When Japan Was China
By Jock O’Connell
Talk of trade these days almost invariably focuses on China. And why not? The country’s rapid emergence as a colossal economic power—and potential military foe—demands our attention. By some reckonings, especially those encouraged by Chinese President Xi Jinping, China will soon overtake the United States as the world’s preeminent geopolitical power. That forecast obviously troubles an unashamedly nationalist administration in Washington, whose byword is not merely “America First” but “America Foremost”.
President Xi’s bold quest for global influence also worries American national security analysts like Harvard’s Graham Allison. His 2017 book Destined for War: Can America and China Escape Thucydides’ Trap? describes the tensions that have historically arisen whenever newly ascendant nations confront the existing dominant power. In most cases, Allison disturbingly concludes, the outcome is war.
Although an incident in the South China Sea could trigger an armed clash between American and Chinese naval forces, the immediate danger is that the two nations will lurch into a full-blown trade war.
So, what does all of this mean for those whose business it is to transport goods between the world’s two biggest economies? After all, the future of U.S. West Coast ports is tightly wrapped up in the future of China. And that future is hard to discern.
At this point, let me indulge in a moment of déjà vu. Back in 1991, a book titled The Coming War with Japan hit the best-seller list. Its authors sketched a scenario in which the implosion of the Soviet Union two years earlier would lead an economically ascendant Japan to challenge America for world supremacy. It is, of course, a plotline that looks fundamentally absurd…in retrospect. But it did not seem so daft at the time.
1980s Trade Hysteria
Those of us who worked in public policy circles through the 1980s will recall the political histrionics that engulfed the nation as America’s global pre-eminence was being tested for the first time in the post-World War Two era. Just as today, the chief metric that policymakers used to evaluate the nation’s competitiveness was the size of the merchandise trade deficit. As Exhibit A shows, trade was reasonably balanced at the start of the decade: exports totaled $225.57 billion, while imports amounted to $245.26 billion. By 1985, however, exports had slipped to $218.82 billion, while imports grew to $336.53 billion, resulting in a $117.71 billion deficit. Just two years later, the deficit had swollen to $152.12 billion.
The numbers may seem modest by today’s profligate standards, but they were high enough then to unnerve America’s political leadership. At doubt was American industry’s ability to compete in foreign markets while resisting the inroads foreign companies were making in American markets.
Individual states and cities across the country responded by revising public procurement regulations to favor American-owned suppliers. Several states, including California, opened export promotion offices abroad, under the peculiar notion that government bureaucrats were somehow uniquely gifted at stimulating business for exporters back home. But nowhere was the reaction to the trade numbers more exaggerated than in Washington, D.C. There, politicians of both parties tended to ignore the macroeconomic causes of the deficit (a strong dollar, federal budget deficits, and a general propensity to spend rather than save) in favor of rounding up the usual suspects. And that was easy.
Parsing the rising trade deficit in the 1980s revealed that two nations accounted for almost half of the imbalance. One was West Germany, which accounted for about ten percent of the deficit at the highwater mark of the crisis in 1987. The other was Japan, which was responsible for a whopping 37% share. (By comparison, China alone accounted for 47% of the U.S. merchandise trade deficit last year.)
The unbalanced trade between the United States and Japan and Germany elicited a reaction in Washington that was even more acutely nationalistic than we see today. That’s because the leading U.S. policymakers at the time were all members of the “Greatest Generation” that had four decades earlier fought a real war against the Axis. To them, the idea that Japan and Germany (but especially Japan) had not only recovered from the devastation we had inflicted on them but had apparently outflanked us with presumably superior economic models was personally galling. A National Bureau of Economic Research whitepaper in 1988 explained the political context: “The bilateral relationship with Japan now dominates American thinking on the benefits and costs of foreign trade. Japan has become the model of all things modern and efficient, the standard against which the United States measures its own economy and finds itself wanting.” Against a background of ever-increasing bilateral imbalances, protectionist rhetoric spiraled. Sound familiar?
