The trade war with the US ended in a fiasco for Japan. Switzerland should learn the lessons from it.

There was once a time when the Western media warned at a rapid pace about Japan's rise. Titles like "The Rising Sun" and "The Coming War with Japan" dominated the book market. The German news magazine "Der Spiegel" predicted the demise of the German auto industry, Hollywood films incorporated Japanese villains into their plots, and when Mitsubishi bought the Rockefeller Center in New York in 1990, there was a great outcry. Commentators warned of the "Japanization of America."

The warning was exaggerated. As is well known, Japan did not become the new world power, but rather suffered a precipitous economic decline in the 1990s, from which the country has only recently recovered. Less well known, however, is the underlying reason for Japan's decline, and because it is so relevant today, it is worth recalling. Japan did not decline automatically; rather, it was punished by the United States. What happened then reads like a script for the events we are witnessing today.

Even then, foreign trade played a crucial role. In the early 1980s, Japan's trade surplus grew steadily, while the United States faced a growing trade deficit. At public events and on talk shows, businesspeople, trade unionists, and politicians complained about the growing imbalance. One of them was New York real estate developer Donald Trump. "If you go to Japan now and try to sell something, you can forget it," he explained in a 1988 interview. "The Japanese come here, sell their cars, their VCRs, and destroy our companies." Trump's obsession with trade deficits goes back to the conflict with Japan.

The trade surplus reached a record high of 4 percent of Japanese GDP by the middle of the decade, while the American deficit seemed to be spiraling downward. Congress reacted promptly with a sharp condemnation of Japan's trade practices and pushed for the imposition of a 25 percent tariff on all Japanese imports. The initiative came from the Democrats. They feared that a large portion of industrial jobs would disappear under the pressure of foreign competition. One of the advocates of a hard line was Democrat Dick Gephardt. Already during the 1980 election campaign, he declared: "We will not allow our workers and industries to be displaced by unfair import competition."

The threat worked. Japanese automakers soon began building factories in the United States to continue supplying the large American market. The fierce reaction from Congress prompted the Reagan administration to take action. In 1985, it invited Japan and other industrialized nations to the Plaza Hotel in New York to agree on measures to weaken the dollar. The so-called Plaza Accord led to a sharp appreciation of the yen, which, with some delay, also reduced the trade surplus. The United States had achieved its goal.

Japan, however, paid a high price for this. To slow the appreciation following the Plaza Accord, the Bank of Japan reduced interest rates, even though the economy was booming. The result was a gigantic real estate boom. In the major cities, house prices skyrocketed starting in 1987 and doubled by the end of the decade. To correct its mistake, the Bank of Japan raised interest rates from 2.5 to 6 percent in 1989/90, but it was too late to bring about a soft landing. On the contrary: The interest rate shock triggered the worst real estate crisis of the late 20th century. To prevent deflation, the authorities pursued an extremely expansionary fiscal policy, which caused record-high levels of debt. The share of public debt in GDP is now around 250 percent.

Of course, the Japanese crisis cannot be entirely attributed to Washington's measures. But they were certainly decisive. Japan allowed itself to be intimidated, made economic policy mistakes, and went astray. The memory of the Japanese fiasco is therefore extremely relevant for dealing with today's tariff dispute. Concessions should certainly be made to the Trump administration, but the price must not be too high. Above all, Switzerland's position as a pharmaceutical center must not be permanently weakened. The pharmaceutical industry not only accounts for a large portion of exports but also forms the country's most important innovation network. Our economic future depends crucially on it.

Tobias Straumann is Professor of Economic History at the University of Zurich.

An article from the « NZZ am Sonntag »