What 1985 tells us about a US China trade war
Back then, the US had felt similarly threatened by Japan—but Donald Trump will find it difficult to emulate Ronald Reagan’s tactical success
In 1985, Ronald Reagan pulled off a coup. The Japanese bogeyman loomed large on America’s economic horizon. The US trade deficit with Japan was substantial. And the roughly 60% appreciation in the real value of the dollar between 1979 and 1985 created a conducive environment for imposing quotas, tariffs and voluntary export restraints. By 1985, the US congress had begun to consider protectionist legislation. This spurred Reagan, then US president, to bring the US’ main trade partners to the negotiating table to work out a multilateral pact. The pact entailed coordinated interventions in currency markets in order to depreciate the dollar with regard to the Japanese yen and German deutsche mark. And so, the Plaza Accord was born.
Today, the tariffs and retaliatory tariffs are mounting as another US president takes aim at another economic bogeyman. The US is running a large trade deficit with China, like it did with Japan back in 1985. China, like Japan, is using domestic industrial policy to fuel domestic companies into becoming global titans. This raises a question: What are the chances of Donald Trump emulating Reagan and making China blink first?
Trump is not wrong in calling out China’s unfair practices. Beijing’s barriers to investment and business operations, hijacking of intellectual property rights (IPR) and subsidies to home-grown companies are all problems. Trump also has substantial leverage. The US is China’s top trade partner, accounting for 18% of its exports. US exports to China are relatively small. This means that despite Beijing’s announcement of retaliatory tariffs in the initial skirmishes, tit-for-tat is not a sustainable option. More broadly, China’s debt-fuelled growth makes it vulnerable—particularly in light of rising daily wages and slowing growth engines—to the sort of havoc Trump could unleash. Chinese President Xi Jinping’s recent promises to open China to trade and address IPR issues show that he is well aware of this.
But China is not without its own leverage. Firstly, it might not be able to play the tariff game as effectively as the US, but it can intervene tactically. For instance, cancelling Boeing aircraft orders would cost almost 200,000 jobs in the US and imposing tariffs on agricultural products—particularly soya bean—would hit American agriculture hard. Secondly, in general, the Chinese government has plenty of options for making life uncomfortable for American companies in China. Companies like Apple, Tesla and Westinghouse, for whom investments and operations in China are important, could be targeted, for instance. American automakers and other manufacturing enterprises could find local partners squeezing them, and regulatory action going into overdrive. This will reverberate in Washington via lobbying. And thirdly, there is the nuclear option—the $1.2 trillion of US debt China holds, although the many headaches this route would cause for Beijing as well make it more useful as a bluff.
This affects the nature of domestic support for Trump and Xi. Trump faces strong domestic opposition and is likely to confront a demanding trial in midterm congressional elections. Loss of jobs or turmoil in the agricultural sector—crucial in the Midwest states that are among Trump’s base—owing to Chinese tariffs would hurt him here. Xi, with his authoritarian regime, commands stronger domestic support. His government also seems to be better situated to avert economic fallout. The Chinese government can protect its people from job cuts or factory shutdowns by directing banks to support industries subjected to US tariffs.
The geopolitical climate is also very different today from what it was in 1985. Japan and West Germany were still heavily dependent on the US as part of the grand alliance against the Soviet Union. The US’ position as leader of the western bloc in a bipolar world order was also undisputed. Therefore, the US proposition to coordinate currencies faced relatively weak opposition. Geopolitics is much more complex today. The world’s major economies no longer have a common adversary to unite against, which makes the task of bringing them to the negotiating table far more onerous. And China, with its rapid rise and geopolitical ambitions that run counter to US interests, is certainly no Japan.
Likewise, Trump is no Reagan. The chances of his achieving another economic coup like the Plaza Accord are low. In fact, his attempts to drive down the trade deficit with China might end up emulating the Accord in another, unintended way: The Accord didn’t actually succeed in reducing the US’ trade deficit with Japan. Mark Twain once said, “History doesn’t always repeat itself, but it does rhyme.” Trump would do well to mind this.
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