The US won a trade war against Japan. But China is a whole new ball game
Hong Kong (CNN Business)As President Donald Trump lands in Japan Saturday amid a worsening trade war with China, he could well be thinking back to a previous economic spat between Washington and an Asian economic powerhouse.
In the 1980s, Japan was the big bad. Its economy was booming — the second largest in the world — and many in the United States feared they were about to be overtaken.
Articles were published warning of the "Japanning of America" or an "economic Pearl Harbor," as Japanese businesses bought US companies and landmarks. Lawmakers and commentators warned of a growing trade deficit between the two countries, and complained of Japanese firms stealing US intellectual property and taking advantage of unfair trade deals.
In an interview with the "Morton Downey Jr. Show" in 1989, Trump himself complained that Japan had "systematically sucked the blood out of America — sucked the blood out!"
"It's a huge problem, and it's a problem that's going to get worse," Trump said of the US-Japan trade balance. "And they're laughing at us."
By then, however, change was already happening. And far from overtaking the United States, Japan was about to fall far behind.
Trade war
After President Ronald Reagan took office in 1981, the United States started pressuring Japan to open its market up to American companies and reduce the trade imbalance between the countries.
While Japan agreed to measures including a limit on the number of cars it exported to the United States, panic over Japanese trade power grew — and lawmakers on both sides demanded action.
In approving a bill calling for tough trade reprisals against Japan, Robert Packwood, then Republican head of the Senate's finance committee, promised to give Tokyo "an eye for an eye ... that is all they understand."
During a 1985 finance committee hearing, Democratic Sen. Max Baucus said that: "Reagan predicted 'a future in which commerce will be king, the eagle will soar, and America will be the mightiest trading nation on Earth.' Well, commerce may be king. And eagles may be soaring. But they're not American eagles. America's trade performance has never been worse."
That year, five countries — the United States, West Germany, France, the United Kingdom and Japan — signed the Plaza Accord, devaluing the US dollar against the Japanese yen (and the German Deutsche Mark). This was a boon for the United States, leading to an increase in exports and a lowering of its trade deficit with many Western European countries.
Yet the Plaza Accord wasn't the end of US action against Japan. In 1987, Washington imposed 100% tariffs on $300 million worth of Japanese imports, effectively blocking them from the American market.
Things quickly turned sour for Tokyo. As the yen increased in value, Japanese products became more and more expensive, and countries turned away from the one-time export powerhouse. Efforts by the country's central bank to keep the yen's value low sparked a stock price bubble, the collapse of which helped push the country into recession and a "lost decade."
"Japan's export and GDP growth essentially halted in the first half of 1986," economists Joshua Felman and Daniel Leigh wrote in a report for the International Monetary Fund. They concluded that while the Plaza Accord did not cause Japan's economic downturn by itself, it did trigger a series of events — compounded by poor decisions in Tokyo — which led to the collapse.
Competing lessons
Some of Trump's first forays into politics involved railing against Japan during the 1980s and early 1990s. During that time, he started calling for the use of tariffs as a trade weapon.
While he has not referenced the historical US-Japan relationship during the recent China conflict, Washington's success against Tokyo could influence his thinking on how to handle Beijing. One of his key advisers on trade, Robert Lighthizer ( Article about Lighthizer below this article. ) , also took part in Japan negotiations in the 1980s.
In 2011, as Trump flirted with a presidential run, Lighthizer praised his "skepticism toward pure free-trade dogma."
"The icon of modern conservatism, Ronald Reagan, imposed quotas on imported steel, protected Harley-Davidson from Japanese competition, restrained imports of semiconductors and automobiles, and took myriad similar steps to keep American industry strong," he wrote.
Yet while Lighthizer and Trump may take positive lessons from the 1980s trade war, Beijing is also paying attention — and China's leaders have no intention of copying Japan's mistakes.
In an editorial last year, China's Xinhua state news agency warned that "Japan was seriously hurt by its improper response" to the Plaza Accord and US trade pressure.
