In the mid-1980s, Japan’s booming economy and soaring exports into the U.S. market triggered one of the most significant financial agreements of the 20th century — the Plaza Accord. The United States, concerned about its widening trade deficit, convinced major economies to appreciate their currencies against the dollar. The yen surged, Japan’s asset bubble inflated — and when it burst, the nation entered decades of economic stagnation.
Today, U.S.–China tensions echo that period. China’s manufacturing dominance and America’s strong-dollar policy during the Federal Reserve’s interest rate cycle are drawing comparisons to the past. But while Washington might hope a stronger dollar could pressure Chinese exports, such a move may ultimately hurt the U.S. economy itself.
The Lessons of 1985: Japan’s Rise and Fall
In 1985, U.S. manufacturing still accounted for 33% of global GDP, but Japan was rising fast, exporting cars and electronics worldwide. The dollar’s exchange rate against the yen climbed from 200 to over 240, making U.S. exports expensive and pushing the American trade deficit to $148 billion.
At New York’s Plaza Hotel that September, the U.S. Treasury Secretary James Baker met with his counterparts from France, the U.K., West Germany, and Japan. The result — the Plaza Accord — called for a yen and mark appreciation to weaken the dollar.
The yen jumped from 238 per dollar in late 1985 to 168 by mid-1986. Japanese exports became 12% more expensive, forcing companies like Sony and Panasonic to raise global prices. To offset the slowdown, Japan’s central bank cut rates to 3%, flooding markets with cheap money.
The outcome was predictable: asset bubbles in real estate and equities. Between 1986 and 1989, Tokyo’s land prices doubled, stock indices tripled, and corporate leverage soared. When rates rose again in 1989, the bubble collapsed — property values plunged 50%, bad loans ballooned, and Japan entered its so-called “Lost Decades.”
The Parallels with Today’s China-U.S. Dynamics
Fast forward to the 2020s: China now accounts for nearly 30% of global manufacturing output — comparable to Japan’s dominance before its slowdown. In 2024, China’s industrial output reached $4.66 trillion, and it remains the world’s top exporter in electronics and machinery.
Meanwhile, the U.S. trade deficit exceeded $1 trillion, and the Federal Reserve’s aggressive rate hikes since March 2022 — from near-zero to 5.25–5.5% — have strengthened the dollar dramatically. The Dollar Index rose from 95 in early 2022 to 114 by October that year, while the renminbi depreciated from 6.3 to 7.2 per dollar.
By 2025, the index fluctuated near 99, reflecting uncertainty over U.S.–China trade talks. Yet the pattern resembles the 1980s: a strong dollar, a large U.S. trade deficit, and tensions over industrial competition.
Why a Strong Dollar Is a Double-Edged Sword
A rising dollar makes U.S. exports less competitive, pressuring domestic manufacturers. Employment in manufacturing rose modestly from 12.8 million in 2022 to 13 million in 2023, but capacity utilization fell from 78% to 76%.
Moreover, the stronger dollar attracts capital inflows — but not into factories. Instead, much of it ends up parked in Federal Reserve reverse repos, which reached $2.5 trillion by late 2022, earning over 4% interest daily but doing little to stimulate real economic activity.
At the same time, rising interest rates have made corporate borrowing costlier, slowing investment by 20% in 2025. The U.S. federal debt, at $35 trillion, continues to climb, with annual interest payments exceeding $800 billion. The Congressional Budget Office projects total debt could reach $100 trillion by 2055, equal to 156% of GDP.
These figures suggest that the U.S. may be trading short-term financial stability for long-term industrial weakness — the very imbalance the Plaza Accord once sought to fix.
Shifting Global Currencies and Regional Pushback
Interestingly, the dollar’s dominance is facing quiet resistance. Texas and Florida have explored state-level digital or precious-metal-backed currencies, while California has discussed crypto reserves as part of fiscal autonomy proposals.
Meanwhile, China and several trading partners — including Brazil — have begun settling trade in local currencies, with cross-border RMB transactions surpassing ¥10 trillion in 2024. This gradual diversification away from the dollar reflects a global recalibration of financial power.
Can the U.S. Afford Another “Plaza Moment”?
If Washington again seeks to manipulate global exchange rates, it risks repeating the Japanese trap — a short-term win that leads to structural stagnation. The dollar’s continued appreciation may undermine U.S. manufacturing, inflate debt, and fuel political discontent at home.
China, meanwhile, is adapting. Though its manufacturing output dipped slightly from $4.84 trillion in 2022 to $4.66 trillion in 2023, its global share remains stable. Domestic demand and local-currency trade settlements are buffering it against dollar volatility.
The two economies are deeply intertwined. A strong dollar that hurts China’s exports also inflates U.S. import costs and debt burdens. In a globalized economy, currency wars rarely produce winners — only new kinds of dependencies.
References
- U.S. Department of the Treasury Historical Reports
- Bank of Japan Monetary Policy Review, 1985–1995
- Federal Reserve Economic Data (FRED), 2022–2025
- National Bureau of Statistics of China, 2024