By the end of the next decade, we had ceased fretting so much about the Germans and the Japanese. Neither seemed to pose an existential threat to America. For their part, Germans soon turned inward to the challenge of integrating their East German cousins into the West and to nurturing the expansion of the European Union. Japan, meanwhile, stumbled into a prolonged period of economic stagnation. No longer did its economic model seem so worthy of emulation. No longer were its diplomats heard to claim that the land under the Imperial Palace in Tokyo was worth more than all of the real estate in California.
Japan’s humbling funk came as a new Asian player emerged, and this would have profound implications for transpacific maritime trade. In 1980, when Deng’s economic reforms were just getting underway (and when I first visited China), Japan dominated America’s maritime trade. According to MARAD statistics, Japan accounted for 23.3% of our entire containerized trade with the world that year. Second place Netherlands held a 10.4% share. If there was a China trade that year, it involved Taiwan and Hong Kong, which respectively accounted for 8.4% and 7.8% of America’s oceanborne containerized trade. The People’s Republic of China does not even appear on MARAD’s list of the nation’s top 40 trading partners for 1980.
Today, of course, China accounts for a dominant share of U.S. containerized trade, 45.9% in 2017, while Japan’s share has fallen to 8.2%. As for trade between China and Japan and U.S. West Coast seaports, Exhibit B shows containerized tonnage levels over the past fifteen years.
As Exhibit B shows, the volume of containerized trade between Japan and USWC ports has not been growing. Partly, this has been due to Japanese investments in manufacturing plants in North America that had the effect of reducing imports. Still, one of the more interesting (and no doubt counterintuitive) findings from a closer assessment of U.S. maritime trade with Japan is that, while the U.S. continues to run an overall merchandise trade deficit with Japan ($68.88 billion last year), that deficit is not reflected in the volume of seaborne trade between the two countries.
As Exhibit C reveals, the U.S. ships more containerized tonnage to Japan by sea than Japan ships to us. That is because U.S. exports to Japan are dominated by agricultural produce and raw or unfinished materials, Japan’s exports to the U.S. run heavily to manufactured goods. For example, where the category of Industrial Machinery (including computers) is Japan’s leading export to the USWC ports, our top export to Japan is Oil Seeds (soybeans).
Japan Today and Tomorrow
Japan, of course, remains a formidable economic power. Yet it no longer engenders the kind of fear it did in the 1980s. The nation’s economy underwent a growth spurt that saw its GDP triple between 1980 and 1990. But growth peaked in 1995 and, according to World Bank statistics, Japan’s GDP is less now in real terms than it was then. GDP growth rate in Japan between 1980 and this year averaged an anemic 0.5%. Japan tomorrow is even less likely to pose a threat to U.S. interests, although certain trends point toward a continued fall-off in trade between the USWC ports and Japan.
One key reason is that Japan, like China, is among the major economic powers that are shrinking in population. The Japanese Health Ministry reports that 946,060 babies were born in Japan in 2017, the fewest number of births since official statistics began in 1899. The Japanese population had grown steadily throughout the 20th century, from around 44 million in 1900 to 128 million in 2000. The gains were primarily due to increased life expectancy but were also buoyed by families that typically had at least two children. However, beginning in the late 1970s, birth rates started to crash. By 2100, according to the consensus of demographic forecasters, there could be nearly 40 million fewer Japanese than there now are. In both Japan and China, populations are also aging, limiting the size of workforces and increasing the burden of caring for elderly residents. At the same time, consumption patterns should shift, perhaps dramatically, as people typically consume fewer goods but more services once they pass retirement age. Fewer people buying fewer goods is not a recipe for growth in merchandise trade.
The commentary, views, and opinions expressed by Jock O’Connell are his own and do not reflect the views or positions of the Pacific Merchant Shipping Association. PMSA does not endorse, support, or make any representations regarding the content provided by any third party commentator.