I’ll preface this post with the fact that this piece is not supposed to be read or interpreted as a rigorous academic work that is of the quality of a piece of original research. The purpose of this post is merely to espouse some of the thoughts I’ve had from background reading I’ve done recently in the realm of international relations, trade wars, the Japanese economy, and US unilateralism. As such, I will not be citing specific sources for some claims I make, but know the information I’ll be using can roughly be found in the additional reading articles at the end of this post.
Chapter 1 — The Aftermath of WW2:
To say the US emerged as the dominant world superpower both militarily and economically after WW2 would be an understatement. The US in 1945 on its own accounted for more than 50 percent of global GDP and held nearly two thirds of the world’s gold reserves. While the US had been the largest economy in the world by GDP since at least the late nineteenth century, its global military prowess did not become solidified until its rapid build up during WW2.
Given this new found power, the US set about constructing an new international order as it saw fit, leading to establishment of institutions such as the UN, world bank, and other multilateral bodies to mediate conflicts. Institutions where often the US maintained a dominant position in negotiations and application of soft power.
On the contrary, Japan’s economy was decimated at the end of 1945. With its infrastructure in taters, loss of natural resources from its colonial territories, and previous industrial powerhouses such as Tokyo and Osaka firebombed to ruins, the physical condition of the country was in no way conducive to economic growth.
After Japan’s surrender, the US armed forces occupied the island nation and set in motion a series of policies to institute a new parliamentary government along with a new constitution to establish Japan as an economic ally in East Asia. Unlike the conclusion of previous wars, the victor country, which in this context is the US, actively directed a huge amount of funds to rebuild Japanese cities and infrastructure, along with importing huge amounts of food and capital goods to keep the country afloat while it rebuilt its industry.
Japan also had to contend with huge ways of repatriation. Ethnic Japanese previously living in Taiwan, Korea, China, and other areas Japan had conquered, who numbered over 5 million, moved back to Japan as colonial territories were returned to their previous owners. This mass migration in turned put even more stress on nearly non-existent food supplies and housing.
Chapter 2 — The First Asian Tiger
In our present discourse, China’s rapid economic ascent often dominates. But you can gain deeper insight into global geopolitics by studying the rapid growth of another economic power during the late twentieth century.
In many ways, Japan’s rapid growth is even more impressive than that of other Asian countries. Japan lacks natural resources and has very limited land to develop industry as most of its terrain is mountainous. Japan also relies heavily on imported goods to maintain its food supply and meet its energy consumption needs.
So under such conditions, how did an island nation build an economy that at one point threatened to overtake the US in terms of real GDP?
Japan was first to blaze the fast growth model of centering an economy around exports and manufacturing later followed by other Asian tigers such as Taiwan, Singapore, and South Korea. Unlike other Asian countries, prior to WW2 Japan was largely industrialized and thus possessed economic infrastructure that though partially destroyed, could easily be rebuilt. With the help of generous US foreign aid, Japan rapidly built up transportation infrastructure, culminating in its 1964 opening of a bullet train line from Tokaido to Shinkansen. Investments in well built infrastructure integrated supply chains bolstering efficiency further in Japan’s burgeoning manufacturing sector.
To develop an export driven economy, Japan first focused its efforts on manufacturing low cost goods. The textile and cheap plastic goods industries were easy to develop given Japan’s relatively large cheap labor pool of the 50s and 60s. Japan’s government also heavily subsidized manufacturing along with devaluing the Yen to further boost the attractiveness of its exports based on price on international markets.
Riding the rising tide of globalization and liberalization of international trade during the 70s and 80s, Japan further diversified its export market away from cheap goods to become a dominant player in exporting automobiles, consumer electronics, and other high tech manufactured products. Japan’s government continued to subsidize these export oriented industries while maintaining policies which partially barred foreign products from entering the Japanese market.
New innovations in supply change management also gave the Japanese economy a leg up over its competitors. Car manufacturers for instance sourced parts from multiple competitors thus enabling flexible shifts to demand while also driving down prices as multiple suppliers competed to source the same parts to car manufacturers. Japan’s factories also had the most stringent quality control mechanisms of any country during this period, making their products attractive to consumers.