It blamed the US for scapegoating Japan for problems in the domestic economy, adding a "strong protectionist sentiment was the direct driving force behind the Plaza Accord."
This has been a common theme in state media coverage of the trade war -- that the US is seeking to blame Beijing for matters outside its control.
Donald Trump in 1989. At that time, he was inveighing against Japan for taking advantage of the US on trade.
Repeating history
Of course 2019 is not 1985, and China is not Japan. Beijing is far stronger both economically and politically than Tokyo was in the 1980s, with Japan dependent on the United States for national security and less willing to risk Washington's ire.
"Japan was an easy target for US bashing. After the second world war, Japan has been both politically and economically dependent on the US, resulting in limited bargaining power to counteract the US," analysts Alicia Garcia-Herrero and Kohei Iwahara wrote last week. "China is in a better position to resist US pressure."
The risk in this instance isn't of a failure to learn from history, but that both parties could take the wrong lessons.
Trump and Lighthizer, having cut their teeth in the battles against Tokyo, could assume that a similarly aggressive policy will prompt Beijing to bend to their demands. Chinese negotiators have already learned what happens when you push back against Trump, with trade talks collapsing this month after Beijing reportedly attempted to alter the deal at the last minute.
The failure of those talks led to an immediate escalation in tensions, with new tariffs imposed by both sides. This could be blamed on Beijing's late changes, but equally on Washington's unwillingness to negotiate.
At the same time, China's interpretation of the 1980s could also lead it to make missteps.
On Thursday, Foreign Ministry spokesman Lu Kang said any "mutually beneficial deal must be based on mutual respect, equality and win-win outcomes." But as many observers have noted, what China's leaders regard as "win-win" often means a win on its terms, and a desire to avoid repeating Japan's mistakes could result in Beijing refusing to take a minor loss that could ultimately lead to a better overall agreement.
Japan is currently celebrating the beginning of the Reiwa era, under a new emperor, a time to wipe the slate clean and start again. US and Chinese trade negotiators might be better off copying that lesson than those of the 1980s.
*****************************************
Below an article from Foreign Policy. Thank you FP.
You Live in Robert
Lighthizer’s World Now
Trump might look like he's flailing on trade—
but it's all going according to his trade czar's plan,
which has been years
in the making.
BY QUINN SLOBODIAN
AUGUST 6, 2018, 5:46 PMeoliberalism.
Last month, U.S. President Donald Trump’s trade
representative, Robert Lighthizer, sat through two hours of grilling by
Congress, fending off grievances about the Trump trade war’s effects on Alaskan
salmon, Maine lobsters, and Delaware chickens. “Nobody is declaring war on
Canada,” Lighthizer protested, even as he conceded that the use of Section 232
of the 1962 Trade Expansion Act to levy tariffs on steel and aluminum was
premised indirectly on assessing that country as a national security threat.
When pushed on whether he had this assessment vetted by the National Security
Council, he demurred that doing so was the Commerce Department’s
responsibility, not his own.
Lighthizer’s performance was consumed by such efforts to
smooth the ruffled feathers of his congressional inquisitors. Mostly, this
involved assuring lawmakers that progress has been made in negotiations with
the European Union and trade partners such as Mexico and Canada, and dispelling
the impression that new tariffs on China had “stirred up a hornet’s nest of
problems in other parts of the world with trusted allies,” as one
congressperson put it. And yet it would be a mistake to attribute Lighthizer’s obsequious
performance to a lack of self-confidence. The trial lawyer known for having a
life-sized portrait of himself in his home has never lacked for the latter. And
unlike most others in the Trump administration, he has known what he wants to
achieve, and how, from his first day in office.
