Once upon a time, Americans freaked out about Japan. Today, it’s China. Here’s why the U.S. ain’t finished yet.

I was a boy in the 1970S when America experienced the last wave of Yellow Peril. With my family, I was visiting Disneyland in Anaheim, California, observing hundreds of Japanese tourists as if they—and not the Matterhorn, the Tea Cups, the Monorail—were the most remarkable feature in the world. They wore brightly colored t-shirts that apparently identified them as members of distinct, well-organized groups within the larger group. Each team was led by a woman wearing something like an amateur welder’s visor to protect against the blazing summer sun; each woman wore delicate-looking white gloves and held aloft a small pennant the color of the t-shirts.

“They seem very polite,” said my mother who, even as a retired schoolteacher, continues to value social order. But a resort guest standing behind us—maybe a World War II vet—responded, “They can afford to be polite. It looks like they’ve finally won the damn war.”

Back then Americans trembled in the face of rising Japan, a magical kingdom where disciplined workers performed daily, spirited calisthenics before tending machines that cranked out cheap products fueled by a powerful banking sector and managed by government officials who operated with piratical commitment to boosting exports while heading off imports. Japanese successes in the semi-conductor industry drove U.S. chipmakers into Sematech, a consortium that belied American devotion to individual success—but not before the digital wave of Japanese clock radios, tape players and cameras swamped the U.S.

Flush with cash generated by record sales abroad, Japanese investors bought up real estate in major U.S. cities, from Rockefeller Center in New York City to the Pebble Beach Golf Club in California and almost everything on Waikiki. Japanese carmakers crushed Detroit, the very symbol of American industrial power. President Ronald Reagan talked about free trade, but reintroduced the Rooseveltian concept of voluntary export restraints. There was, of course, nothing “voluntary” about them: in exchange for continued access to the U.S. market, for instance, Japanese manufacturers volunteered to reduce sales of Japanese motorcycles in the U.S., and even helped apply the defibrillators to Harley-Davidson, teaching the benighted manufacturer to build a better bike.

Americans sought everywhere for an explanation of Japanese ascendancy; some meted personal vengeance. In one gruesome case, in 1982, two Michigan autoworkers beat to death Vincent Jen Chen, a Chinese-American the pair mistook for Japanese. More reasonably, some cited the work of W. Edwards Deming, the American management guru whose “Plan-Do-Check-Act” rigor seemed to resonate among Japanese who (the narrative went) were simply more disciplined than Americans. Others argued that the Japanese government manipulated the yen and encouraged the theft of U.S. technology. It is undeniable that the Japanese blocked imports of U.S. farm products; in the case of meat they argued that Japanese—so different from other homo sapiens—could not digest U.S.-grown beef.

Running against incumbent President Reagan in 1984, Walter F. Mondale stoked the Japanophobic anxiety spreading among Americans: “What do we want our kids to do? Sweep up around the Japanese computers?”

Just a few years later, it was all over. The sun had set on the land of the Rising Sun.

Writing in 1995, a Los Angeles Times reporter observed, “Today, the Boeing 747s landing at Honolulu International Airport are disgorging somber bankers, accountants and lawyers assigned the messy task of cleaning up a disastrous Hawaiian real-estate binge that has cost Japanese investors, by one estimate, a staggering $6 billion.”

Now, Japan looks like the sick old man—or woman—of Asia. Sony was recently delisted. The killer 2011 earthquake and tsunami clearly fall under the category of Acts of God; but the government’s response and resulting nuclear crisis at Fukushima have undermined the country’s reputation for high-tech skill. Ditto for a recent tunnel collapse outside Tokyo.

Today, it’s China we’re worried about.

DURING THE RECENT PRESIDENTIAL CAMPAIGN, CNN.com observed that Republican candidate Mitt Romney pledged “he would label China as a currency manipulator on his first day in office—a promise he frequently works into his campaign speeches. And he accused China of ‘stealing’ designs, patents and technology pioneered by U.S. companies.”

Romney wasn’t alone. President Barack Obama has taken Reaganesque actions to limit Chinese imports (of tires, famously), and a Pew Center poll found that a majority of Americans “describe China as a competitor and few say the U.S. can trust the Asian nation.”

Here’s betting that China will go the way of Japan.

AS THIS ISSUE OF GLOBAL TRADE goes to press, the Ob River, a massive natural-gas carrier, is cruising eastward from Norway to Japan through the Arctic Circle, the first ship of its kind to make the winter journey.

Environmentalists are, reasonably, wigged out by the prospect of a voyage that’s aided not just by a Russian nuclear-powered icebreaker but by global warming and a changing international energy market. “We have studied lots of observation data,” the ship’s owner told the BBC. “There is an observable trend that the ice conditions are becoming more and more favorable for transiting this route. You are able to reach a highly profitable market by saving 40 percent of the distance. That’s 40 percent less fuel used, as well.”

The gas aboard the Ob River was supposed to have gone to the U.S. But the U.S. is now producing so much energy that experts at the Paris-based International Energy Agency predict the U.S. will be the world’s No. 1 producer by 2017.

So LNG that was headed west for sale is now headed east.

“The people on board have been seeing polar bears on the route,” the ship’s owner said.

Depending on your perspective, the journey of the Ob River may be terrifying or wonderful news. Or both. It’s certainly evidence that the U.S. is gaining an advantage in global manufacturing: cheaper energy means cheaper manufacturing—and that likely means more industrial jobs in the U.S.

