Deja Vu All over Again; China Is an Aspiring Superpower, with Economic and Military Ambitions; It Is Even Less Likely to Cave [to U.S. Demands] Than Japan

Article excerpt

Byline: Jeffrey E. Garten (Garten is the Juan Trippe Professor at the Yale School of Management. He can be contacted at Jeffrey.Garten@Yale.edu.)

During this past week, secretary of the Treasury John Snow, Federal Reserve chairman Alan Greenspan and Securities and Exchange Commission chairman Christopher Cox all descended on China. Their mission: to pressure Beijing to further open its economy and to allow its currency to float further upward. Observing this full-court press, I couldn't help recalling my experience as an investment banker living in Tokyo in the 1980s, watching the procession of American cabinet members demanding that Japan change its policies, or my later involvement as a senior trade official in the Clinton administration trying to pressure Japan on a number of economic fronts. Unfortunately, the United States does not seem to be applying the lessons of Japan to its dealings with China.

Japan between 1985 and 1995 was America's economic bete noire. The country ran trade surpluses while the United States ran deficits. Its currency was considered undervalued by Washington and the IMF. Japan Inc. was accused of predatory trade polices and of using its mountains of cash in a plot to "buy America"--all echoes of American fears about China today.

Washington and many of America's leading companies, such as Motorola and Intel, put many demands on Japan: spend more, save less, strengthen your currency and intellectual-property protections, lower your trade barriers. The Japanese were told to deregulate their economy in general and to take very specific measures in the construction, telecommunications, retail and automobile sectors. The pressure peaked in the summer of 1995 when Washington came close to imposing $5 billion in trade sanctions on Japanese cars. A trade war was averted only at the last minute with a fig-leaf compromise.

The shame was that so little was accomplished. True, a few American companies, especially in the semiconductor industry, made inroads into the Japanese market. Eventually Japan started to open up, but that was due more to a 10-year recession than to anything Washington did. Even today Japan's deregulatory agenda remains enormous, the trade surplus is twice the size of China's and the yen is often manipulated for competitive purposes.

We are seeing a rerun of this movie. As the U.S. trade deficit with China tops $107 billion so far this year--an increase of 27 percent from 2004--Congress is threatening to impose a heavy new tariff on all Chinese imports. The U.S. Treasury is under pressure to label China a "currency manipulator," a highly unusual charge and one that would precipitate emergency negotiations with Beijing. …