New York – It sounds like history repeating itself: The United States faces a huge trade deficit with an Asian country, which is also under intense scrutiny for its interest in buying U.S. assets and having a currency many deem undervalued.
Today, that best describes how China is viewed. Two decades ago, Japan came under similar attack that spurred all sorts of protectionist talk in Washington.
The Japanese hysteria eventually died down as the country fell into a long recession. But don’t look for that to happen with China, where its politics combined with its potential for growth may make it a far tougher force to reckon with.
The United States’ trade deficit with China hit $162 billion last year, making it the largest imbalance ever recorded with a single country. This year’s deficit is running 32 percent above last year’s pace.
American lawmakers have blamed some of this on China’s undervalued currency. They threatened to impose punitive tariffs on China if it didn’t switch to a more flexible currency system rather than have the yuan trade at a fixed exchange rate that was pegged to the U.S. dollar – which has kept its export prices low.
In July, China announced it would gradually let the yuan rise in value against a basket of currencies, though some critics say that move isn’t enough.
The China-bashing is reminiscent of the talk directed at Japan in the 1980s, when fuel-efficient Japanese cars were gaining popularity with U.S. consumers while the Japanese were buying up American companies as well as trophy U.S. real estate.
Back then, the U.S. trade deficit with Japan was ballooning, and there were many claims that Japan was keeping its currency artificially low to boost its exports. To fix that, U.S. politicians demanded that Japan strengthen the yen or face trade sanctions.
“What is being said about China sounds like the same speeches and arguments that were heard about Japan” about foreign-made goods, said Milton Ezrati, a senior economic strategist at the money management firm Lord Abbett.
But while China today looks a lot like yesterday’s Japan – before its asset bubble burst – Morgan Stanley global economist Stephen Roach sees big differences. “In terms of the scale of their economies and financial markets, China and Japan are like day and night,” he said.
China has a much more outward-looking growth and development model than Japan. In 2004, exports and imports combined equaled 74 percent of Chinese gross domestic product, more than triple Japan’s 23 percent share.
While the Chinese have been more open to foreign investment than Japan, there are some concerns that the communist political structure means that the Chinese won’t embrace all kinds of foreign involvement, such as an American company buying a big Chinese company.
Standard & Poor’s chief economist, David Wyss, points out that China’s huge population means that China has the capability of taking over world production of just about everything.