In addition to cheaper energy, the rising cost of Chinese labor is likely to help some manufacturers reconsider the good old U.S.A. About the time the Ob River slipped anchor in Hammerfest in the north of Norway, workers rioted at a plant in Shanghai, China. “The unrest was noteworthy because the factory site is managed by Foxconn Technology, one of the world’s biggest electronics manufacturers and an important supplier to companies like Apple, Dell, Microsoft and Hewlett-Packard,” the New York Times reported.

The unrest was also noteworthy because it wasn’t unusual. “The incident put a spotlight on growing tension in China’s factories as companies struggle to meet worker demands for better compensation and work conditions even as economic growth slows,” the Wall Street Journal reported. “China’s gross domestic product rose 7.6 percent in the second quarter from a year earlier, the slowest pace since the global financial crisis. The China Labour Bulletin, which tracks strikes and protests, reported an increase in such incidents, logging an average of 29 a month for the first eight months of this year, up from 11 a month for the same period last year.”

“Many of the protests this year appear to be related to the country’s economic slowdown, as employees demand the payment of overdue wages from financially struggling companies, or insist on compensation when money-losing factories in coastal provinces are closed and moved to lower-cost cities in the interior,” the Times reported.

Then, too, there’s the simple fact that factory work—particularly factory work that is dis-integrated from creative innovation—is simply soul-crushingly dull. “Many [Chinese] youngsters increasingly prefer working in China’s restaurants and stores to the tedium of making widgets,” reports the Financial Times. In response, some Chinese companies have turned to workers who complain less: robots, those emblems “of a new industrial revolution in China driven by the changing nature of the labor force.”

Many companies—often pushed by the Chinese government—are simply paying up. Earlier this year, government officials raised the minimum wage by nearly 14 percent, about $2,880 per year. That’s still far less than American pay, but high enough that manufactures are looking elsewhere. “If you are only focused on reducing labor costs, then outsourcing work to places like Vietnam may be a better option,” an American factory manager told BusinessTheory.com. “However, this strategy involves chasing a few cents savings and moving to new factories or new vendors every few years.”

THAT SORT OF INTERRUPTION to the supply chain exacts its own toll. But even in the absence of supply-chain screw-ups, there’s increasing awareness that the whole outsourcing movement was dumb at birth.

Writing in the current issue of The Atlantic, Charles Fishman says outsourcing severed crucial relationships between manufacturing, innovation, operations and marketing. “In the first blush of cheap manufacturing, it’s easy to overlook the slow loss of your own skills, the gradual homogenization of your products, the corrosion of quality and decline of innovation,” he writes.

Fishman studied GE’s decision to bring home to Kentucky the manufacturing of its GeoSpring water heater. “A funny thing happened,” he reports. “The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up. GE wasn’t just able to hold the retail sticker to the China price. It beat that price by nearly 20 percent.”

And then there’s speed. “It used to take five weeks to get the GeoSpring water heaters from the factory to U.S. retailers—four weeks on the boat from China and one week dockside to clear customs,” Fishman reports. “Today, the water heaters—and the dishwashers and refrigerators—move straight from the manufacturing buildings to Appliance Park’s warehouse out back, from which they can be delivered to Lowe’s and Home Depot. Total time from factory to warehouse: 30 minutes.”

“What we had wrong was the idea that anybody can screw together a dishwasher,” GE’s head of design told Fishman. “We thought, ‘We’ll do the engineering, we’ll do the marketing, and the manufacturing becomes a black box.’ But there is an inherent understanding that moves out when you move the manufacturing out. And you never get it back.”

IF IT SERVED NO OTHER purpose, outsourcing may have helped bring China into the global community—something Karl Marx and Friedrich Engels predicted nearly 200 years ago.

If you haven’t had the pleasure, read Marx and Engels’ iconic Communist Manifesto for yourself. Yes, yes: there’s much that’s wrong here: far from spreading poverty, as they claim, capitalism actually raises living standards—consider the side-by-side experiment on the Korean peninsula, for just one example. And the infamous workers-in-chains declaration near the end now feels obsolete given that organized labor is working with U.S. corporations to bring jobs back.

All of that will be familiar to you. But what’s surprising is Marx and Engels’ admiration for capitalism and capitalists—and their understanding that the only constant in capitalism is constant change. Their own language is worth quoting at length, reading, as it does, like a hymn of praise to capitalism rather than its obituary:

The bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country. To the great chagrin of Reactionists, it has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilized nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations. And as in material, so also in intellectual production: The intellectual creations of individual nations become common property. National one-sidedness and narrow-mindedness become more and more impossible, and from the numerous national and local literatures, there arises a world literature.

There will be holdouts, they acknowledge. But the holdouts will be overcome—not by violence/war/invasion but by their own desire to participate in the global economy:

The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbaric, nations into civilization. The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilization into their midst, i.e., to become bourgeois themselves. In one word, it creates a world after its own image.

In that “bourgeois” world, China’s time as a threat to American industry has likely already passed. Next, India or Brazil, or any of several other rising manufacturing centers will come to embody American fears of decline.

But fear of decline is part of the American DNA, antedating baseball and apple pie by centuries. It arrived here with our forebears, carried like a virus to Plymouth Rock. Its symptoms include a terror of corruption and sloth, or (conversely) of great wealth and cosmopolitanism, but in every case of Satan himself unleashed upon the new continent. When we grasp that—can step outside the icy grip of the fear, can see that the fear is sometimes just a random, misfiring impulse, just background noise, part of what it means for better and worse to be an American—then we might actually get to enjoy the coming American renaissance.