The Downing Street Years, 1979-1990

by Margaret Thatcher

  The rest of the morning was spent in some two and a half hours of talks with Prime Minister Zhao Ziyang. The mood was friendly and relaxed: but it was clear to me that the Chinese were as concerned about the transitional period as I was. They wanted to maintain stability and prosperity: but they had their own ideas about how this should be done. I emphasized that it all came down to the drafting of the Basic Law. It must be suited to the capitalist system and consistent with the Hong Kong legal system. I stressed how important it was that China had expressed willingness to solicit opinions from a wide range of people within Hong Kong. I then broached what I knew would be an even more sensitive topic. I said that the Chinese would be aware of our proposals for the constitutional development of Hong Kong — essentially strengthening in a modest way democracy and autonomy, though I was careful not to use these words. Mr Zhao answered that the Chinese Government was not prepared to make any comment on constitutional development in the transitional period. In principle, the Chinese too wanted more Hong Kong people involved in the administration. But that process must not adversely affect stability and prosperity or the smooth transfer of government in 1997. I left it at that; it was as far as I felt it was prudent to go at this meeting.

  In the afternoon I talked to the Chinese Communist Party General Secretary, Hu Yaobang, whose influence I had been told was greater than some outside observers thought. I had earlier met the diminutive Mr Hu when he visited London. He was widely considered — perhaps too widely for his own interests as it turned out — to be Deng Xiaoping’s preferred successor and was known as a reformist. I had said quite openly to him in London that many of us hoped that those like him who had lived through the Cultural Revolution would bring a new approach to China’s affairs. He went on to tell me, with tears in his eyes, about the suffering he personally had endured at this time. It would be nice to believe that he could understand at least some of my worries about Hong Kong’s future: but perhaps human nature is not quite that simple.

  I then went on to the crucial meeting with Deng Xiaoping. The most important immediate guarantee of Hong Kong’s future was Mr Deng’s goodwill. I told him that the ‘stroke of genius’ in the negotiations had been his concept of ‘one country, two systems’. He, with becoming modesty, attributed the credit for this to Marxist historical dialectics, or to use what appeared to be the appropriate slogan, ’seeking truth from the facts’. Apparently, the concept of ‘one country, two systems’ had been devised originally from Chinese proposals of 1980 for dealing with Taiwan. (In fact, it proved a good deal more appropriate for Hong Kong: the Taiwanese attitude was clearly ‘one country, one system — ours’ — and given their economic success and their move to democracy, I can see their point.)

  The Chinese had set out in the agreement a fifty-year period after 1997 for its duration. I was intrigued by this and asked why fifty years. Mr Deng said that China hoped to approach the economic level of advanced countries by the end of that time. If China wanted to develop herself, she had to be open to the outside world for the whole of that period. The maintenance of Hong Kong’s stability and prosperity accorded with China’s interest in modernizing its economy. This did not mean that in fifty years China would be a capitalist country. Far from it. He said that the one billion Chinese on the mainland would pursue socialism firmly. If Taiwan and Hong Kong practised capitalism that would not affect the socialist orientation of the bulk of the country. Indeed the practice of capitalism in some small areas would benefit socialism. (Since then, it has become clear that Chinese socialism is whatever the Chinese Government does; and what it has been doing amounts to a thorough-going embrace of capitalism. In economic policy, at least, Mr Deng has indeed sought truth from facts.)

  I found his analysis basically reassuring, if not persuasive. It was reassuring because it suggested that the Chinese would for their own self-interest seek to keep Hong Kong prosperous. It was unpersuasive for quite different reasons. The Chinese belief that the benefits of a liberal economic system can be had without a liberal political system seems to me false in the long term. Of course, culture and character affect the way in which economic and political systems work in particular countries. The crackdown after the Tiananmen Square massacre in June 1989 convinced many outside observers that in China political and economic liberty were not interdependent. Certainly, after those terrible events we reassessed what needed to be done to secure Hong Kong’s future. I was reinforced in my determination to honour Britain’s obligations to those on whom British administration and Hong Kong’s prosperity depended up to 1997. In any case, I always felt Britain would benefit economically from talented, entrepreneurial Hong Kong people coming here.

