Clamping down: Once Japan, now China

Since World War II, the US has consistently engaged in military conflicts overseas, extending beyond its territorial boundaries. Despite these conflicts, their domestic economy, political institutions, and society have only been marginally affected. 

Once the country recovered from the economic depression of the pre-war period, its unbroken production structures and relations provided the foundation for its global economic dominance. Innovations, technological advancements, effective product marketing, and the establishment of freer production relations laid the groundwork for the development of a global consumer market. 

This has eventually led to the global consumer revolution. US businesses and political interests had a significant stake in reviving European economies and societies, as initiated by the Marshall Plan. This was not necessarily driven by humanitarian concerns, but rather to transform the transatlantic world into a "consumer democracy". 

The US resorting to dropping atomic bombs on Hiroshima and Nagasaki during World War II led to Japan's defeat and compelled them to ban military build-up and live under a US security blanket. This ensured that Japan could not challenge US economic dominance, develop militarily, or contemplate military might. Japan willingly opened up its economy. Within two decades, it successfully rebuilt its economy and by the 1970s, had emerged as a formidable competitor to the US manufacturing sector.

Reading the Financial Times' cover on Japan during a transatlantic flight in the late '80s, it dawned on me that the West would not stand by and let Japan's economic growth and potential global economic domination go unnoticed. The article highlighted Japanese 'lean production' and efficient goods and shipping at the lowest possible cost. This fascination with Japanese production methods grew exponentially as Japan emerged as the manufacturing hub. 

Several articles in the Financial Times discussed Japan's cultural heritage, referring to how the "yellow peril" lacked decency, was deceptive — their true intentions difficult to understand when measured against direct, honest and value-laden morals of the West. The rise of Japanese companies challenged Western perceptions, raising questions about the economic dominance of a non-white race. 

By the early 1970s, Japan faced US quota and trade restrictions on textile exports. By the end of the 1980s, Japan had gained a significant share of the US domestic market in automobiles, motorcycles, radios, cameras, video recorders, watches, and machine tools. The Walkman, an innovation that revolutionised music listening, became an indispensable accessory for Central Park joggers in New York City.

When Japan emerged as a premier house of semiconductor innovation and production, its technology and innovation were closely monitored, sparking fears of tech domination. By 1990, 12 Japanese semiconductor firms dominated the international market, out of the top 20 firms. This led to President Ronald Reagan slapping import tariffs on China. Why semiconductors? "Chips", the New York Times explained, "the tiny slivers of silicon that are the essence of computers and other electronic products, are considered vital to national security." 

In the ensuing trade war, the US accused Japan of dumping, forcing it to export at a set price, and slapping tariffs on $300 million of imports from Japan to press the country to buy more US chips. Known to champion free markets and trade, Reagan and later Presidencies carried out protectionist policies, rationalising their actions by stigmatising competitors for "dumping" and "subsidising" policies. It remains an open question whether Japan, had it been left to pursue its industry independently, would have surpassed the US semiconductor innovation and industry. 

Quotas, tariffs, and currency adjustments were forced on Japan to manage the ballooning US trade deficit. The Plaza Accord aimed to weaken the dollar in 1985, with disastrous consequences to Japan. James Baker, then the US Treasury Secretary, tipped that Japan should manage its currency but must agree to lower interest rates. By Japan lowering its official discount rate, money flushed into speculative investments in land and real estate. Policymakers kept lowering interest rates, done at the prompting of Baker. Mieno, then Deputy Director of the Bank of Japan, later said, "The BOJ did not cut the rate because of domestic factors but out of consideration of a foreign country." 

Meanwhile, in the early nineties, manufacturing in China was maturing. Sanyo electronics, once a giant, could no longer compete with China's Haier and Korea's Samsung. Japan's manufacturing preeminence was slowly fading as China emerged as the global manufacturing hub. 

The world has undergone a profound transformation since the nineties. Western countries, having successfully thwarted Japan's rise and economic dominance, are now facing the challenge of another Asian nation's ascent. China, once an impoverished, dilapidated, and populous country, is now boldly competing and potentially dominating the economic empire of the West. 

The prevailing narrative suggests that China is a rising power poised to replace the US/West, and a potential war between the two nations is even contemplated. US-centric narratives portray China as an aggressive pursuer of global dominance, asserting that its 'authoritarian' and 'communist' China-model is fundamentally incompatible with the 'free' and 'liberal' world model. 

These narratives are bolstered by aggressive rhetoric, propaganda, and an agenda that contradicts objective, critical, and rational approaches to addressing fundamental economic, political, environmental, and social issues confronting the world today. 

Moreover, these narratives infringe upon a sovereign nation's right to manage its own economy and politics. After only a decade since the dissolution of the USSR and Japan's perceived economic dominance prevented it, America cannot stop drumming up the old tune. Anti-China smears are now unleashed on the Chinese. 