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The indications were there in his congressional testimony, in
the way Lighthizer interspersed his defensive responses with declarations about
his own philosophy on trade—one that he claimed to share with Trump. This
philosophy of Lighthizerism deserves far closer attention than it has received,
eclipsed as it has been by the approach of the director of Trump’s National
Trade Council, Peter Navarro, which is flashier but ultimately less informed by
policy experience. As a decades-long denizen of Washington, Lighthizer is more
grounded but also less easy to place politically. Lighthizer’s is the economic
philosophy most responsible for guiding the Trump administration, and he has
ensured its influence for years, perhaps decades, to come.
Lighthizer’s work has culminated in the budding trade war
with China, with the Trump administration poised, as of last week, to raise
existing tariffs on Chinese products to 25 percent. But to call Lighthizer a
“prophet of protectionism,” as some have, gives the false impression of an
underlying drive for U.S. autarky, self-sufficiency, or withdrawal from global
markets. Nothing could be further from the truth. Lighthizer speaks openly in
favor of free trade, comparative advantage, and what he calls simply
“economics.” “The basic philosophy that we have is that we want free trade without
barriers,” Lighthizer explained to Congress at the July 26 hearing. He said
that the Trump administration “wants to get to the position where the U.S. is
competing with countries on a bilateral basis and on a no-barrier basis, and
then let the United States, let pure economics make the decision.” (“I’ve heard
of Ricardo,” Lighthizer snipped at Sen. John Kennedy (R-La.), who was straining
to reassemble a parable about English cloth and Portuguese wine.)
Where Lighthizerism departs from standard free trade
philosophy isn’t in its desired goals of open markets but in its commitment to
using an openly politicized arsenal of weapons for achieving them. Since the
formation of the General Agreement on Tariffs and Trade—the precursor to the
World Trade Organization—in 1947, the dominant school of thought on
international trade has favored multilateralism, or agreements between many
nations where trade barriers sink collectively on the “most favored nation”
principle. Lighthizerism scorns the multilateral approach in favor of
bilateralism, or deals between two nations to lower barriers. Against the
collective approach exemplified by the WTO agreement, which over 100 countries
signed in Marrakech in 1994, he promotes a transactional one instead,
proceeding deal by deal and case by case. “We’re not talking about a level
playing field,” he said to Congress, “What we’re saying to the country is,
‘We’ll give you better access than the rest of the world, and you give us
approximately an equal amount of better access.’”
To get to the endpoint of better access and lower barriers,
Lighthizer sees little shame in the use of unilateral action. Executive orders,
diplomatic pressure, and legal measures like the above-mentioned Section 232
are legitimate tools for unsettling existing arrangements and pushing partners
to the negotiating table. Lighthizerism is no roadmap for retrenchment but a
blueprint for recapturing what is seen as a lost edge for U.S. manufacturing on
the world stage. It does not herald “the end of globalization” but a more
aggressive phase of it. And far from shielding producers from the discipline of
competition, Lighthizerism aims to deepen it.
We need to “make sure that market forces determine who
survives and who doesn’t survive,” he explained to Congress. Paradoxical as it
may seem, Lighthizerism sees trade wars as the road to freer trade. Yet even as
the rhetoric cleaves closely to the end goal of open markets, Lighthizerism in
practice reveals a deeper and arguably more consequential belief—that to beat what
he calls the state capitalism of China in the market, the United States must
emulate part of the style of its adversary and become a bit more state
capitalist itself.
President Ronald Reagan and Prime Minister Zenko Suzuki of
Japan begin talks in the Oval Office May 7, 1981, on a range topics, including
the sensitive U. S.-Japanese trade relationship. (Bettmann/Getty Images)
Lighthizerism’s combination of sovereign action and free
trade principles is no novelty. Nor is it quite the paradox it might seem. One
could find its roots in the 19th century, when military expeditions opened
markets for Western goods. Access to both Japan and China was achieved at the
barrel of a cannon.
