If trade imbalances truly fuel protectionist backlash, as many claim, the world should have witnessed comparable anti-trade sentiment during the 1980s when the US’s deficit with Japan reached historic proportions. Yet the past tells a different story. Japan was offered – and wisely seized – an economic escape valve that today’s geopolitical climate threatens to deny China. This asymmetry not only betrays a fundamental misunderstanding of how global trade evolved but risks triggering an unprecedented economic disruption.
Japan’s solution to trade friction came through a direct investment revolution. Faced with mounting trade barriers and the Plaza Accord’s dramatic yen appreciation, Japanese manufacturers transformed themselves from exporters into local producers. Toyota, Honda and Sony didn’t retreat from the US market, they embedded themselves within it. This ‘build locally, sell locally’ approach defused trade tensions while preserving market access and protecting against currency volatility.
This strategy wasn’t revolutionary but evolutionary. American corporations had blazed that trail decades earlier. By the early 1960s – long before ‘globalisation’ entered our lexicon – sales from US companies’ foreign affiliates already exceeded traditional exports. American businesses recognised that direct investment offered resilience against both protectionist impulses and the dollar’s persistent strength. When foreign markets threatened to close or currency valuations made exports uncompetitive, embedded local production provided strategic immunity.
Misreading China’s economic model
Today’s conventional wisdom portrays China as an export-dependent economy whose growth model must inevitably clash with western interests. This fundamentally misrepresents economic reality. China’s exports constitute less than 20% of gross domestic product – lower than Germany (47%), South Korea (43%) and even Canada (32%). The notion that China’s prosperity depends primarily on flooding western markets with goods is simply unsupportable by data.
Since the 2008 financial crisis, Chinese domestic consumption has risen dramatically. That consumption hasn’t claimed a larger share of GDP reflects not consumption weakness but rather China’s continued robust investment. This same investment could power a global direct investment strategy if permitted to deploy internationally. Chinese households are buying more than ever, but investment continues to outpace even this impressive consumption growth.
We stand at a critical inflection point. If China is denied the same evolutionary path that Japan followed – and that the US pioneered – we will intensify global trade frictions beyond anything witnessed in modern economic history. The stakes extend far beyond tariff rates or trade balances; they encompass the fundamental architecture of the global economy.
Trade not the enemy of equality
The narrative linking rising inequality in the US to global trade represents perhaps the most pernicious economic misconception of our time. If trade openness caused wealth disparity, we would observe the most ‘open’ economies suffering the greatest inequality. Yet countries such as Denmark, Sweden, the Netherlands and Germany all maintain significantly higher trade-to-GDP ratios than the US, while simultaneously achieving far more equitable wealth distributions. These countries also engage more intensively with global markets yet maintain stronger social cohesion and less extreme inequality.
The American paradox – rising GDP alongside widening inequality – stems not from Beijing’s policies but from decisions made in American corporate boardrooms and legislative chambers. As of 2025, the US is wealthier than ever, with record-high GDP and household net worth. The failure to distribute this prosperity equitably represents a domestic policy failure, not an inevitable consequence of global engagement. As a result, two imperatives emerge:
First, western economies must permit China to pursue the same direct investment strategy that defused previous trade tensions with Japan. Blocking this evolutionary path won’t restore manufacturing jobs or revitalise declining regions – it will simply accelerate economic fragmentation while denying both sides the benefits of continued engagement. The choice isn’t between competing economic models but between adaptation and unnecessary conflict.
Second, addressing America’s wealth and income disparities requires domestic policy solutions rather than trade restrictions. The evidence conclusively demonstrates that inequality stems from internal power relationships, tax structures, labour market institutions and corporate governance – not from trade agreements or import competition. Blaming foreign competition for domestic policy failures merely distracts from the real work of institutional reform.
A template for today
History offers clear lessons for those willing to learn. The direct investment revolution that transformed Japanese-American economic relations provide a template for defusing today’s tensions with China. Similarly, the varied distributional outcomes among trade-oriented economies demonstrate that domestic policy choices – not trade itself – determine who benefits from prosperity. This applies not only to modern trade disputes but also to earlier episodes of economic diplomacy. For instance, Keynes opposed the ‘bleeding of Germany’ not out of a particular fondness for Berlin, but because of realpolitik considerations.
The question isn’t whether global economic integration will continue, but whether we’ll manage this evolution intelligently or sabotage it through misdiagnosis and misguided remedies. The stakes – for economic prosperity and geopolitical stability alike – could hardly be higher.
Marc Chandler is Chief Market Strategist at Bannockburn Global Forex.
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