The implications from the Plaza Accord

The Plaza Accord is believed by many people as the key that ended the legend story of the Japanese rapid economic growth. The Plaza Accord was an agreement between the US, Japan, as well as the UK, France and West Germany, to depreciate the US dollar in relation to the Japanese Yen and the German Mark, signed on September 22th, 1985 at the Plaza Hotel.

The Japanese government was not forced to sign the agreement, instead the Japanese government voluntarily entered the negotiation with the US and compromised on the exchange rate issue. In early 1980s, the US dollar had appreciated by more than 50% against other major currencies, leading to a dramatic increase in the US trade deficit. The trade tension between the US and other countries, especially Japan, had increased due to this increase in the US trade deficit. This is a bit like what the current trade tension between the US and other countries is. Japan did not want to enter a trade war with the US due to political as well as economic reasons, so Japan tried to negotiate with the US and the Plaza Accord was signed in order to release the trade tension. However, after the Plaza Accord, the Japanese manufacturing sector was deeply hurt by this agreement, as the Japanese products became more expensive while the US products became cheaper in the world market.

This story certainly provided several implications. Firstly, if only being able to win competitions by prices, it does not last long. Secondly, when trying to compromising in order to avoid a trade war, it is really just choosing the best among the worst scenarios. Thirdly, here comes a question if other countries have to compromise when the ‘enemy’ is the US. Fourthly, if the trade tension is caused by a wide trade balance difference, then is there a way that is able to auto-correct the trade balance between countries?