A more recent—and more directly relevant—analogue is the
trade conflicts of the 1980s, which served as the crucible in which
Lighthizerism was formed. Lighthizer’s career in economic policy began during
this period, when U.S. policymakers routinely complained of trade deficits and
the undercutting of U.S. manufacturing by distant competitors, and figures such
as Walter Mondale predicted a dark future of Americans left only to “sweep up
around the Japanese computers.” A native of Ohio born in 1947 who attended
Georgetown University at the same time as eventual President Bill Clinton,
Lighthizer served as a chief counsel for the Finance Committee under Sen. Bob
Dole beginning in 1978 before being appointed a deputy U.S. trade
representative in 1983, when he was in his mid-30s. He served as chair of the
U.S.-Japan Investment Committee and helped lead negotiations over steel imports
with Japan.
In this role, Lighthizer had a front-row seat for what the
economist Jagdish Bhagwati calls the “aggressive unilateralism” used by the
Reagan administration to combat new competition. The characteristic tool of
this style of governing trade was Section 301 of the 1974 Trade Act, which
allowed the United States to take retaliatory action against nations whose
trade practices it deemed unfair or discriminatory. Rather than tariffs, the
favored tool was the voluntary export restraint. While the primary targets were
the rising East Asian economic powers of Japan, Taiwan, and South Korea, new
special Section 301 measures introduced in 1988 were also used to threaten
developing countries with retaliation if they failed to respect U.S.
intellectual property provisions. Even as they broke with the (always fragile)
consensus around multilateralism, such unilateral acts did serve specific U.S.
interests, as the target countries often agreed to voluntarily restrict their
exports to the United States to the advantage of local producers.
Bhagwati read President Ronald Reagan’s use of executive
action on trade as a symptom of what he called “diminished giant syndrome,”
where the United States lashed out in fear of its loss of industrial dominance.
While he disapproved of the method, Bhagwati acknowledged that these actions
often functioned in the interest of opening markets, because fear of being hit
by the stick of unilateral action compelled smaller economies to negotiate and
settle trade agreements with the United States. Bhagwati and the economist
Douglas Irwin described the approach elsewhere as “the return of the
reciprocitarians,” comparing it to the “fair traders” of the late 19th century
in Britain who also hoped to use trade deals to open new markets. Some see the
creation of the WTO itself as the product of a negotiation in which other
nations were cowed by the threat of U.S. unilateralism.
Lighthizer returned to private law practice in 1985, and
it’s easy to imagine the lessons he drew from his time in public office—namely,
that aggressive unilateralism worked in international economics. Japan proved a
pliant opponent—and one that, not incidentally, existed under the security
umbrella of the United States, complete with a permanent military presence.
Ever since, Lighthizer has worked to recode the Republican legacy on trade away
from the model of multilateralism, which was indeed spearheaded by Democrats
such as Cordell Hull, and toward the model represented by Reagan.
Along the way, Lighthizer’s own views have only hardened;
the 1990s were an especially formative influence on Lighthizerism. In the
mid-1990s, Lighthizer was the main economic advisor to Bob Dole in the run-up
to his GOP presidential candidacy. Defending a challenge from their right
against the staunch sovereigntist Pat Buchanan, Lighthizer and Dole supported
U.S. membership in the WTO but also pushed the idea of a separate panel of U.S.
judges to review adverse cases and back up the threat of a U.S. departure from
the organization if it was not functioning to their pleasure. After the
creation of the WTO, however, Lighthizer appeared to regret his decision. In
2000, he testified before Congress with fellow lawyer Alan Wolff that the
organization’s power overreached and represented a dangerous ability to trump
U.S. law while also being inadequate to correct other nation’s “unfair trading
practices.” He effectively reversed his position from 1995 and sided
retroactively with Buchanan against the WTO. After Trump’s inauguration,
Lighthizer became the new U.S. trade representative, and Wolff became a deputy
director-general of the WTO itself.