In fact, Japanese products in the eyes of many were getting too popular. Especially in the US, where a ballooning trade deficit with Japan coupled with a recession in the early 80s started stoking fears about how Japan was slowly eroding the US’s economic dominance.
Chapter 3 — A Trade War and Neoliberalism
The defining policy of the Reagan-Thatcher era during the 80s was that of breaking down global barriers to trade while deregulating large swathes of the financial market, ushering in the present economic era many economists coin neoliberalism. The power of labor unions were weakened, worker’s benefits such as pensions were eroded, and corporate taxes cut substantially.
So why in this age of massive deregulation and promotion of free trade, did the US decide to initiate a trade war to erect enormous barriers in economic exchange with the then second largest economy in the world?
In the face of geopolitical competition, governments will take contradictory stances if such strategies strengthen their position on the figurative international chessboard. Realism, a theory of international relations (IR) establishes two core tenants countries abide by when interacting with each other on the geopolitical stage: first is that sovereign actors operate in an anarchic international arena (no single set of rules govern/regulate behavior for all sovereign actors), and second is that countries will generally make decisions that solely bolster its own political standing.
Now consider the US’s position starting in the 1980s. With the country going through a process of de-industrialization, it was slowing losing manufacturing jobs which had long been the base of its post-war economic boom to emerging economies such as Japan’s. The oil shocks of the 70s induced by oil embargoes on the US showcased internationally massive vulnerabilities in US economic power. From the 50s to 60s, the US was the primary exporting and manufacturing power who ran trade surpluses with virtually every countries it traded with. By the 80s, key industries the US once prided itself in such as car manufacturing were losing to Japanese companies such as Toyota and Subaru.
The burgeoning electronics industry in computing, TVs, and radios had all been captured by Japanese companies. Japan was a leading innovator in semiconductor technologies and computers, all products the US considered crucial to national security.
The rise of Japan and perceived loss of US economic prominence fed a wave of national insecurity that Reagan rode to win the 1980 presidential election, all summed in Reagan’s GOP convention speech where he eerily toted to “make American great again” against a media backdrop proclaiming Japan was causing a “economic pearl-harbor”. In his cabinet, Reagan nominated a number of high profile Japan trade hawks such as Robert Lighthizer.
And almost immediately, Reagan turned rhetoric into action. First, he pressured Japan to adopt voluntary export restrictions (VERs) on automobiles and various electronics products in an effort to reduce the trade deficit with Japan. In this process, Japan willingly limited the amount of marketshare it could take in key industries that it was dominating in the US. However when the Japanese trade deficit further increased, Congress enacted legislation allowing the US to place tariffs on countries running large trade surpluses with the US, mainly targeting Japanese products (but also notably threatening West Germany and the rest of the EEC).
However, the trade war’s most important moment culminated in 1985 when US officials in New York negotiated a deal with Japan and several other countries to allow the US dollar’s value to fall relative to their currencies. The effects of this agreement, known as the Plaza Accord, were extremely detrimental to Japan’s exports. With the US dollar cheaper, Japan’s Yen comparatively rose in value making Japanese goods more expensive, thus decreasing their competitiveness.
Japan’s central bank, the BOJ, subsequently responded to faltering international demand for its goods by slashing interest rates to encourage domestic demand, triggering one of the largest asset bubbles in history (the story of the late 80s Japanese boom and bust, and subsequent economic stagnation could be a blog post in of itself).
The Plaza Accord was a major victory for the US, yet Reagan and the rest of the US government were now further emboldened to pursue hardline trade policies given Japan’s concessions. Reagan’s rhetoric shifted towards accusing Japan of espionage and attempting to set global tech standards in ways that solely benefit Japanese companies. 100 percent rate tariffs were put on 300 billion dollars worth of varied Japanese electronics goods, functionally shutting them out of the US market. Japan in response, could only placate US continuing US frustration by placing more voluntary export restrictions on its own goods while enacting rules that guaranteed a certain fraction of marketshare in Japan for US made goods such as semiconductors.
