Commentary / Japan

U.S. and China take trade friction to a new level

by Takashi Imamura

A possible trade war between the United States and China has been “put on hold” as the two governments agreed in a joint statement May 19 on their trade talks that China will significantly increase its purchase of U.S. goods and services. They also concurred that both sides will shelve the threatened imposition of punitive tariffs against each other while they continue trade negotiations. Stock markets have reacted favorably to this seeming rapprochement between Washington and Beijing on their trade disputes.

I’m not optimistic over the prospect of the U.S.-China talks, however, since I believe that the trade frictions between the two countries are much more severe than the trade disputes that raged between Japan and the U.S. from the 1980s to the ’90s — and that today’s divide between Washington and Beijing goes much deeper than the gap between Tokyo and Washington back then. The following are the grounds for my concern based on the comparison between the Japan-U.S. relations of the 1980s and current U.S.-China ties.

First, China, unlike Japan of the 1980s, can stand up to U.S. trade actions with retaliatory steps. Japan, which depended on the alliance with the U.S. for its national security, refrained from taking any retaliatory measures against American demands for export curbs and opening up its domestic markets to U.S. imports. The Japanese government at that time, even though it viewed the U.S. demands as irrational and based on a misperception of facts, continued to make a series of concessions such as voluntary restrictions of vehicle exports to the U.S. and bilateral semiconductor agreement — in an effort to maintain good bilateral relations. The U.S. side did not imagine that Japan would resort to retaliatory measures either, and aimed for Japanese concessions from the start.

In the ongoing spat between the U.S. and China, Beijing immediately announced plans to introduce retaliatory tariffs in response to the U.S. policy on punitive tariffs against China. China’s threatened action matched the U.S. measures in terms of the tariff rates and the value of exports to be targeted, which included main U.S. exports like agriculture, automobiles and aircraft.

In negotiations in which both sides refuse to budge an inch, a compromise seems harder to find than in the Japan-U.S. dispute, and the risk of the situation developing into a trade war is higher.

It should also be noted that Japan made concessions in its 1980s trade dispute with the U.S. because the importance of exports for Japan’s economy was limited — and therefore the government could afford to sacrifice some exports to strike a compromise. In those days, the share of Japan’s goods and services exports in its total GDP was relatively low — in the lower half of the 10 percent range — and thereby their contribution to the economy’s growth was limited. At that time — just as previously — the engine of growth of Japan’s economy was domestic demand. Since the population was rising and the domestic market was expanding, most Japanese companies were able to focus only on the domestic market — and it was only certain manufacturers such as carmakers and general trading houses that were actively interested in exports.

In comparison, exports are one of the key growth engines for China today. Its goods and services exports still account for around 20 percent of its GDP — though the ratio is on the decline. China cannot afford to sacrifice its exports in response to U.S. demands for reducing its trade deficits.

Second, from the time of the Japan-U.S. trade frictions then and U.S.-China trade frictions now, the production operations of manufacturers — which used to be clustered within the borders of industrialized countries — have been dispersed among emerging economies. The Japan-U.S. trade disputes of the 1980s derived from the competition between finished products such as automobiles and semiconductors manufactured in Japan and the U.S., respectively. The U.S. target at that time was Japanese cars produced by companies like Toyota in Japan.

Due to the information and communications technology revolution and globalization that went into full swing in the 1990s, however, cross-border dispersal of the production process of manufacturers made rapid progress — in particular relocation of labor-intensive processes to China and other emerging economies where unskilled labor was available at a low cost.

What also transpired was the formulation of a global value chain that combined U.S. technology and China’s cheap labor — such as the growing numbers of cases like Apple Inc. assembling its iPhones in China and shipping them to the U.S. market in large volumes. As a result, the scale of the U.S. trade deficit with China is far larger than the one it incurred with Japan in the ’80s. The U.S. deficit with Japan in the late 1980s was the equivalent of around 1 percent of its GDP; its current deficit with China is equivalent to about 2 percent of GDP.

The U.S. administration of President Donald Trump, however, has turned its back to such major changes even though it continues to care about the sheer size of the U.S. trade deficit with China, which is the product of the changes in the U.S. manufacturing and trade structure — and seeks to cut the deficit using the same old trade policies from the 1980s. In the Trump administration, internationalists who understood the mechanism of the global value chain have mostly been purged and replaced by economic nationalists who, sharing the president’s mercantilist view that exports are good and imports are bad, advocate the 1980s trade policies.

True, many of the white blue-collar workers — who make up Trump’s key support base — were hit hard when U.S. manufacturers relocated production to China and other economies. It is understandable for the president and his allies to want to help his supporters. But even if the U.S. succeeds in slashing its deficit with China, the production processes relocated to China will not return to the U.S. Nonetheless, white blue-collar workers strongly support the Trump’s administration’s vow to cut the U.S. deficit with China and his hawkish posture toward Beijing. Therefore, the administration will likely not change its position toward China on trade issues — and China will have to cope with it.

Third, behind the intensifying U.S.-China trade friction is the competition between the two countries for hegemony over next-generation technologies — and Washington is on the defensive. Also behind the Japan-U.S. friction in the ’80s was the competition between Japanese and U.S. firms over semiconductors, but U.S. businesses back then were quite bullish and demanded the opening of the Japanese market for their products.

The Trump administration, however, is calling on the Chinese government to review its “Made in China 2025” program to beef up its high-tech industries with massive subsidies. It reflects the administration’s sense of crisis that China is unfairly seeking to build high-tech industries that could outperform the U.S. by infringing on American firms’ intellectual property and promoting technological innovation at home by pressing foreign firms for technology transfers. But from China’s perspectives, that constitutes interference in its domestic industrial policy, and there’s no way China will make concessions on that point.

U.S.-China trade frictions today are thus severer than the Japan-U.S. trade problems of the past, and it will be much harder for Washington and Beijing to bridge their gap. There indeed are growing ranks of the U.S. public who believes that progress in information technology and globalization, as well as the formulation of the global value chain — which are all linked to the rise in the U.S. trade deficit with China — work to their disadvantage.

The Trump administration will likely insist on cutting the U.S. deficit with China even harder than the Reagan administration pushed for reducing the U.S. deficit with Japan. One cannot be optimistic about the course of U.S.-China trade relations.

Takashi Imamura is director of Marubeni Research Institute.