By Sebastien Canderle, an investment consultant, a lecturer at Imperial College London, and the author of Private Equity’s Public Distress
The Trump administration has shown much resistance to Huawei’s and ByteDance’s American expansion due to the risks the former’s 5G technology and the latter’s TikTok video app cast over national security and user privacy laws, respectively. Not for the first time, Washington is applying a bog-standard policy template to protect its domestic market.
Immediately after World War II, Japan received the support of America to rebuild and modernize its economy. As Richard McGregor points out in his book Asia’s Reckoning, this strategy was so successful that, by the 1980s, CIA analysts fretted over Japan’s techno-nationalism, seen as a danger to U.S. security.
Washington worried about Japan’s industrial policies, which had enabled the country to surpass the U.S. not just in low-wage manufacturing but also in high-tech industries like telecoms and semiconductors.
At the outset of the Reagan administration, Japan held 100% of America’s video recorder market, two-thirds of its motorcycle market, and one-fifth of U.S. demand in the automotive sector.
Confronted with a growing trade deficit with Japan, Washington engineered the Plaza Accord in September 1985 to manipulate the $/yen exchange rate. But it wasn’t enough to stop Japan’s tech ascendancy.
Two years later, Reagan imposed 100% tariffs on Japanese electronic goods, complaining that the Japanese Government was guilty of turning a blind eye to counterfeiting of American products. ‘Japan-bashing’ was in full swing – when Sony bid for Hollywood studio Columbia Pictures in 1989. To placate political opposition, the electronics-to-entertainment conglomerate announced its intention to leave the business under American management.
To counter the influence of Japanese industrial groups, such as Toyota and Honda in car manufacturing, Sega and Nintendo in video games, or Sony, Canon and JVC in consumer electronics, America proactively offshored its production to low-cost countries.
The move was so successful that, by the mid-2010s, almost half of Apple’s suppliers were based in China and a quarter of them came from other Asian countries outside Japan. Nowadays, even if designed in California, the iPhone is assembled in China.
Like Japan in the post-war period, after initially forging its credibility in low-value items, China moved rapidly up the value chain, frequently copying U.S. technology in the process. In 2011, China dislodged America as the largest manufacturing country in the world.
Today, China accounts for 61% of the U.S. electronics import market. In the first quarter of 2019, more than a quarter of TV sets shipped to North America were from a single Chinese brand: TCL.
The similarities between the two Asian countries are striking. Both today’s China and Japan in the 1980s operated a state-sponsored strategy to protect home-grown industrial champions and establish market leadership. Japan’s keiretsu system, which saw the corporate and banking cartels woven together with the apparatus of government, is analogous to the way the Chinese Communist Party dictates economic policies.
Eventually, to counteract the most harmful effects of the Plaza Accord, Tokyo had eased monetary policy. Unfortunately, that led to rampant inflation in asset prices. Thus, in 1990 Japan decided to boost the yen and burst its domestic asset bubble by raising interest rates. This self-flagellation led the country into a protracted stagnation that lasted two decades.
Partly because it saw how much harm these policies did to Japan, today’s China is reluctant to comply with Washington’s bullying. But there are other reasons to explain Beijing’s resistance:
-First of all, China has not yet caught up with U.S. standards of living, whereas Japan had done so by 1990. Japan recorded a GDP per capita of $23,400 that year versus America’s $24,000. By contrast, last year the average American generated four to five times more wealth than a Chinese citizen. Realistically, it will take China another generation before its population can enjoy the material comfort and social well-being of Americans.
-China is not under the yoke of the U.S. the way post-war Japan was seventy years ago. It does not owe its re-emergence on the global stage to the international community’s benevolence. Rather, China’s size and independence give it a unique chance to share geopolitical influence with America. In 2017, the U.S. accounted for only 8% of China’s imports – individually, Japan, Taiwan and South Korea were bigger import markets. By contrast, the U.S. represented a quarter of Japan’s imports in 1990. Similarly, while 19% of China’s exports were assigned to America in 2017, almost a third of Japan’s exports went to the U.S. in 1990.
-America’s blacklisting of Huawei – preventing the latter from purchasing components from major U.S. suppliers – has taught Beijing that they should not leave themselves at the mercy of U.S. policies and regulations. Chinese tech groups are now working hard to develop a fully-integrated supply chain that will guarantee better insulation from Washington’s whimsy political maneuvering. Its recent decision to remove foreign hardware and software from government offices also shows that the Chinese Communist Party is willing to take up the challenge.
-Despite the numerous copycat attempts from all corners of the globe, China is the only country in the world that has successfully promoted, by forming Special Economic Zones in the 1980s, credible rivals to Silicon Valley. Shenzhen, for instance, is the home of telecom groups Huawei and ZTE and of China’s leading social networking and online gaming group Tencent. Naturally, Beijing is taking part in this major push in new technologies, with telecom operator Xiaomi, ride-sharing platform Didi Chuxing, and ByteDance all headquartered in the capital. These tech champions’ national clout easily matches the prestige bestowed to Japanese electronics groups three decades ago.
-Since the Global Financial Crisis (GFC), China has taken a proactive role to impose its economic model, portrayed as an alternative to the discredited deregulated market approach. The Belt and Road Initiative to rebuild a Silk Road across Central Asia as well as regional programs to partner up with African and Eastern European countries have set the tone for a collaborative style.
-Finally, with a population of 1.5 billion, China represents a consumer market a lot more enticing to foreign corporations than 120 million Japanese ever were in the 1980s. To maintain its growth agenda, the West needs access to the Chinese market. With an economy heavily dependent on continued globalization, the world depends on China’s cooperation to manufacture cheap goods and meet worldwide demand. For that reason alone, Beijing is unlikely to fall in line with Washington’s trade rebalancing act.
No longer satisfied with being the workshop of the West, since joining the World Trade Organization in 2001, China has chosen its own path, making sure to protect national corporations, allowing them time to build impregnable competitive positions. Without regulatory barriers enforced by Beijing, firms like Xiaomi and e-commerce retailer Alibaba would not have gained the market supremacy they enjoy today.
Benefiting from quasi-exclusive access to the largest domestic demand in the world, China’s state-owned enterprises and tech giants, be they the BAT (Baidu, Alibaba and Tencent) or the next generation known as TMD (Toutiao, Meituan, and Didi Chuxing), represent a formidable challenge to America in emerging technologies.
America’s present hostility towards China is uncannily similar to its tactical moves against Japan in the 1980s. Trump’s cookie-cutter trade policies show that, when under threat, the largest free market in the world will not hesitate to adopt protectionist measures. Yet, this time around, it seems Washington has found its match. The GFC and the ensuing Great Recession permanently impaired America’s dominance the way, one hundred years ago, the Great War sapped the strength of European nations.
With the 21st century widely expected to see China overtake the U.S. as the next economic superpower, what is at stake is global market leadership. The world should get used to Washington’s jingoistic, defensive agenda. Action against Huawei and ByteDance is likely just the start. ‘China-bashing’ has replaced ‘Japan-bashing’ for the foreseeable future.