Can China end like Japan in its trade war with US?

The US has been criticizing China for its unfair trade practices and, in the past, even currency manipulation. These developments remind us of the US-Japan disputes in the 80s and 90s. Because Japan was politically and economically dependent on the US, it inevitably implemented economic policies to reduce its current account surplus. Subsequently, Japan suffered from a bursting asset price bubble, which led to deflation and clearly a lost decade – if not more- growth wise. With this experience in mind, the important question is whether the US-China trade war could end like that of Japan. Our take is that definitively no. Being less dependent on the US, China is in a better position to resist US pressure to adjust its economic policies to create demand for US products. This was specially the case for the exchange rate (with a massive appreciation of the yen) and very lax monetary policy to create more import demand in Japan. Another important lesson relates to Japan’s downplay of its strong industrial policy by accepting to step up its imports of US semiconductors, effectively reducing the competitiveness of Japan’s own semiconductor industry. Similar lessons can be learnt from Japan’s auto industry. Because China’s growth prospects are still relatively solid, which basically guarantee a larger size than the US economy soon and China does not depend on the US militarily, one should expect China to be ready to challenge the US pressure in the ongoing negotiations for a settlement to the trade war. This also means that any deal will only be temporary as the US will not be able to contain China as easily as it contained Japan.