Our China Fears Compared to Japan
Oct 3, 2010

Our China Fears Compared to Japan

One of the dominant changes occurring on the world stage is the rise of the economic force that is China. With levels of fear, xenophobia and more than a little bit of awe at this rising Chinese economic strength becoming increasingly aparant in our national discourse, it is instructive to take a step back and compare both the rhetoric and reality to that of Japan's rise particularly in the 70's and 80's. The comparison shows that we have less to fear than the rhetoric indicates and ought to expect an increasingly multipolar economic world and not a replacement of our western unipolar economy with a Chinese unipolar economy on the world stage.

As China passed Japan as the worlds second largest economy a few months ago the comparison is both apt and timely. In both cases (China today and Japan 30 years ago) the basic aspect is a strong regional power experiencing an explosive growth rate, a rise in economic influence to second in the world and creating considerably competitive pressures on the west. In both cases a very strong American trade deficit resulted as their economies relied on exports and manufacturing to the west. The respective periods were marked by the development of a quickly growing middle class and rise in average living conditions for their countries. Perhaps most directly resulting in worry in the west, both were very successful at competitively taking over large portions of the market in sectors like electronics and automobiles for Japan and general factory manufacturing for China. In both countries there was a similar tendency by which the state gave enormous benefit and assistance to sectors of their economy whether it was a state oil company in China or companies like Toyota in Japan. Both countries are resource poor (Japan because of its geographic size and composition, China because of its immense demand resulting from high population) which while providing caps on growth has promoted a very aggressive outreach into the world to acquire basic resources and motivates to some degree their expansive economic policies.

While there were these similarities in the realities there were also similarities in the rhetoric. This fear of losing economic power to the two countries was and is very high and often cast in not so subtly xenophobic terms. The perception that the Japanese and Chinese were harder working and more willing to work in poor conditions, used as a pejorative, is a common perception. Complaints about their various protectionist policies (Japanese tariffs or Chinese currency), worries about being overly indebted to them and other economic worries were all very prevalent. Perhaps most interestingly, in both there was a persistent worry that the Japanese or Chinese would take over, surpass and replace the US economically. The result is that in both rhetoric and reality there is a lot of similarity between  China and Japan's respective boom to number two.

Now with Japan we know what happened. Their amazing decades long growth sputtered out in the 90s and has been more or less deflatimg or stagnating ever since with not one but two "lost decades". The fears that the US auto, electronic, manufacturing and other business would become a thing of the past never materialized. To be sure, Japan still maintains a powerful economy but the story is one decidedly  of Japan's rise to being a major player in a multipolar economic world and not replacing the unipolar US led world by a unipolar Japanese world. We have seen that the result is not zero sum on a large enough scale, the rise of Japan was not at the detriment of the US even if a specific industry like autos lost market share. So if we apply this outcome to china, motivated as we are by their similarities, equally we should not be so fearful of China being a dominant player in an increasingly multipolar world. On the specific issue of growth rate, while it seems unstoppable now, so to did Japan's and stop it did.  We have yet to see an example where the modernizing and creation of a middle class didn't introduce growth rate ceilings and curb the phenomenal growth after some time.

There are, of course, also significant differences between the two. Firstly, they are of course fantastically different societies. Japan has a largely western liberal democracy, fairly free markets and while historically it did provide much more assistance to their biggest international companies than the US did, it was more or less a free, competitive society. China remains by and large under an authoritarian communist rule although it has substantially embraced selective capitalism since Deng Xiaoping. So there is the possibility that the differences in their society will result in a special ability to dominate that Japan lacked. However, I feel the momentum is towards an increasingly liberal and market based society so they are likely to get more similar and as such face more of the same problems. As an interesting note, the collapse of the Soviet Union is often cast as the inevitable result of the failures of communism while contradictorily there still remains this big fear of Chinese economic dominance. Ultimately, neither side is likely completely correct.  Secondly, the geography, population and level of development of the two countries is very different. China in theory has far more room to grow than Japan ever did with a much larger population that can potentially modernize, become commodity and labour markets, and provide room for economic growth. At the same time, it is held back substantially by the sheer magnitude of its impoverished people, its lack of development and the scale of the resource problems it faces for things like energy. Japan got the luxury of while being energy poor, of coming to power during a cheap oil glut as was especially evident during the late 80s. For a long distance export dominated industries as both were, oil prices are significant. A third but more minor difference is the places China and Japan invest abroad. Japanese investment in the United States was relatively much higher than China's and instead of hoarding it, they reinvested much of the trade surplus back into the US gobbling up iconic brands like 7 11 and Rockefeller center. While it does invest a lot in the US, China has also invested heavily around world. Partly this is through the desire for resources as they are able to, say, outbid American oil companies in Iraq oil auctions who are unassisted (at least in comparison) by the US government. Partly this is just because the world has stabilized, globalized and presents a more diversified set of investment opportunities than it did for Japan back in the day. Regardless, the difference is important and has the potential for China to continue growing outside of a symbiotic relationship with the US.  A fourth difference is regarding the use of currency. In some ways this is mainly a different tactic than it is a different strategy. In both cases the idea of supporting the economic asymmetry by protectionism such as tariffs or restrictions on foreign investment at home and support of exports through loans, subsidizing costs (such as power generation) and the like. With deliberate currency devaluation it allows the Chinese exports to remain competitive. The exchange rate rose substantially for the Japanese actually which allowed them to spend their money investing in the US all the more. This is the issue dominating the political scene and a lot of US- China official  relations. Regardless, I don't feel this is actually a large systemic issue big picture as we are experience a race to the bottom in many countries currency wise and the desire to transform to a consumer market for its masses will motivate the Chinese to raise its currency if it ever wants to move past its current export dominated but somewhat limited economic model.

The result of this discussions is the idea that despite the differences, the similarities between Japan and China are compelling enough to use the history of Japan as something of a guide for the future for our relations with China. In particular, worries that our current economic world order will be replaced by a unipolar Chinese one are I believe unfounded. Instead, we should expect an increasingly multipolar world where China, Japan and the US are all merely powerful players in that world but none the kind of dominance once enjoyed by the US. However, the end result is I think good for all countries and not something to be fearful of.

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