The Premier League pair will do battle in the quarter-finals of the competition over two legs, and while City have been the dominant force in England’s top flight, Reds coach Jurgen Klopp has promised "fire" in the tie.
Indeed, Liverpool are the only team to get the better of Pep Guardiola’s men in the league this season, and James thinks they can stop them this time too.
“Liverpool have already beaten Man City, so I think there's a wonderful opportunity for Liverpool to do something,” he told Goal.
“Straightaway, I think Liverpool fans, because of Manchester City's superiority in the Premier League, I think the initial thought was 'Oh no!'
“But it would only be better if it was a final.
“If they get past Man City, then I don't think they should be scared of anybody. Having said that, because Man City have been doing so well this season, for Liverpool to win it would be a tremendous performance because what Pep Guardiola has done at Man City is remarkable. He's a genius.”
The tie will pit two managers that James has a great deal of respect for, while he pointed to an interesting quirk of Guardiola’s that bodes well for England this summer.
“Jurgen Klopp has been in a Champions League final before with Borussia Dortmund,” he noted.
“Interestingly, when Germany won the World Cup, Pep was in charge of Bayern Munich. Spain won the world cup, he was in charge of Barcelona. I’m not sure that means England will win the World Cup because he is in charge of Man City but that's a good chance!”