  So in 1990 we legislated to give British citizenship to 50,000 key people in the Colony and their dependants — though the essential purpose of the scheme was to provide sufficient reassurance to persuade them to stay at their posts in Hong Kong where they were vitally needed. We were also brought under strong pressure immediately to accelerate the process of democratization in Hong Kong. There were, in any case, strong moral arguments for doing so. But all my instincts told me that this was the wrong time. The Chinese leadership was feeling acutely apprehensive. Such a step at that moment could have provoked a strong defensive reaction that might have undermined the Hong Kong Agreement. We needed to wait for calmer times before considering moves towards democratization within the scope of the agreement.

  If it was China’s recognition that she could benefit from extending the notion of ‘one country, two systems’ to Hong Kong which allowed the Hong Kong Agreement to be reached, something more would be needed in the long term. At some point the increasing momentum of economic change in China itself will lead to political change. Keeping open the channels of trade and communication, while firmly pressing for human rights in China to be upheld, are the best means of ensuring that this great military power, on the verge of becoming a great economic power, becomes also a reliable and predictable member of the international community.

  Japan

  Japan is not only a great economic power and a leading democratic nation in the region, but of great importance to Hong Kong. The confidence of Hong Kong is much affected by the confidence of Japanese investors there, who also regard it as the gateway to mainland China. For reasons of wartime history, the Japanese were shy of making public statements about China. But they had close contacts with and a deep insight into what was happening there. So I always sounded out Japanese politicians on their impressions of thinking in Peking.

  However, the main subject of (often difficult) negotiations with the Japanese during my time as Prime Minister was trade. We pressed the Japanese to open up their markets to our goods, to liberalize their financial and retail distribution systems and to work towards the reduction of their huge and destabilizing balance of trade surpluses with the West.

  Much of the criticism of the Japanese was unfair. They were everybody’s scapegoat. The Japanese should not have been blamed for prudently saving more — and so having more to invest at home, overseas or, indeed, financing the US budget deficit. Nor should the Japanese have been blamed for producing first-class cars, cheaper video recorders and advanced cameras, bought eagerly by western consumers. Yet in both cases they were.

  Far more important was to ensure that their markets should be as open to our goods as ours were to theirs. In fact, in addition to tariffs, which of course were subject to GATT regulations, there were two big obstacles. The first was that their distribution system was inefficient, fragmented and overmanned and their administrative system was difficult to get around. The second was a cultural difference. For example, Japanese consumers automatically prefer to buy home-produced goods: government action can do little to change that. More potentially amenable to international pressure was that the Japanese offered terms of aid which we could not match and so secured foreign contracts.

  The Japanese have also regularly been pilloried by western governments for not taking a more active i
nternational role in upholding security when we — and even more so Japan’s immediate East Asian neighbours — would not wish Japan to rearm and act as a great or even a regional power. As was shown in the Gulf War, Japan is increasingly willing to pay for others, particularly the United States, to uphold international order and security. The fact that, in both the economic and security fields, much western criticism of Japan is unfair does not, however, mean that we should be anything other than tough-minded and realistic in dealing with Japan. But the Japanese must also be treated with genuine (and deserved) respect and their own sensitivities understood.

  My second visit to Japan was in the autumn of 1982 on my way to China and Hong Kong. It set something of a pattern. I stressed to my hosts — both politicians and businessmen — my concern at the difficulty which British companies faced in penetrating Japanese markets. The Japanese themselves had promised action to deal with this, but it was a long time in taking effect. There were, though, more positive elements to the visit. I met members of the Keidanren — the Japanese CBI — and was struck by the fact that the top Japanese industrialists I encountered seemed often to be engineers, people with a practical understanding of the manufacturing processes of their firms and able to contribute to innovation. This was in marked contrast to Britain where, all too often, ‘management’ seemed to be qualified in administration and accountancy. It was, I thought, a clue to Japanese industrial success.