To make a long story short, Japan’s economy headed towards disaster as the Bank of Japan cut interest rates to stimulate demand to offset the damage of the trade war. The result was an asset bubble of staggering proportions whose bust resulted in the so called ‘lost decade’, a topic that deserves its own blog post.
Chapter 4 — Changing Waters
The US finds itself in a similar predicament as in the 80s, except challenged by a new Asian power, China. When analyzing rhetoric used by politicians regarding China now, there are noticeable similarities to talking points used against Japan in the 80s. Similar to 80s Japan, China threatens the US economically through rapid growth that will upset the US’s numerical GDP advantage over the world. But unlike Japan, China also poses a military and geopolitical threat to the US’s foreign policy interests in East Asia given its rapid military build up over the past decades. China has a nuclear arsenal and population over ten times that of Japan’s, giving it a much better advantage over Japan when it faces strategic competition against the US.
Given China’s strengths, US policy makers have understandably responded with a greater intensity of containment policies than they did against Japan, which is a US ally. Since the Trump administration, the tone towards China has shifted from peaceful coexistence to one of strategic competition. For instance, the US has placed a string of sanctions on Chinese tech companies in an effort to end their access to important semiconductors, thus decreasing their competitiveness. Trump’s tariffs were also an effort to reduce reliance on Chinese imports as well as blunt the Chinese economy, though they were mostly ineffective (another blog post topic in of itself).
And China has made far greater effort than Japan did in the 80s to extend its soft and hard power globally. China’s OBOR program has used investments from state controlled banks to fund vast infrastructure projects from southeast Asia to Italy, increasing reliance on Chinese tech. Countries who are unable to pay back China’s infrastructure loans face many negative consequences, such as Sri Lanka who had to lease Hambanthota harbor to China for 99 years after falling behind on loan payments.
The list of belligerent actions China has used to bolster its global standing would be too long to list in this blog post alone, but the fact China has gone this far in executing them clearly signals it is intent on becoming a global superpower militarily and economically. A great power transition during the 21st century is at hand, and the possibility of conflict arising is at a probability that is dangerously alarming given recent US-China tensions, especially worrying since there’s possibility of leaders miscalculating decisions with nuclear weapons.
Chapter 5 — How Worried Should We Be of War? Defensive vs Offensive Realism
Thucydides Trap refers to the theory that great power transitions tend to lead to conflict, generally sparked by the current hegemonic power seeking to contain or destroy a rising power that is threatening to take its place. This exact situation played out between Athens and Sparta two millenia ago during the Peloponnesian War. Similarly, a lot of the conflict between Japan and the US during the 80s was stoked by fears that Japan would become a dominant world power economically, remilitarize, and attempt to redraw the international order in its favor.
China already takes actions many policymakers in the 80s worried that Japan would carry out. While politicians feared Japan would remilitarize, China is already rapidly working to expand its navy, army, and nuclear arsenal such that it’s in parity with the US. In response, the US is now strongly considering re-modernizing its nuclear forces, building dangerous new weapons such as hypersonic missiles, and bolstering defensive forces and bases in territories surrounding China in the Phillipines, Japan, and Korea.
US policymakers, however, should be more cautious before taking these aggressive stances, and instead carefully analyze China’s intentions. As of now, the dominant consensus in Washington is that China is an offensive realist, which is an subset of realism claiming countries formulate strategic international decisions primarily with maximizing power on the international stage through dislodging other powers. Under such a paradigm, the US’s current policy decisions are sensible given they work to contain the spread of Chinese influence.
The problem is, unlike most policymakers, international relations scholars are not entirely sure China really is offensive realist. Instead, a good number argue the opposing point, that China is instead a defensive realist, which is the other subset of realism claiming countries make strategic decisions based on what best provides themselves security against perceived threats, and that countries tend towards being more reserved/moderate when great powers appease or attempt to compromise with them. If China is a defensive realist, then the US’s current stance of posturing aggressively would provoke further Chinese attempts to militarily expand and secure economic dominance in order to defend against US encroachment. Encouraging further Chinese worry in a defensive realist world spells many risks, including increased chance of accidental conflict in hot spots such as the Taiwan Strait and the South China Sea.
Additional Sources:
[2] doi.org/10.1111/aepr.12279