’80s Fears of a Japanese “Economic Pearl Harbor” Look Silly Today—But They’re Instructive

This article appeared at the Foundation of Economic Education on June 14th, 2019

I know from a common sense financial standpoint that something has to burst. When a country is losing billions and billions and billions of dollars a year and when other countries are making hundreds of billions of dollars, something is going to burst.

These are familiar words from Donald Trump. They aren’t the words of President Trump talking about his misguided trade war with China in 2019but of businessman Trump talking about the trade deficit with Japan in 1989. Japanese cars, Chinese steel, the song remains the same.

Then as now, since China’s accession to the World Trade Organization in 2001, American producers have been faced with increased competition from more productive foreign firms.

Between 1963 and 1967, the Kennedy Round of talks took place under the General Agreement on Trade and Tariffs (GATT), followed by the Tokyo Round (1973-1979) and the Uruguay Round (1986-1993). Together, these reduced tariff rates in all the developed nations (averaged over dutiable items) by about one-third.

Superior productivity gave Japanese producers an edge in these newly competitive markets. With automobiles, as economist David Flath explains:

Process innovations that had been developed at Toyota in the 1950s and 1960s, and then diffused to other Japanese companies, had lowered the production costs of the Japanese auto manufacturers and boosted their exports. Then the rise in gasoline prices arising from the two oil shocks (the 1973 Arab oil embargo and the 1979 Iranian revolution) switched demand away from the large American cars and toward the Japanese imports.

Between 1975 and 1982, Japanese manufacturers’ share of total US new car sales rose from 9.4 percent to 22.6 percent.

Then as now, the US found itself buying more stuff from than it was selling to a particular trade partner, resulting in a trade deficit. This totaled $49 billion with Japan in 1989, which so alarmed businessman Trump.

But the flipside of this was that the Japanese, like the Chinese now, were selling more stuff to than they were buying from a particular trade partner, giving them a trade surplus. Where America piled up consumer goods, Japan piled up dollars. Surely, the Americans were doing better out of this.

What could Japan do with these dollars? They sent them home, using them to buy assets like the Mobil Building in New York in 1987, Firestone Tire and Rubber Company in 1988, and the Rockefeller Center in Midtown Manhattan in 1989. These dollar inflows showed up as a surplus on the US capital account, offsetting the ballyhooed deficit on the trade account.

Then, as now, American producers began demanding, and getting, protection from Congress and the president.

The American auto industry found eager defenders in both parties. During his 1980 presidential campaign, Ronald Reagan said

Japan is part of the problem. This is where government can be legitimately involved. That is, to convince the Japanese in one way or another that, in their own interests, that deluge of cars must be slowed while our industry gets back on its feet….

In 1981, Senators John Danforth (R-MS) and Lloyd Bentsen (D-TX) proposed a bill to establish import quotas for automobiles. The Japanese government acquiesced, agreeing to a system of voluntary export restraints. Initially set to run until 1983, they were renewed annually until 1994. As a wise man once said, “A government bureau is the nearest thing to eternal life we’ll ever see.” That wise man was Ronald Reagan in 1964.

Then, as now, military metaphors entered circulation.

In 1985, Sen. Bentsen fretted, “We are in a trade war, and we are losing it.” In 1988, commentator Paul Harvey warned of “an economic Pearl Harbor” in an article titled “Japan buys US with our money.”

The military talk went beyond metaphor. The esteemed writer James Fallows “wrote a series of articles on Japan…in which he hinted at the darker side of the Japanese character by citing the sadomasochistic violence in Japanese sex comics.” A string of books appeared with titles like The Japanese Challenge and Japan as Number One.

These weren’t fringe ideas. Of 1991’s The Coming War With Japan—an actual war, not Sen. Bentsen’s trade war—Publisher’s Weekly wrote that while the authors “sometimes overstate their thesis…their scenario is plausible.”

Then, as now, it was a curious kind of war where the two combatants were transacting voluntarily.

The trade figures showed that American consumers were happy to buy from Japanese companies. While politicians and commentators fretted about the “trade war” with Japan, Street Hawk’s Jesse Mach was fighting crime from the back of a 1984 Honda XR500, and The Breakfast Club was listening to Sony Walkmans. “Pearl Harbor didn’t work so we got you with tape decks,” quipped Die Hard’s doomed Mr. Takagi.

Everyone seemed to have forgotten a basic lesson: when goods cross borders, armies won’t. The war never came.

In 1990, Japan’s stock market collapsed, and the economy tanked. It is arguably yet to recover. As with Ireland’s Celtic Tiger, a “good” boom based on improved productivity was replaced and smothered by a “bad” boom based on cheap money. Businessman Trump had been right: Something had, indeed, burst, but probably not in the way he expected. And for the concerns about Japan buying up the US, the Mobil Building is still on East 42nd Street in Midtown Manhattan, the Rockefeller Center can still be found nearby between 48th and 51st Streets, and the combined Bridgestone /Firestone North American operations are now based in Nashville, Tennessee.

Few now worry about the US and Japan going to war. That avalanche of cheap consumer goods that some thought masked “an economic Pearl Harbor” was just an avalanche of cheap consumer goods.

Few now worry about the US and Japan going to war. That avalanche of cheap consumer goods that some thought masked “an economic Pearl Harbor” like a shroud of fog in front of a flight of Zeros turns out just to have been an avalanche of cheap consumer goods after all.

The similarities between the current concerns about China and the worries about Japan in the 1980s are striking; improved productivity in a trade partner, complaints from domestic producers, political hyperbole, “retaliation.”

We’ve been here, or somewhere very similar, before.

There are differences, to be sure. China has ongoing territorial issues which it wants to resolve, primarily with relation to Taiwan. But, in this case, history gives us some cause for optimism.

John Phelan is an economist at the Center of the American Experiment.