Is China Japan all over again?

In the 1980s, Japan was the bigfoot rival to the US economy. But this Asian giant is different.

By , Staff writer of The Christian Science Monitor

Chinese firms failed in their bids to buy Unocal and Maytag this summer. But that's barely diminished the anxious warnings from Washington. Indeed, as China's economy grows, it's easy to think the 1980s are back.

That's when Japan's economic "miracle" threatened the US, prompting an intense backlash as companies like Toyota and Subaru, Matsushita, and Sony grabbed growing shares of industries at the heart of US identity: cars, steel, and consumer electronics.

Now the ominous warnings are resurfacing - with China cast as the villain.

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As concerns grow that a new Asian giant is intent on challenging the US in everything from sedans to software, the Japan experience of the '80s may provide insights on how the US and China might compete - and coexist - in the global economy of the 21st century.

On one level, say analysts, China is not as much of a threat as it is often portrayed to be. It has decades to go to match the high-tech and management prowess of the US - unlike Japan 20 years ago. Another critical difference is that Beijing has welcomed foreign investment and companies. That's something that Tokyo was (and still is) loath to do. China's total exports and imports accounted for 75 percent of GDP in 2004, for example; the figure for Japan is about 25 percent. And China, thus far, hasn't bid for such American icons as Rockefeller Center, though it clearly has set its eye on greater investment in the US.

In many respects, China's challenge to US economic and strategic influence is only beginning to take form. True, its growth - officially 9 percent annually since embracing market reforms a quarter-century ago - is impressive. And the country is boosting the skills of at the high end of its labor force - churning out more PhDs and building engineering schools - even as its huge reserves of low-wage workers ensure its status as "factory of the world."

Rising, but slowly

"China, with its supply of cheap labor and high levels of education, will continue to be a very big challenge, one that's unlikely to level off as quickly as Japan," says Ezra Vogel, a professor at Harvard University and an expert on China and Japan. But he adds, "While there will be a lot of Americans frightened at a growing China, if we have skillful political managers, there's no reason we can't get along."

China's rise certainly bears similarities to that of Japan. It's easy to forget that Japan once battled with the US over textile exports. Both Asian nations have pursued export-driven growth and focused on developing "strategic industries" like autos and electronics. Like China now, Japan once faced pressure to strengthen its currency to help reduce a monumental trade deficit with the US.

But while there are trade barriers that contribute to that deficit, there's no question the Chinese economy is more open to outsiders than Japan's. China has set up joint ventures as a way to leapfrog development in cars, for example. Foreign direct investment hit nearly $55 billion last year, compared with Japan's $8 billion.

As a result, corporate America today is solidly behind China. American business was solidly antagonistic toward Japan - a result of battles for the right to sell everything from apples to autos in its markets.

China to Wal-Mart: $18 billion

But US business interests - Wal-Mart, General Motors, Microsoft - are increasingly intertwined with China's. America's largest corporation, Wal-Mart, stocked its shelves with $18 billion of goods from China last year.

Companies that once led the charge on Capitol Hill to get tough on Japan are worried about lawmakers' increasingly charged views of China, evidenced most recently in the failed bid by a Chinese firm for the US oil company Unocal.

China also has a friend in US consumers. For the most part, its exports are taking jobs from other countries. And as loyalty to "Made in USA" has waned, low prices - a product of cheap Chinese labor - have become viewed as something of a right.

"The American consumer is not jingoistic," says Laurent Jacque, an economics professor at Tufts University's Fletcher School. Most Americans will choose the cheap import over the more expensive US-made product.

But that very cheapness is causing uneasiness. As high-quality Japanese goods gained ground in US markets, US embraced Japanese quality control and "just in time" purchasing. But in China's case, one thing remains a focus: cost.

"Many people look at China and say, there's no way we can catch up with those prices," says Oded Shenkar, professor at the Fisher School of Business at Ohio State University. He notes that China is unlikely to lose its low-cost advantage even as it moves up the technological ladder. "This generates negative sentiment."

The fact that many Chinese companies are state-owned - with access to cheap capital and labor - is also a sore point.

"One thing that caused so much tension was that the premise of all of our negotiations with Japan was that ... the Japanese economy was similar to ours," says Clyde Prestowitz, president of the Economic Strategy Institute and author of "Three Billion New Capitalists." "That was a false assumption. The same is true of China. They are not playing our game."

He notes that the consumption-driven economy of the US has no match in Asia, where things are structured to export. Still, the American economy has many strengths, and Americans have long had faith in their ability to innovate themselves out of problems.

Patent pirates

But China is playing on an uneven field. It has done little to stem the tide of patent and copyright infringements that help produce cheaper knockoffs of competitors' goods - something the US is pushing China to have corrected. China has also been skillful at getting technology transferred that will help it develop.

Perhaps the biggest challenges underlying the US-China relationship, observers say, are the political ones - differences over Taiwan and support for regimes the US opposes. Japan is a military ally in Asia. China is seen as an emerging military rival.

"With Japan, we never felt there was any fear, just a sense of injustice," says Mr. Prestowitz. In the case of China, he says, "If you could strip away the politics, there wouldn't be too much concern about the relationship."

But as the US continues to be dependent on foreign financing of its deficit, and sees the limits of its influence as China "cozies up" to countries like Iran, Zimbabwe, and Venezuela, he says, "it's going to get tougher."

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