The trade war, characterised by tariffs and disruptions to China's technological progress in the name of security, echoes the approaches taken against Japan. Moreover, to hinder China's rapid technological growth, the US has resorted to political warfare, attempting to ban Chinese companies from participating in global markets. 

The semiconductor industry, once again, emerges as a tool of US national security, with the intention of thwarting China's progress. The political aggression in the South China Sea, the formation of a Quad to oppose China's claims in the SCS, frequent movement and maneuvers of US warships, and the breaking of the agreement with China on the Taiwan question are all significant strains on the US-China relations. 

The Mar-A-Lago Accord, in conjunction with Project 2025, seeks to restore America's global economic dominance. Many Americans recognise that their trade deficits and national debts are unsustainable and must be reversed to achieve the "Make America Great Again" goal. To address these trade deficits, the US is adopting an aggressive policy towards trade with China, including restrictions and bans on China's possession of so-called US-made advanced technology products. 

Notably, the United States runs a quarter of its deficits through trade with China. Contrary to popular belief, the US trade deficit is not a result of China's trade practices, nor is it the cause of the hollowing out of manufacturing in the US. The trade deficit emerged shortly after the US abandoned the gold standard and adopted the US dollar as the fiat currency for global trade. In 1984, Japan held over 30 percent of the US trade deficit, which amounted to 2 percent of GDP.    

The United States also raises concerns about the potential loss of control over significant global resources, financial power, influence, and prestige. In essence, the US might lose its dominance over global rules and structures. It not only needs to address the twin problems of debts and deficits but also the challenges posed by China. 

When debts and deficits appear to be purely domestic policy matters, what challenges does America face from China? The observation that China, similar to Japan in the 1980s, will emerge as the dominant player in the advanced technology sector is intriguing. Huawei, a telecommunications company, has faced unproven accusations of security breaches in its platforms, smartphones, and sanctioned products. 

Huawei chips have been banned and criminalised worldwide, despite lacking any evidence of copying NVDIA or TSMC chips. These restrictions and export controls on semiconductor chips and equipment mirror the aggressive actions taken against Japan but extend to cover several products, including electric vehicles, solar panels, steel, and shipping. 

To address the deficits, the US policy question of necessity revolves around re-establishing manufacturing within the country and utilising tariffs as the means to achieve this goal. Consequently, it is believed that reshoring will reduce or eliminate deficits and positively impact the nation's debt. 

The Triffin dilemma states that to sustain the strength of the dollar as a reserve currency, the US must run a trade deficit. The Mar-A-Lago Accord aims to address this dilemma by lowering the value of the dollar, even imposing a levy on global nations' reserve volumes. The Trump administration employs tariffs as a "twin-tool." 

Initially, the deliberations on tariffs seem to be a shock-and-awe tactic, similar to the Iraq war, aimed at eliciting reactions from nations. This tactical approach might prepare tariffed nations to agree on appropriate levels of duties, including currency appreciation, and seek joint collaboration on restricting or banning Chinese advanced technology investments and their use. 

During the Plaza Accord, the US achieved the aim of appreciating the Yen followed by a decline in Japan's exports. Whether the US succeeds in attracting or even enforcing other nations beyond its traditional allies of Europe, Japan, South Korea, to join its cause remains to be seen. Project 2025 offers nations an enticing incentive — a 'security' blanket against external threats. 

However, it is hard to comprehend how this security differs from the 850 bases the US operates globally and whether interests in US superiority of security arrangements compete with other global powers.  

As the 60-day mark approaches since the Trump tariff poster announcements, the global markets are grappling with uncertainty and volatility, reacting to day-to-day events. The US has had to backtrack on its initial announcements, initiate talks with China, and continue to assert its stance on Chinese chips and AI advancements. 

China and the world today are vastly different from Japan in the 1980s. China, unlike Japan, boasts a substantial military base. China engages in substantial trade with numerous countries as the largest trading partner, and has made significant advancements in various fields, including electric vehicles, aerospace, and artificial intelligence. It is the world's industrial hub, dominating key supply chains, minerals, and logistics. The economic advancements of China, many say, are unstoppable.     

What are the potential options for the US to curb Chinese growth? In the near future, they will likely continue to harass Chinese firms in their business and investments, restricting trade flows that will affect both countries and the global trading landscape. 

Additionally, they will restrict critical technological flows into and out of China and employ soft power propaganda to portray China as an evil authoritarian state. Whether the above aggressions and policies will slow China's growth or if the US can partially transform its economy to finally resolve the twin deficit-debt problem remains uncertain. 

One possible outcome is that China will continue its rapid growth in the next 20 years, as it has done in the past two decades through innovations, focused on the real economy, raising education and living standards of the population in its vast rural landscape, and integrating the South within trade, investments and institutional arrangements. What then? Will war become the only option for the US?

Farook Chowdhury studied economics and finance. He has been in policy advisory services, serving numerous countries globally.