Maybe Japan Was Just a Warm-Up IN the 1980s, the United States faced an unnerving challenge from a rising economic powerhouse and export dynamo. It was an impressive challenger, to be sure, but one that often bent rules of global competition unfairly to its advantage by handing out financial subsidies to domestic companies, discriminating against foreign suppliers in government contracts, pilfering Western technology and keeping its currency cheap. Three decades later, Americans are hearing an echo of the past. Yet this time, the object of admiration and angst is not Japan Inc., but China Inc. â€œWeâ€™ve seen this movie before,â€ says Clyde V. Prestowitz Jr., president of the Economic Strategy Institute and a former United States trade negotiator with Japan in the 1980s. â€œLike Japan, China is climbing up the ladder of economic and technological development, and using every means at its disposal to do so.â€ China, of course, is different from Japan in the 1980s in many ways â€” larger, less affluent, ruled by a Communist government and yet in some respects culturally more entrepreneurial. Silicon Valley venture capitalists, for example, have begun setting up offices in China to forge links with entrepreneurs there, as they never really did in Japan. Economic events and market trends are notoriously unpredictable. In the early 1980s, the Japanese high-technology assault on the American computer and semiconductor industry seemed scary. â€œWhat are our kids supposed to do?â€ asked Walter F. Mondale, the former vice president, speaking to a group of electrical workers. â€œSweep up around the Japanese computers?â€ It captured the economic pessimism of the time, even if it serves as a laugh line today because, after all, how often do you see a Japanese computer? So, applying equal doses of humility and hindsight, a look anew at the economic challenge symbolized by Japan â€” and the American response â€” might offer perspective on the China challenge today. First, a reality check on Japan. Yes, that nationâ€™s big-business culture missed the personal computer revolution and the Internet, producing no rivals to Microsoft, Apple, Google or Facebook. But Japan is no basket case. It is a world leader in autos, machine tools, flat-panel displays and other parts of the consumer electronics industry. Some of Japanâ€™s policies did indeed prevail, and America still runs a sizable trade deficit with the country. Japan, which lacks natural-resource wealth like oil, has a per-capita income of more than $42,000, compared with about $47,000 for the United States, according to the International Monetary Fund. Chinaâ€™s per-capita income is less than $4,300. In America, the 1980s were Ronald Reaganâ€™s decade, a time that celebrated free markets, free trade and tax cuts. â€œGovernment is not the solution to our problem, government is the problemâ€ was his famous distillation. Yet, for certain industries, the Reagan administration took steps that amounted to a measured approach to industrial policy. Washington negotiated so-called voluntary export restraints with the Japanese in the automobile industry. That forced Japanese automakers to build factories in the United States that now employ many thousands of American workers. And a semiconductor trade agreement helped pry open the Japanese market. â€œPeople often forget that we did a lot of things to address the Japanese challenge,â€ says Robert D. Atkinson, president of the Information Technology and Innovation Foundation, a nonpartisan research group in Washington. IN the 1980s, the United States governmentâ€™s semiconductor policy focused the minds of industry leaders facing the demise of their industry. There is still considerable debate over the effectiveness of a consortium, created by the federal government and several companies. Called Semiconductor Manufacturing Technology, or Sematech, it shared the costs and risks of developing computer chip-making skills. But the partial lifting of antitrust and collusion restrictions gave companies a chance to innovate. I.B.M., for its part, was worried that a vital supplier, the chipmaker Intel, was in danger, so it invested in it. That gave Intel â€” under siege from Japanese companies in the market for memory chips, which store data temporarily â€” the breathing room to risk making the jump to microprocessors, which process data and serve as the brains of personal computers. Intel made the move to the more profitable chips before the PC industry really took off â€” but when it did, Intel never looked back. The Japanese didnâ€™t make that innovative leap and became stuck in a commodity business that South Korean and Taiwanese companies eventually dominated. â€œIn semiconductors, we got organized to defend and stay ahead,â€ says William A. Reinsch, a foreign trade expert and the chairman of the United States-China Economic and Security Review Commission, a bipartisan advisory group to Congress. â€œIn that industry, there was a considerable amount of cooperation between the U.S. government and business. The computer chip industry was deemed too important to lose, not least because of all the military applications of computer chip technology.