While Trump’s trade policy is sometimes compared to that of
1930s, an era of widespread fantasies of economic autarky, it is better
understood (like so much about the current president) as a flashback to the
1980s. Lighthizer has been explicit about the comparison, even years before
Trump’s campaign for president. In 2011, Lighthizer praised the reality
television star’s “skepticism toward pure free-trade dogma” by appealing to his
former boss. “The icon of modern conservatism, Ronald Reagan,” Lighthizer
noted, “imposed quotas on imported steel, protected Harley-Davidson from
Japanese competition, restrained import of semiconductors and automobiles, and
took myriad similar steps to keep American industry strong.” The implication
was clear: It was time to use the same playbook, with China playing the role of
Japan.
Robert Lighthizer speaks with former Sen. Bob Dole (R-Kan.)
during his confirmation hearing in the Senate Finance Committee on March 14.
Lighthizer was Dole’s economic adviser during his 1996 campaign for president.
(Bill Clark/CQ Roll Call/Getty Images)
The current crystallization of Lighthizerism can be seen as
an attempt to restage the fight won against Japan and lost against the WTO.
Many have observed correctly that U.S. discontent with the WTO is nothing new.
The Obama administration had already blocked an appointment to the Dispute
Settlement Board before Trump’s arrival. Voices including European Commissioner
for Trade Cecilia Malmstrom and the Chinese themselves agree that the WTO
should be reformed to account for the new reality of Chinese economic might and
its eyebrow-raising record on protecting intellectual property rights.
What makes Lighthizerism distinctive is the way it frames
the solution. It does not propose a remedy, as the Europeans, Canadians, and
Mexicans do, in fine-tuning the multilateral rules. Rather, it suggests taking
a page from the playbook of what it sees as its main adversary: Chinese state
capitalism.
Lighthizer has been a vocal critic of the conventional
wisdom about the democratizing influence of global trade that reigned from the
mid-1990s until about a decade ago. In a 2010 testimony before Congress, he
singled out Francis Fukuyama’s “end of history” argument for special contempt
and noted that “U.S. policymakers had a profound confidence in the ultimate
triumph of democracy and capitalism” after the Berlin Wall’s fall. “This
confidence,” he said, “which can now be seen as hubris, encouraged many U.S.
policymakers to believe that China would inevitably embrace democracy and
capitalism.”
Lighthizer chided U.S. policymakers for assuming that
“acceding to the WTO would cause China to become more and more Western in its
behavior—almost as if it were merely a more exotic version of Canada.” The
obstacle Lighthizer perceived was a cultural one. “China’s inability to
comply,” he concluded, “appears to be the result of deep forces in Chinese
life.”
In his testimony, Lighthizer referred to a contemporary
piece by political analyst Ian Bremmer on the rise of state capitalism. In a
2009 Foreign Affairs article, Bremmer offered a shadow timeline for what has
become known as the “rise of neoliberalism” since the 1970s. In Bremmer’s
telling, the oil crisis early in that decade was a breakthrough moment for a
trend toward the greater influence of states with intimate connections to
corporate interests, with the state-owned oil companies of OPEC being the
banner case. Whereas most historians would describe the decades that followed
as a period when power tipped internationally from states to markets, Bremmer
sees it differently. He argues that the economies such as India, Russia,
Turkey, and Brazil that rose to prominence during the transformation of the
global south and the post-communist world were united by an incomplete faith in
the free market or the rule of law and a tendency to blur state and private
interests. The rise of sovereign wealth funds in the early 2000s only deepened
the fusion of public and private authority. The most important avatar of state
capitalism was China, where the Chinese Communist Party used a high level of
state ownership and support of private national champions to build up a
domestic market to challenge traditional manufacturing superpowers.
The United States was the positive foil for Bremmer, the
putative home of robust dedication to the rule of law and a healthy distance
between public and corporate interests (the revolving door between Wall Street
and Washington notwithstanding). Lighthizer appears to have taken Bremmer’s
analysis very closely to heart and shares his concern that state capitalism
offers an unfair edge in competition with those unwilling to emulate it. He has
made regular reference to China’s state capitalism in his testimony before
Congress as U.S. trade representative and emphasized its coherence. “They have
a system, and their system is challenging our system,” he insisted in last
month’s testimony. In September 2017, he called Chinese state capitalism “a
threat to the world trading system that is unprecedented.”
