Back in the 1980s, Japan’s manufacturing industry dealt a heavy blow to the US. With trade high on the agenda, the Japanese government allowed free movement of short-term capital to address the loan issue while limiting long-term capital that directly invested in Japan. It hence invested in almost the whole manufacturing industry and exported products to the US, making it easy for Washington to hit the economy with tariffs and exchange action.
China is in a different situation. A certain proportion of its export-oriented manufacturing enterprises are foreignfunded. They import raw materials and export manufactured products to foreign countries. The only thing they do in China is assembling or processing. So it seems that China has exported a lot of goods to the US which are dominated by foreign, even US companies. By this rationale, Washington will not see the expected results by imposing tariffs on China. Instead, the tariff move will hurt the well-being of its own people.
When confronting the US, we must look at the full picture and prepare for the future. We must mull over what will happen after a possible trade war before considering how to fight the US. The Chinese people are rich in strategic thinking. In ancient times, we had the Art of War and the Thirty-Six Stratagems. Now we need to see clearly where the world economic structure and the new institutional arrangement are heading while trying to achieve a new pattern.