The following article by Carlos Martinez responds to German Chancellor Friedrich Merz’s call at the recent EU summit for a new “Plaza Accord” to force up the value of the Chinese renminbi.
Carlos recalls how the original 1985 Plaza Accord was not a neutral rebalancing of trade but the deliberate kneecapping of an economic competitor – Washington strong-arming Japan, West Germany, France and Britain into driving down the dollar, plunging Japan into a “lost decade” of stagnation while failing to dent a US trade deficit that originated in Washington’s own model of high consumption and low savings, not in the exchange rate.
Carlos argues that China today cannot be treated as Japan was. Where Japan was a subordinate Cold War ally hosting tens of thousands of US troops; China is a sovereign socialist state with an increasingly prosperous domestic market of 1.4 billion people, an independent financial policy and a central bank that answers to no one in the West – it simply cannot be “Plaza’d”.
The article also takes aim at the language of “overcapacity”, which Carlos describes as a euphemism for European and North American industry failing to compete after nearly half a century of financialisation, privatisation and deregulation. Chinese competitiveness in electric vehicles, batteries and solar panels flows from a complete industrial system and sustained investment in technology – not from currency manipulation – and the EU’s tariffs of up to 35 per cent on Chinese electric vehicles are, he writes, “an act of self-harm disguised as self-defence”.
This article first appeared in the Morning Star.
At the recent EU summit, German Chancellor Friedrich Merz declared the Chinese renminbi to be undervalued by as much as 30 per cent and floated the idea of a new Plaza Accord — a co-ordinated effort to force up the value of the currency, just as Washington did to Japan in 1985.
It is worth remembering how that story ended, because the history Merz is reaching for is not the cautionary tale he imagines it to be.
The Plaza Accord was not a neutral exercise in rebalancing trade. It was the deliberate kneecapping of an economic competitor. Meeting at New York’s Plaza Hotel in September 1985, the United States strong-armed Japan, West Germany, France and Britain into driving down the dollar.
Within two years, the dollar–yen rate had fallen by half. Japanese exports were hammered, capital fled into frenzied property and stock-market speculation, and when that bubble burst at the end of the decade, Japan was plunged into a “lost decade” of stagnation that stretched into a lost generation.
Tokyo’s tormentors, meanwhile, failed to reap much from this harvest: the US goods trade deficit with Japan stood at around $46 billion in 1985 and, instead of shrinking, climbed past $55bn in both 1986 and 1987. The currency had been clobbered, but the imbalance remained.
The reason is that the imbalance never originated in the exchange rate in the first place. It grew out of the US’s own domestic economic model of high consumption and low savings, and out of the dollar’s role as the world’s reserve currency, which compels the US to run deficits in order to supply the world with dollars. No amount of bullying Tokyo could fix a problem made in Washington.
Why could Japan be treated this way at all? Because it was never a sovereign equal but a subordinate ally — a Western outpost in East Asia, permitted to grow rich as part of the cold war project of containing communism, but never permitted to seriously challenge its benefactors. When push came to shove, hosting tens of thousands of American troops and sheltering under the US security umbrella, Tokyo had no choice but to fold. The Plaza Accord is now near-universally regarded, even by mainstream economists, as an act of economic sabotage dressed up as co-operation.
China is in a wholly different position, and, crucially, it has studied this history closely. When Washington tried similar pressure two decades ago, Beijing allowed the renminbi to rise by a modest 20 per cent or so between 2005 and 2008 – enough to take the heat out of the dispute, but managed on its own terms and at its own pace, completely avoiding Japan’s fate.
Two decades on, China is incomparably stronger. A sovereign country with an increasingly prosperous domestic market of 1.4 billion people, an independent financial policy, a comprehensive industrial base and a central bank that answers to no one in the West simply cannot be “Plaza’d.”
As Beijing has made plain, it will not return to an era in which a handful of great powers gather in a hotel to decide the fate of others. The premise of Merz’s proposal is therefore pure fantasy. China has become the leading trading partner of more than 160 countries; it does not need to buy access to the European market by sabotaging its own.
The deeper dishonesty lies in the word being used to justify all this: “overcapacity.” What is branded Chinese overcapacity is in reality European and North American industry failing to compete — the predictable result of nearly half a century of financialisation, privatisation, deregulation and the steady dismantling of any meaningful industrial strategy.
The pressures bearing down on European manufacturing are real, but they are largely self-inflicted or made in Washington: sky-high energy prices following the wars on Russia and Iran, chronic under-investment in innovation, sluggish industrial policy, and the “siphoning” effect of US subsidies luring firms across the Atlantic.
None of this is China’s doing. The enhanced competitiveness of Chinese firms in electric vehicles, batteries, solar panels and machinery flows from a complete industrial system, sustained investment in technology and, in certain sectors, a sometimes ferocious domestic competition – not from some sleight of hand at the central bank. So why on earth should the Chinese working class pay for the failures of the Western bourgeoisie?
For European workers and consumers, the whole framing is perverse. China supplies Europe with high-quality, affordable goods that lower household costs and stabilise supply chains, and it is increasingly the green products – the cheap solar panels, the affordable electric cars – that Europe needs if it is serious about the energy transition. Slapping tariffs of up to 35 per cent on Chinese electric vehicles, as the EU did last year, is an act of self-harm disguised as self-defence.
In reality, the relationship is symbiotic: in 2025, trade between China and Germany alone topped €250 billion; some 5,200 German companies operate in China; and around 61 per cent of them, according to the German chamber of commerce, plan to increase their investment in China over the next two years.
Credit, then, to Spanish Prime Minister Pedro Sanchez, who emerged as the clearest voice of reason at the summit, describing China as a potential ally and warning against being stampeded into a self-defeating trade war. He is right. Europe’s interests lie in co-operation with the world’s leading manufacturing economy and in the genuine “strategic autonomy” its leaders so often invoke but so rarely exercise — not in a grovelling and futile rerun of the 1985 ambush of Japan.
The world does not need a new Plaza Accord. What it needs is a new consensus based on mutual respect and shared development. An ambush that worked once on a subordinate ally will not work on a sovereign, socialist China.
