(CNOOC) in 2005. In contrast, greenfield investments, notably foreign-owned auto assembly plants, have been assiduously courted.<sup>9</sup> Along with these striking similarities, there are also fundamental differences between the two cases. Most important, Japan was already an established industrial nation in the 1980s. By the mid-1980s, Japan’s per capita income was above that of most European nations; enrollment rates for secondary and higher education were likewise comparable to those of the richest nations ( _World Development Report 1986)._ In contrast, China is still poor, at least in terms of per capita income (around $3,000 in 2007), despite a prolonged period of stellar growth performance.<sup>10</sup> Thus, it is not surprising that earlier trade frictions between Japan and the United States focused mainly on direct competition, i.e., Japan’s increasing share of the U.S. market and its displacement of U.S. exports in third-country markets. Moreover, as a wealthy country, Japan consumed many of the same _types_ of goods and services produced by the United States but imported too few of those from the United States—at least in the view of U.S. producers and policy makers.

Given China’s much lower per capita income, only a small fraction of Chinese consumers can yet afford the products that represent U.S. comparative advantage, i.e., those supplied by intellectual-property-intensive industries (films, music, software, pharmaceuticals), when sold at prices that reflect full enforcement of U.S. intellectual property rights. Moreover, Chinese consumers’ desire to acquire such goods at affordable prices feeds the demand for pirated and copycat goods produced locally, thereby adding to U.S. complaints regarding China’s lax enforcement of intellectual property rights. But this consumption pattern also implies that China’s continued growth may help to increase still further the country’s already large imports from the United States.<sup>11</sup> As a reflection of the large differences in relative factor abundance and productivity between the United States and Japan, direct competition with China has been an important issue for only a few U.S. industries, mainly for labor-intensive “sunset” industries like apparel. Rather, China has displaced other established trading partners in supplying the U.S. market. As Figure 1 illustrates, China’s share of the total U.S. trade deficit has largely replaced the share of

> 9 The 1981 U.S. VERs limiting auto imports from Japan encouraged Japanese companies to move their factories to the United States.  Between 1984 and 1987, seven Japanese companies built U.S. assembly plants. These were financed in large part by the abnormally high profits resulting from the VERs.  By increasing supply to the U.S. market, the Japanese investments reduced profits of both Japanese and U.S. auto makers (De Melo and Tarr, 1991).

> 10 Per capita income and other national averages mask large differences between the coastal areas and the interior provinces in the north and west of the country.

> 11 As of 2008, China was already the third largest market for U.S. merchandise exports, although a large share of those exports consisted of agricultural products and raw materials.

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