The Plaza accord, one of the great episodes of coordinated foreign-exchange policy, turned 41 in September. It is increasingly being invoked as a template for a new agreement to force the Chinese renminbi higher. But this analogy while appealing, is also misleading.
The Plaza accord was signed by the US, Japan, West Germany, France and the UK at New York’s Plaza Hotel on 22 September 1985. The goal was clear: the dollar had become too strong, and a more orderly alignment of currencies was desirable to arrest the protectionist push in the US.
The Reagan-Volcker policy mix was a powerful part of the explanation of the extreme dollar over-valuation at the time. Expansionary fiscal policy combined with tight monetary policy produced high US interest rates and attracted foreign capital into dollar assets. The federal deficit approached 6% of gross domestic product while the federal funds rate had been around 20% in 1981.
There is an important wrinkle to the popular version of the story. The dollar had already begun to decline before the agreement. Indeed, central banks had been intervening against it for months. The dollar fell sharply immediately after Plaza, but the agreement reinforced a trend that was already underway.
Superficial symmetry
The case for a new Plaza rests on a superficial similarity. China has a huge trade surplus, the renminbi is widely viewed as undervalued, and the US and Europe would like China to rely less on exports and more on domestic demand. Some have proposed coordinated pressure to force the renminbi higher.
But Japan in 1985 and China in 2026 are not remotely comparable bargaining positions.
Tomomitsu Oba, Japan’s vice finance minister for international affairs and one of the principal Japanese negotiators, later offered an unusually candid explanation of why Tokyo yielded. Japan’s economic rise had occurred under the protection of the US-Japan security alliance. Oba understood that strategic dependence constrained Japan’s freedom of action. In his later recollection, Japan felt it had to accommodate Washington.
Beijing, by contrast, has acquired leverage over supply chains that Washington and Europe cannot easily replicate. China accounted for around 60% of global mined magnet rare earths in 2024, 91% of refining and an extraordinary 94% of sintered permanent-magnet production. These are not commodities sitting at the beginning of a supply chain. They are embedded in the technologies of automobiles, wind turbines, industrial machinery, data centres and defence systems.
China occupies important positions across a broad range of manufacturing supply chains, from low-value-added goods to increasingly sophisticated machinery, electronics, batteries and clean-energy equipment. Its leverage is therefore not merely financial; it is industrial.
That makes the threat of coordinated pressure very different from 1985. Push too hard on the renminbi and Beijing can push back somewhere else. The blowback would not necessarily be a stronger renminbi and a smaller trade imbalance. It could be higher input prices, disrupted production and weaker growth in the US and Europe.
There is another problem. The G7 does not command the global economy the way the G5 did in 1985. Developing countries have their own interests. Many have benefitted from access to inexpensive Chinese manufactured goods and capital. They are unlikely to automatically join a western campaign designed to constrain China’s competitiveness.
If the US and its allies cannot force China to appreciate the renminbi is there nothing that can be done? The political realist solution is to find a way to make appreciation serve China’s interests.
Lessons from Plaza
In the 1950s and 1960s, the US gradually shifted from an export-orientated economy towards one in which American companies increasingly invested directly abroad. Japan eventually followed a similar path. As the yen appreciated and trade friction intensified, Japanese companies increasingly moved production offshore. Foreign direct investment became an alternative to exporting from Japan.
Perhaps the more interesting lesson from the Plaza is that Japan now runs a trade deficit. Â Currency appreciation was not, by itself, the solution. The deeper adjustment came from changing where production occurred and how Japanese companies served foreign markets.
China should be allowed to pursue the same course by encouraging Chinese companies to invest abroad, allowing excess industrial capacity to become foreign direct investment rather than ever-larger export volumes, and giving Chinese capital a path from exports to ownership.
That would also begin to align Beijing’s interests with a stronger renminbi. A Chinese company building a factory in Mexico, Europe or the US has a different relationship with the exchange rate than a Chinese exporter shipping another container from Shenzhen.
A new Plaza based on compulsion is likely to produce resistance. A quid pro quo based on accommodation that produces more jobs and economic activity in the US and Europe has a better chance of success. The objective should be to make a stronger renminbi compatible with China’s own economic evolution.
Marc Chandler is Managing Director at Bannockburn Capital Markets and Adam Farhat is a Student at University of Sussex.
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