Media  Foreign Affairs and National Security  2019.11.21

Will Japan be a loser in U.S.-China trade war?

the japan times on November 5, 2019

It was a cozy but significant occasion. Forty participants including former deputy defense ministers, chiefs of staff of the Self-Defense Forces as well as many generals and admirals gathered Monday night to commemorate the 20th anniversary of the SDF's training program at the Stimson Center in Washington.

The program was launched in 2000 when the SDF started sending visiting fellows to the U.S. capital. Yuki Tatsumi, now co-director of the East Asia Program at the Stimson Center, is the founding director of this unique training program for competent mid-ranking SDF officers. Tatsumi was also with us over the weekend at the Canon Institute for Global Studies (CIGS) when we hosted another 24-hour policy simulation (war game). This time we focused, for a change, on the geoeconomic crisis caused by the U.S.-China trade war in the first half of 2020.

My takeaways from this simulation were scary. Japan was so indecisive that it achieved almost nothing. As the U.S.-China trade war intensified, Washington urged its allies to raise tariffs against China by 30 percent. In response to the U.S.-dominant virtual currency system, China launched a new monetary scheme called digital renminbi.

Both Washington and Beijing asked other nations to choose one of their two systems. Trapped in quandary with an allegiance test, Tokyo decided to pursue a third way, working with European nations to establish another digital currency system. Everybody predicted a serious economic showdown between the U.S. and China.

At the end of the policy simulation, however, Washington and Beijing agreed to lift the additionally imposed tariffs on each other. The U.S. was willing to resume dialogue to solve the trade issues. China praised the new agreement as reflecting "the new major-power relations" between China and the U.S.

Was Japan a loser in the game? Would China outsmart the U.S. and win a trade war against Washington? Would new digital currency systems divide the global economy? While CIGS will eventually publish a more detailed report on this event, the following three points are my personal takeaways from the simulation's outcome.

1) How the market views Japan. In this simulation, the Japan team had virtually no dialogue with the market so Japan's policy measures were not taken seriously. In fact, 70 percent of Japanese stocks are traded by foreigners and the Tokyo stock market is heavily dependent on how the world sees Japan, not vice versa.

2) The asymmetrical relationship among Japan, China and the U.S. Japan-China relations are, unfortunately, heavily dependent on relations between the U.S. and China. In this simulation, Japan had space for maneuvering only when Washington disagreed with Beijing.

3) Japan's failure of the allegiance test. Tokyo decided to avoid taking sides between Beijing and Washington. In a real politico-military situation, however, decision-makers must take sides whether they like it or not. In this regard, the outcome of the game seemed rather unrealistic to me.

Talking about unrealistic judgments, one of Japan's best economists recently misread the speech on China by U.S. Vice President Mike Pence that he delivered at the Wilson Center on Oct. 24. The economist concluded that the speech was "more moderate" than his first speech on China in October 2018.

Similar views were also expressed by a prominent Japanese scholar on American politics. "In his second speech," he asserted, "the U.S. policy vis-a-vis China seems to have somehow changed, which is worth our attention." One wonders if he really read the transcripts.

Both the economist and the scholar took notice of the following in Pence's second speech: "And people sometimes ask whether the Trump administration seeks to 'de-couple' from China. The answer is a resounding 'no.' The United States seeks engagement with China and China's engagement with the wider world."

Their argument must be that in his first speech Pence strongly hinted "de-coupling" from China, but now that it is almost impossible to "de-couple" from China, the U.S. administration changed its position vis-a-vis Beijing and put more emphasis on engagement with China.

Alas, it is difficult to analyze issues related to the U.S. and China. If you predetermine or wish to see that there will be rapprochement or at least slightly better relations between the two countries, you will be doomed. The second speech was as critical of China as the first one, while both speeches tried to reach out to Beijing.

For example, at the end of his first speech Pence stated that "we want a constructive relationship with Beijing where our prosperity and security grow together, not apart. ...Today, America is reaching out our hand to China. And we hope that soon, Beijing will reach back with deeds, not words, and with renewed respect for America."

At the end of the question and answer session after the second speech, the vice president also said, "If we can get this economic relationship right, we may lay a foundation for also addressing other issues." This simply means that even if they solve these economic issues, competition and rivalry with China will continue.

Thus, I see virtually no change, both in tone and substance, between Pence's first and second speeches on China, despite some experts' rather optimistic interpretation of a shift in U.S. attitude toward Beijing. Preconceptions and wishful thinking are always the biggest obstacles for understanding reality.