Commentary | 07 June 2018

So how can China tame Trump? By cribbing from Japan.

Originally published in The Washington Post.

Originally published in The Washington Post.

Anyone with a sense of the history of the United States’ perennial trade spats with rising Asian nations will recognize China’s latest pitch to Commerce Secretary Wilbur Ross in talks in Beijing over the weekend. Beijing’s offer to buy nearly $70 billion worth of U.S. goods is straight from the playbook that Japan used for decades to parry pressure from Washington to reduce its similarly large bilateral trade surplus with the United States.

President Trump may not have been reading his briefing books before discussing trade with Chinese President Xi Jinping, but you can bet that the Chinese have been doing their homework.

At the top of the list for study in Beijing has been Japan’s experience in battling the United States in trade negotiations for four decades, starting in the 1950s. Japan, of course, was a U.S. ally and virtual security protectorate, something that has prompted many commentators to dismiss comparisons with China. The alliance with Japan, so the argument goes, always ensured that the disputes were patched up. China, by contrast, is a geo-strategic rival of the United States, with incentives running in the opposite direction.

There is some truth to that, but far more striking are the similarities in the way that the United States viewed Japan then and looks at China now. In both cases, Washington blamed what Americans characterized as undemocratic pathologies in the two East Asian countries’ political systems to explain the trade imbalance.

The United States portrayed both Japan and China as managed economies with manipulated currencies, where the market took a back seat. Both were accused of stealing foreign technology, while pursuing policies to promote exports and limit imports.

In other words, the United States’ trade problems with Japan and China were endemic to their domestic politics. There was a reason President George H.W. Bush called his trade negotiations with Tokyo the “structural impediments initiative” — they were aimed at changing the Japanese system.

The criticism went both ways, of course. Leaders in Japan and now China resented U.S. intrusions into their domestic affairs and abhorred America’s adversarial legal system and activist civil society. More fundamentally, they argued that the prime driver of their surpluses with the United States was macroeconomic. They saved and invested. The Americans borrowed and spent.

Industrialist Akio Morita, the then-chairman of Sony Corp., pithily summed up Japan’s disdain for the United States in the late 1980s. “America looks forward ten minutes,” he said. “Japan looks forward ten years.” Much the same statements are made by and about the Chinese today.

China knows from studying the U.S.-Japan experience that their trade battles will be bitter, protracted and gradually focus more on technology rather than cheaper, mass-produced goods.

This seems right. Washington’s complaints about Japan started in the 1950s, with textiles, and didn’t really wind down until 40 years later in the mid-1990s, in disputes over semiconductors and cars.

But the main lesson that China has taken from Japan is the need to buy off the United States with one-off concessions, as it tried with its recent offer to import more energy and farm goods from America. That way, Beijing can head off what it suspects is Washington’s real game, which is to change its political system, or interfere with sovereign decisions, especially on currency.

Washington’s impulse, in turn, might be to replicate the approach it took with Tokyo and demand changes in China’s party-state and the way it embeds its tentacles in the economy. But that misreads what happened with Japan.

The U.S.-Japan disputes ended not because Japan reformed as Washington demanded, by breaking up their interlocked industrial and financial groups. They wound down because the Japanese model ran out of steam. Japan ground to a halt not because it changed, but because it didn’t.

China’s hybrid statist-entrepreneurial economy, firmly managed by the Communist Party, is a much bigger challenge. Again, Washington sees itself as grappling not with simplistic notions of comparative advantage, but with the need to unravel China’s political economy.

Beijing’s promise to open its market on joining the World Trade Organization was all smoke and mirrors, the Trump administration argues, because China remained “committed to an economy dominated by the state” and “mercantilist industrial policies.” According to this reasoning, plain-vanilla trade talks might win concessions at the margins but will never address the core problem.

The truth is that the United States tried that approach with Japan and failed. Instead, Washington should focus on doing unto China as it would do unto itself, and focus on reciprocity, in areas such as forced technology transfer and investment barriers.

Put another way, give the Chinese the incentive to reform themselves. The Communist Party is not going to stop being the Communist Party just because Washington tells it to.