The core of the Chinese threat is the loss of the U.S. edge
in technology through what Lighthizer summarized in March as “forced technology
transfer; of requiring licensing at less than economic value; of state
capitalism, wherein they go in and buy technology in the United States in
non-economic ways; and then, finally, of cybertheft.”
To confront the Chinese threat, the United States under
Lighthizer has dusted off the toolkit from the Reagan years. A Section 301
investigation initiated in August 2017 was completed in March of this year,
paving the way to the first round of tariffs at 25 percent on one set of
Chinese imports and 10 percent on another. Just last month, Trump asked
Lighthizer to look into more than doubling the 10 percent to 25 percent, a
measure that could come into force next month. The Financial Times observes
that the trade war with China is “only just beginning.”
What is Lighthizer’s game plan? The stated intention is to
“protect our technology” by using the blunt instrument of tariffs until the
Chinese changes its ways. “We want to get back to even,” he told Fox News
Business in June, and “try to remove some of those structural barriers while at
the same time opening up China.”
If Lighthizer’s goal is to counter the long-term vision of
Made in China 2025 with a long-term plan to keep the U.S. edge in technology,
he faces the crucial obstacle of time. This was highlighted in the most heated
exchange of last month’s testimony, between Lighthizer and Democratic Sen.
Brian Schatz of Hawaii, one of the youngest members of the Senate. “It seems to
me we’re playing chicken with China,” Schatz observed, and “among [America’s
disadvantages] are that they take a 50- or 100-year view. And we, because we’re
a democracy, take a ‘every two years’ view.” The differing time horizon made
the strategy of using tariffs to correct structural trade imbalances futile:
“Why would you stare down a non-democracy?” Schatz asked, “How we have leverage
in a situation where they have unending patience and we have almost none?”
This cut to the heart of Lighthizer’s philosophy—and it left
him with no good response. He conceded the point later in the testimony when he
said that the Chinese “do take a longer view, which by the way, I think is the
right view. To the extent we can, we ought to be taking it. I realize we have a
political system that makes it difficult, but nonetheless, the reality is an
awful lot of our senior politicians do take a long view.” He added, “We’re
going to have a problem with China that’s going to go on for years.”
Lighthizer’s mild Sinophobia manifests, as such
intercultural attitudes often do, as a kind of China envy. It is only the
apostrophized “senior politicians” (including, one presumes, Lighthizer
himself) who are able to extend their time horizon as long as the Chinese.
Lighthizer’s response also raised the question of whether his own philosophy is
the opposite of state capitalism or a variety of it. Imposing tariffs by
executive order performs the very detour around democratic decision-making that
Lighthizer sees as the core of state capitalism and that, though injuring U.S.
interests, has brought China tremendous wealth.
As a philosophy of economic governance, Lighthizerism,
because it is structured around the idea of interstate competition, bends
toward state capitalism. It reserves for government executives the sovereign
right to decide when economic rules bind and when they do not. Democratic
accountability is an impediment, from this perspective: an unfair disadvantage
that the adversary does not share. A cynic might observe that Lighthizer’s flaw
is taking one page from the book of state capitalism without going further and
suppressing the cyclical process of democratic elections itself; this would
solve Schatz’s “two years” problem and give the tariffs time to have their
effect. But there is no sign that Lighthizer has any notion of going this far.
Even failing this last step, the rise of Lighthizerism
suggests a new narrative of convergence—not to the hypothesized “end of
history” that he so scorns, in which democracy and capitalism are imagined to
flourish together harmoniously, but rather toward a globally minded state
capitalism where aspects of the democratic process are routinely
short-circuited in pursuit of a competitive edge. Whether this path will be
taken might depend on the next round of that very confounding process of
democracy in America’s midterm elections.
Quinn Slobodian is the author of Globalists: The End of
Empire and the Birth of Neoliberalism.
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