â€ One big reason that Japan posed a threat in the 1980s in computer chips and large computers was the technology transfer that had occurred years before. In order to sell in the Japanese market and repatriate profits, I.B.M. and Texas Instruments, an early leader in chips, had to share technology with the Japanese. They set up factories there, too. In China these days, the details may differ, but the government imposes the same kind of requirements to share technology and set up manufacturing plants in joint ventures for preferred access to the domestic market. China has a lengthy list of industries where it has long-term ambitions. They include commercial aircraft, telecommunications equipment, high-speed trains, clean-energy goods like solar panels and wind turbines, and even automobiles. â€œThe bet for I.B.M. in Japan, as it is for companies like Boeing and General Electric today in China, is that they can stay ahead, innovate faster than the potential competitors they are helping,â€ says Edward J. Lincoln, professor of economics at the Stern School of Business at New York University, and director of its Japan-U.S. Center for Business and Economic Studies. In China, however, American companies are making a much larger bet that they can stay ahead in the intellectual property race. In some fields, particularly computer software, China has a well-earned reputation for theft, though Beijing has pledged to curb the practice in government agencies and state-owned companies. And in China, many more Western companies are engaged in technology-sharing joint ventures than was ever the case in Japan. Japan sharply limited direct investment by foreign companies, while China has welcomed it. And in China, the terms and conditions of investment have evolved over the years. Beginning in the 1980s, China opened up â€œspecial economic zones,â€ mainly in the southern part of the country, where foreign companies could set up factories and export goods. In the 1990s, China opened up more broadly to foreign investment, allowing companies to sell in the domestic market. In the last couple of years, the Chinese government, analysts and executives say, has prodded foreign companies to transfer more advanced technology for the inside track in its market. The government effort to accelerate Chinaâ€™s technological climb is called â€œindigenous innovation.â€ â€œThe campaign is focused on employing Chinaâ€™s fast-growing domestic market and powerful regulatory regime to decrease reliance on foreign technology and develop indigenous technologies,â€ explains a report on the U.S. Chamber of Commerce Web site. C. Fred Bergsten, director of the Peterson Institute for International Economics, says: â€œChina was much more clever than Japan with its investment policies. It invited foreign direct investment and then took the American corporations hostage.â€ The lure of tapping the fast-growing Chinese market â€” far larger than Japanâ€™s â€” gives China a lot of leverage with American companies, which mutes complaints in Washington, Mr. Bergsten says. Most American corporations, he says, have resisted trade restrictions on China because they hope to tap the Chinese market and produce goods there. Yet American corporations are worried about Chinaâ€™s innovation policy, since it means potentially jump-starting Chinese rivals. Business leaders pushed that to the top of the agenda for President Hu Jintaoâ€™s trip to the United States last week, Mr. Bergsten says. And, indeed, in meetings during the week, the Chinese delegation gave American executives assurances that China would be flexible in pursuing its innovation initiative. The Chinese currency, the renminbi, took a back seat as an issue during the state visit. But Mr. Bergsten estimates that the renminbi is undervalued by 20 percent or more â€” the Chinese central bankâ€™s purchases of dollars depress the Chinese exchange rate and the subsequent lower value of the renminbi makes Chinese exports less costly abroad. â€œItâ€™s an across-the-board export subsidy,â€ he says. THERE will be ceaseless currency and trade issues with China, as there were with Japan. Still, as China grows wealthier, economists predict, it will buy more of the high-value, high-technology products and services at which the United States excels. The real answer to the China challenge, like the competition from Japan in the 1980s, must come from the United States, the industrial policy thinkers say. A mix of several ingredients will undoubtedly be sought: skillful government policy, smart private-sector strategies, national investment in research and development for long-term innovation, and improved performance of the American education system. In short, all the things the United States should be doing anyway, but with an added measure of urgency because of the global competition that China epitomizes â€” an economic Sputnik.