The Plaza Agreement turns 41 today. The
anniversary is worth remembering not simply because it was one of the great
episodes of coordinated foreign-exchange policy, but because it is increasingly
being invoked as a template for a new agreement to force the Chinese yuan
higher.
That analogy is appealing. It is also misleading.
The Plaza Agreement was struck by the US, Japan, West Germany, France and the United Kingdom at New York's Plaza
Hotel on September 22, 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 GDP 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.
That history matters today.
The case for a new Plaza rests on a superficial
similarity. China has a huge trade surplus, the yuan is widely viewed as
undervalued, and the United States and Europe would like China to rely less on
exports and more on domestic demand. Some have proposed coordinated pressure to
force the yuan higher.
But Japan in 1985 and China in 2026 are not
remotely in 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 U.S.-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.
China has no comparable dependency.
Quite the opposite. Beijing has acquired leverage
over supply chains that Washington and Europe cannot easily replicate. Consider
rare earths. China accounted for about 60% of global mined magnet rare earths
in 2024, roughly 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 centers and defense systems.
Rare earths are only the most obvious example.
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 yuan and Beijing can push back
somewhere else. The blowback would not necessarily be a stronger yuan and a
smaller trade imbalance. It could be higher input prices, disrupted production
and weaker growth in the United States 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 benefited from access to inexpensive Chinese
manufactured goods and Chinese 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 yuan is there nothing that can be done? The political realist solution is to find a
way to make appreciation serve China's interests.
There is a historical precedent. In the 1950s and
1960s, the US gradually shifted from an export-oriented economy toward one in
which American companies increasingly invested in points of production capacity
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.
Today Japan runs a trade deficit.
That is the more interesting lesson from Plaza.
Currency appreciation was not, by itself, the solution. The deeper adjustment
came from changing where production occurred and how national companies served
foreign markets.
China should be allowed to pursue the same
course. Encourage Chinese companies to invest abroad. Allow excess industrial
capacity to become foreign direct investment rather than ever-larger export
volumes. Give Chinese capital a path from exports to ownership.
That would also begin to align Beijing's
interests with a stronger yuan. 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 an
accommodation that produces more jobs and economic activity in the US and
Europe has a better chance of success. The objective should not be to make China
surrender. It should be to make a stronger yuan compatible with China's own
economic evolution.
(with the assistance of Adam Farhat, a graduate student at Sussex)
Reviewed by Marc Chandler
on
September 22, 2026
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