  While in Japan I met the President of Nissan, whose company was considering at that time whether to go ahead with the construction of the plant it eventually built in Sunderland. We had a useful talk, though I could not at this stage draw from him any explicit commitment. Negotiations were at first known only to a small group. But agreement was finally reached in January 1984. I was convinced that the Nissan project made as much sense for Japan as it did for us. By exporting investment to Britain they would undercut protectionist pressures against them, bring in income for years ahead as well, of course, as providing incomes and jobs in the recipient country.

  During my visit I also went to the Tsukuba Science City. This was fascinating. But I thought the decision to concentrate scientists in one particular location away from the great industrial centres was questionable. Interestingly, I found a number of Japanese who shared that view. This is all the more important because Japan’s research is often on the technological side, whereas, by contrast, Britain’s emphasis is on basic science. (Most of Japan’s advances in industry have come from the application of well-established scientific principles.)

  At this time the export of Japanese machine tools to the West was one of the most vexed issues of dispute. At Tsukuba I saw just how advanced the Japanese were. I was photographed shaking hands with a robot and, to my astonishment, found that it even had smooth, delicately jointed fingers. It was a demonstration that the Japanese not only had advanced electronics: they had managed to develop and apply that technology far more successfully than we had.

  Under Prime Minister Nakasone, Japan began to play a more active role in international affairs. So, when he made a visit to Britain in June 1984, I felt that I was dealing with a Japanese leader who understood and sympathized with western values and had shown that he was prepared to make steps in the right direction on economic policy. The talks I had with him in the morning and over lunch on Monday 11 June 1984 could, therefore, concentrate as much on wider international issues as on Anglo-Japanese bilateral trade disputes. Mr Nakasone gave me an account of his dealings with the Chinese. I told him about the state of our negotiations on Hong Kong. This was, of course, nearing the end of that period of freeze in the Cold War which preceded the advent of Mr Gorbachev. Mr Nakasone showed a shrewd understanding of what Japan’s role in these circumstances should be. He said that the Soviets would come out of their hibernation only when they decided to do so and that the West should wait for this. But he had continued to urge on the USSR the need for dialogue. He believed that the Soviets would need Japanese expertise and capital to develop Siberia and that this would in the long run be a powerful influence. In fact, this accurate and imaginative approach, which could yield enormous benefits, has still not been applied, mainly because of the dispute between (now) Russia and Japan over the Kurile Islands. I also discussed with Mr Nakasone Japanese investment in Britain. He said that half of the Japanese companies now established within the European Community were in the United Kingdom. ‘Not enough,’ I replied. ‘I would like two dozen more.’ He went away in no doubt about the welcome Britain would accord to Japanese investment.

  My next visit to Tokyo was for the G7 economic summit in May 1986. The main issues at the summit were not economic at all but rather political. In the wake of the US-Libyan raid, international terrorism was the principal item on the agenda. The appalling consequences of the nuclear disaster at Chernobyl were also still being assessed and discussed. On terrorism I was determined to support the Americans with a strong statement in the communiqué. I was glad to learn from President Reagan when I saw him in Tokyo on the afternoon of Sunday 4 May, on the eve of the summit, that he could go along with what I proposed.

  Both President Reagan and I were keen that the summit should be a success for the Japanese. The President was a strong supporter of Prime Minister Nakasone and was rather more inclined to be optimistic about the changes which had been promised in Japan’s economic practices than I was. But I had to agree with him that Mr Nakasone had the right instincts in international affairs and it was important not to endanger his position.

