China may be suffering from President Donald Trump’s trade war. A substantial number of Chinese companies are laying off staff, cutting wages and reducing capital expenditures. Prices are being slashed on goods subject to tariffs. And China’s export growth has slowed.
Of course, U.S. consumers and manufacturers will also get hurt by the tariffs. And there’s a chance that China’s slowdown is just a coincidence, and that the trade war has only slightly exacerbated the pain. China had already been trying to cool off credit growth in its shadow banking system, and its economy has been decelerating for the past six years:
But nevertheless, there’s a strong possibility that tariffs — and quieter but potentially more important restrictions on tech exports to and investment from China — are causing China pain. That raises the question of what kind of concessions the U.S. can demand from China, and what China is likely to agree to, in order to end that the conflict.
Earlier this year I suggested that one aim — in addition to concessions on intellectual property and lifting restrictions on U.S. business operations in China — would be to get the country to loosen its capital controls. This would help China take steps toward shouldering the burden of being the world’s reserve currency. In the short run, letting investors move money in and out of China might cause the yuan to fall in value against the dollar, but in the long run it would probably result in yuan appreciation, as global capital starts to park itself in China. This would be somewhat similar to the 1985 Plaza Accord, in which Japan and some European countries agreed to let their currencies appreciate relative to the dollar.
But it seems there’s little chance that China would agree to such a deal. Some people believe that Japan’s concessions to the U.S. in those long-ago trade talks sowed the seeds of its later economic bust in the 1990s. Thus, China’s leaders will probably be wary of repeating history.
This fear is misplaced. The Plaza Accord almost certainly did not cause Japan’s lost decade.
First of all, the agreement didn’t seem to do anything to halt Japan’s export juggernaut. Yes, the yen appreciated by about 100 percent against the dollar after 1985:
But despite the big currency swing, Japan’s trade surplus didn’t shrink much in the years that followed. What’s more, Japanese growth accelerated for years after the accord was signed. The late 1980s were a legendary boom time in Japan:
So those who believe that the Plaza Accord crushed Japan’s economy must believe that it did so through indirect means. Instead of halting Japan’s trade surpluses or slowing its growth, they must believe that the Plaza Accord gave rise to the asset bubbles whose bursting caused Japan’s economy to stagnate in the 1990s.
Writing in the Wall Street Journal, Peter Landers makes this argument. The idea is that the Bank of Japan, concerned that the Plaza Accord would slow Japan’s economy, kept interest rates too low in the late 1980s, giving rise to bubbles in the price of land and stocks. The BOJ cut interest rates from 5 percent in November 1985 to 2.5 percent by March 1987, and didn’t raise rates again until two years later: