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A US-China ‘Plaza Accord’?

Comments & Analyses-II

A US-China ‘Plaza Accord’?

By Yoichi Funabashi

Nearly 30 years ago I published a book titled “Managing the Dollar: From the Plaza to the Louvre” (Peterson Institute for International Economics, 1989). In the 1980s, during the Reagan administration, trade friction between the United States and Japan extended to every possible area: electronics, automobiles, machine tools, precision machinery, construction equipment, semiconductors, communication equipment, supercomputers, tobacco and rice. In the U.S., this led to a rising flood of calls for regulations on Japanese imports. Left unaddressed, the trade imbalance would have prompted a greater eruption of protectionist appeals in the U.S., threatening the system of free trade. U.S. Treasury Secretary James Baker possessed both the historical perspective to recognize that “the isolationism and protectionism of that era [during the aftermath of World War I] in part helped caused the Great Depression,” and a determination to avoid repeating that folly. The result of Baker’s initiative was the 1985 Plaza Accord between the U.S., Japan, (West) Germany, England and France, which centered on adjustments to the currency exchange rates. The Plaza Accord resulted in a 50 percent depreciation of the dollar relative to the yen and the deutschemark. My book offered a behind-the-scenes account of the “currency diplomacy” conducted between the various countries during the negotiation of the accord. A Chinese edition of my book, titled “Managing the Dollar: The Plaza Accord and the Fate of the Yuan,” was published by CITIC Press in China in March. The promotional words accompanying the Chinese language title read: “A behind-the-scenes look at macroeconomic policy, bargaining between the great powers, and a guide to the future of the yuan.” The belated publication of a Chinese edition of my book can be explained by the current trade friction between the U.S. and China. Stressing the damages incurred by China’s intellectual property infringement, the Trump administration has invoked Section 301 of the U.S. Trade Act to sanction China by imposing tariffs on Chinese products. The Chinese government initiated retaliatory tariffs in response. The U.S. then initiated a complaint with the World Trade Organization, claiming China’s actions violate WTO agreements. The Chinese financial market is on edge. There are concerns about a simultaneous depreciation of the yuan and fall in stock prices, as occurred in 2015-2016. Guiding macroeconomic policy is also proving difficult. Buying up huge amounts of the yuan in order to maintain its value will deplete the country’s foreign currency reserves. Raising interest rates may put a damper on the economy. Capital controls may scare off foreign investment. At present, Chinese products account for 20 percent of American imports; this is the same as Japan’s share of the American import market in 1989. The Trump administration may be lashing out against all the countries that have a trade surplus with the U.S., but China remains its primary target. In the U.S. today, just as in the early 1980s, fiscal spending is expanding while monetary policy is tightening. Meanwhile, the dollar is strengthening as the yuan depreciates. Thus, structurally speaking, the current trade friction between the U.S. and China is quite similar to the U.S.-Japan trade friction of the 1980s. All of this has led China to suspect that the Trump administration will soon press for some kind of currency adjustment akin to the 1980s Plaza Accord — Plaza Accord II, if you will. Several reviews of the Chinese edition of my book from the Chinese blogosphere caught my attention: “We all saw the Plaza Accord as an attempt by the U.S. to crush the rise of Japan, and this was also the argument that Japan’s right wing fabricated to fan the flames of anti-American sentiment. I now know that this was not the truth of the matter. “I was impressed that the author viewed the Plaza Accord rather as a positive development — as the product of policy coordination between the major countries of the world to counter protectionism and redress the global imbalance in trade revenue. Today, China is in the same position as Japan at that time. We should learn from the history of the Plaza Accord, and develop a strategy for handling trade wars. “I thought that the Plaza Accord had brought about Japan’s recession, but I learned from this book that Germany was also pressed to accept a sweeping revaluation of its currency — but the German market did not collapse.” The Plaza Accord and a broader set of international agreements, which included the easing of fiscal and monetary policies, were later criticized for bringing about Japan’s “bubble” boom. It has also been argued that the fact that these policies were not accompanied by structural reform in such areas as banking and residential housing regulations aggravated the effects of the bubble economy. However, the Plaza Accord did prove effective in correcting the U.S. trade imbalance. By 1991, the U.S. had erased the deficit in its current account balance. Yet that did not mark the end of the U.S.-Japan trade wars. The fierce battle for dominance in high-tech industries continued. The conflict over semiconductors brought about the worst period of tension between the U.S. and Japan. The U.S. demanded that Japan secure a specific share of domestic semiconductor sales for foreign-made products. While the Japanese side agreed, the U.S. later invoked Section 301 of the Trade Act to impose sanctions upon Japan for not meeting the specified target. In 1991, the U.S. and Japan revised their semiconductor agreement, with Japan promising effectively to ensure a 20 percent domestic market share for foreign-made semiconductors. Of all postwar trade agreements between the U.S. and Japan, this can be cited as the worst example of managed trade. The current trade friction between the U.S. and China is unlikely to end in a ceasefire following a long war of attrition involving endless imposition of punitive tariffs. On the contrary, it seems very likely that the current trade dispute will develop into a fierce conflict over currency and high-tech industries. Yoichi Funabashi is the chairman of the Asia Pacific Initiative and a former editor-in-chief of the Asahi Shimbun. This article is a translation of his column in the monthly Bungei Shunju.

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