  In fact, there was not much practically to show for the vigorous efforts we had made to have the Japanese open up their markets. There was, for example, still heavy discriminatory tax on imported liquor. Whisky was the fourth largest single UK export to Japan. This being my own favourite nightcap, I felt a truly proselytizing zeal to encourage the taste for it. The former Governor of the Bank of Japan, Mr Maekawa, had also produced a report on ways to reform the Japanese financial and commercial system so as to allow the reduction of Japan’s huge trade surplus. But it was better on generalities than specifics.

  Japan’s trade surplus was sharply up again in 1986. But the Japanese had allowed the yen to rise in value, something which was far from popular among Japanese industrialists, and this would probably be the most important factor towards achieving a better balance of international trade relations in the future. The other good news from our point of view was that by now forty Japanese manufacturing companies were operating in the UK, creating over 10,000 jobs; and the Nissan plant was expected to start full-scale production that summer with total employment of around 3,000 people. On the cultural level, contacts between our two countries were good. The Japanese had begun a policy of endowing teaching posts at British universities. The eldest son of the Crown Prince of Japan had recently completed two years at Oxford University. Our own Prince and Princess of Wales were due, in turn, to visit Japan.

  I talked to Mr Nakasone shortly after the end of the summit. After congratulating him on the organization — which was far better than the previous Tokyo summit I had attended — and discussing the inevitable subject of Scotch whisky, I said that I wanted to try to ensure that in future relations between Britain and Japan were not dominated by the trade imbalance. That was still not possible at the moment. Some sizeable purchases by the Japanese of aircraft would help. But I was clear in my own mind that we must get beyond these issues to those of wider international importance if Japan was to play her proper role in world affairs.

  Japanese politics are sui generis. Leaders ‘emerge’ from negotiations between factions. Decisions are taken through gradually developed consensus rather than debate. And in spite of his achievements in establishing Japan as a major player on the international stage, Mr Nakasone was unable to buck the convention by which the nominees of other factions in the governing Japanese Liberal Democratic Party (LDP) must have their turn in office.

  It was his successor, Mr Takeshita, as head of the largest faction in the LD
P, who took the most important decisions to make structural changes in the Japanese economy. Of most importance from our point of view, it was he who removed the discrimination against Scotch whisky and opened up the Japanese Stock Exchange to two of the best-known British stockbrokers who had been excluded. I said to Mr Takeshita when he came to London to see me that he was the fourth Prime Minister with whom I had raised the issue of the Stock Exchange. He promised action but asked for time. And he proved as good as his word. I did not have to raise it with a fifth. Partly as a result, however, of public resentment at the introduction of a new, though modest consumption tax and partly as a result of political scandal, Mr Takeshita resigned in May 1989. His successor, Mr Uno, after just a few months in office, soon resigned too. So it was the comparatively young and relatively unknown Prime Minister Toshiki Kaifu who was in office when I made what turned out to be my last visit to Japan as Prime Minister in September 1989.

  Mr Kaifu was to host a meeting of the International Democratic Union (IDU) — the international organization of Conservative Parties which Ronald Reagan and I had founded. Inevitably, the IDU comprised a variety of right-of-centre parties: but it had the advantage over its junior partner, the European Democratic Union (EDU), that it was not dominated by the Christian Democrats and included the American Republican Party. (The star of that year’s conference was undoubtedly the Swedish Conservative leader — since Prime Minister — who delivered a speech of such startling Thatcherite soundness that in applauding I felt as if I was giving myself a standing ovation.)

  Mr Kaifu had his own domestic reasons for wanting the occasion to be a success. He had no strong power base of his own within the LDP and needed to cut something of an international figure in order to win back alienated LDP voters before the forthcoming general election. For my part I wanted to help him as much as I could. He was strongly pro-western, a man of integrity, and not at all in the somewhat reticent, introverted mould of some Japanese politicians that I met. I had not really got to know Mr Kaifu before I came to Japan — though he had been to see me at No. 10 as part of a group on previous occasions. I was told that his favourite sayings were: ‘politics begins with sincerity’ and ‘perseverance leads to success.’ It seemed an uncontroversial philosophy.