The China Challenge Is Not the Japan Challenge—It’s Worse

Last week’s Trump–Xi summit produced plans for tariff reductions on about $60 billion in bilateral trade. While that may provide relief for some American exporters and consumers, the reductions focus on goods produced by “nonstrategic industries,” including hair care products and toys. Meanwhile, the agreement left key “national power industries,” such as semiconductors and batteries, outside its scope. Those are the industries that underpin economic strength and national security. That distinction matters.

Negotiating better terms for American farm exports and Chinese fireworks imports does not halt China’s multidecade, systematic campaign to dominate advanced industries, displace U.S. industrial capabilities, and fundamentally reshape the global order under CCP leadership. Nor does it deny Beijing the leverage to weaken and coerce the United States and its allies. Policymakers should not mistake easing trade tensions for easing the underlying threat China poses.

Yet techno-economic competition with China is a Rorschach test: People see what their ideological commitments predispose them to see. Some see the PRC as a threat, but many are convinced that threat is just an illusion.

For the progressive left, if the China threat is taken seriously, that means public policy will focus less on their main commitments: climate, racial justice, breaking up big companies, higher corporate taxes, and more regulation. For the free-market right, taking the threat seriously means more government and less unfettered free trade—things they oppose with all their being.

So, to protect their ideological agendas from challenge, the deniers use a variety of arguments to say, “Nothing to see here. Move on.” One of those arguments is that the China challenge is just like the Japanese challenge from the 1980s and 1990s: a nothingburger.

To be sure, the Japanese threat did somewhat dissipate. But that shouldn’t lead to complacency about China. U.S. policymakers should not assume that China will fade as an industrial rival just because Japan’s growth eventually slowed.

Let’s not forget that Japan has maintained a persistent goods surplus with the U.S. every year from 1985 through 2025. And America lost its dominance in consumer electronics manufacturing, much of its machine tool industry, and a large share of its auto market. The U.S. still hasn’t regained that ground.

While Japan may not have an iPhone or a Google of comparable global reach, it remains incredibly strong in a wide range of advanced producer goods, including coater/developer equipment for photolithography, CMOS image sensors, silicon wafers, industrial ceramics, photoresists, enterprise image scanners, and specialty chemicals.

Now, the key differences between Japan then and China today:

1. Security leverage. Japan sheltered under the U.S. security umbrella, and that gave the American government leverage. The Plaza Accord on currency, voluntary export restraints, the 1986 U.S.–Japan Semiconductor Agreement, and pressure to build auto factories in the United States were all possible in part because Tokyo depended on Washington for its security. China is not under the U.S. security umbrella; it is a military adversary.

2. Rule of law. Japanese mercantilism was real but bounded: administrative guidance, keiretsu (corporate group) procurement, and an opaque distribution system. Those were irritants, but they operated within a system with courts and enforceable property rights, which limited what Japan could do. The CCP-controlled state does not face independent judicial checks comparable to Japan’s on subsidies, forced technology transfer, or IP appropriation. And Beijing demands that national champions absorb sustained losses to capture a market.

3. Democracy. Eventually, Japanese leaders faced voters who could challenge policies that favored producers over consumers. Chinese households get no such vote. Beijing has long favored investment and export competitiveness at the expense of its own consumers. While household consumption in China rose from about 35 percent of GDP in 2010 to 40 percent in 2024, that’s still well below the 53 percent average for middle-income countries. Beijing can keep shortchanging its own consumers without facing the voters Japanese leaders had to answer to.

4. Market leverage. Japan was not as large as China, so U.S. companies faced less pressure to operate there. That gave the Japanese government less leverage over American companies. China is so large that many U.S. companies believe they cannot afford to stay out of that market; if they stay out, their European and other Asian competitors happily take the business instead. And that gives the CCP enormous leverage.

5. Hostages. Japan largely restricted market access for U.S. companies, which helped explain why American business lobbied so strongly for toughness and industrial policy in the 1980s. China induced U.S. companies to enter, leaving many firms with significant revenue at risk there. They often function as a standing constituency against confrontation. Beijing bought much of America's business class (and Europe’s). Tokyo never had comparable leverage.

6. Supply-chain leverage. Japan never had China’s combination of strategic chokepoints and willingness to weaponize them. China has leverage in rare earths, pharmaceutical inputs, and batteries and is expanding its position in legacy chips. For example, China’s export restrictions on yttrium, a rare earth used in jet engines and chipmaking equipment, have already disrupted U.S. production. Without alternative supplies, Beijing can keep doing so. As China works to create more chokepoints, the United States’ ability to “get tough” becomes even more limited.

7. Scale and impact. At its peak in the 1980s, Japan had roughly half of America’s population, and its smaller population limited its potential economic scale. China has roughly four times America’s population, and even with a shrinking population, its economy is already larger than the U.S. economy in purchasing power parity terms. Whether it overtakes the United States at market exchange rates is less certain, but possible. That scale gives China power.

8. Ambition. Japan wanted to move up the value chain through exports, but not in every industry. The PRC wants dominance across all advanced industries, bar none. It wants to write the rules of the international order, set global technology standards, and displace the United States as Asia’s security guarantor.

9. Learning. Beijing studied Japan’s experience closely to avoid a similar fate. The Plaza Accord helped drive the yen from 240 to the dollar to roughly 120 by early 1988. The Bank of Japan cut interest rates to offset the resulting slowdown, and the bubble followed. Whether appreciation or monetary policy deserves the blame remains debated among economists, but Beijing appears to have drawn a clear political lesson: Resist externally imposed revaluation and retain control over capital flows and the exchange rate.

China has run a managed float, kept a tightly controlled capital account, accumulated nearly $4 trillion in foreign exchange reserves at its peak, and retained substantial control over its currency's value. A Plaza Accord-style agreement would require Beijing’s cooperation; capital controls make market pressure alone less effective. Capital controls also insulate Beijing from the market discipline that would otherwise pressure it to rebalance.

10. The Galapagos syndrome. Many Japanese firms exquisitely optimized products for their home market but struggled to sell them abroad—the “Galapagos syndrome.” China watched that too and decided to combine domestic scale with global reach. Many of China’s leading firms are globally oriented and competitive from birth: Huawei, BYD, CATL, DJI, ByteDance, DeepSeek. That makes China a far more formidable competitor than Japan was in its MITI era.

11. Entrepreneurship. Many established Japanese firms excelled at process innovation but were less adept at disruptive innovation. Japan, for all its advantages, has struggled to foster entrepreneurial dynamism. Its postwar corporate culture prized the “salaryman” ideal, meaning a career built on long-term loyalty to one company. But China is different. Alongside its state-directed industrial policies, it has produced fiercely competitive entrepreneurial firms.

Japan was a competitor inside the U.S. alliance system. China is a rival trying to replace that system. Last week’s tariff negotiations don’t change that distinction: Easing commercial tensions does not end Beijing’s strategic campaign for global industrial dominance. The historical analogy with Japan may assuage ideologues unwilling to challenge their worldview, but it offers false reassurance that risks leading the United States to defeat.

The United States needs fundamental policy changes to strengthen its techno-industrial-economic system. It also needs coordinated action with allies to counter Chinese mercantilism and slow the PRC’s progress toward global dominance. Waiting for China to repeat Japan’s slowdown is not a strategy.