Trade War Bullying : the common thread through history

We highlight the parallels of the China-US and Japan-US trade wars.  None of this is new and there is a long way to travel yet.  Firstly, let’s start in the mid 80s.  New York Times, 11 March 1985, page 1 headline “JAPAN INVESTS HUGE SUMS ABROAD, MUCH OF IT IN U.S. TREASURY BONDS”.

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An enormous tide of money was moving through the world from Japan with about half of it landing in the United States.  It represented Japan’s growing surplus in foreign trade.  Much of it was invested in the Treasury securities issued to finance the Reagan Administration’s huge budget deficits.

China does the same today.

The funds represented the nest eggs of frugal Japanese consumers and the profits of Japanese industry.  World markets had been conquered by Japanese giants producing automobiles, video recorders, cameras and computers.  Japan became the world’s biggest creditor, while the United States, once the biggest creditor, became the biggest borrower.  Funded by the Japanese.

China does the same today.

To make investments in the United States, the Japanese sold yen and bought dollars. The effect was to keep the US dollar up and the yen down.  This allowed the Japanese to protect the price advantage of their exports to the United States.  It also disadvantaged American manufacturers that competed with the Japanese, both in the United States and in the world export market.

China does the same today.

Is there anything familiar with this story of Japan in the 1980s? 

What followed was a trade war.  During this trade war the US claimed that the Japanese were manipulating their currency, engaged in unfair trade practices, stole IP and US jobs.

Amazingly enough the current US negotiator of the Chinese trade war was part of the team dealing with the Japanese all those years ago.  But making the same moves is not going to help the US. 

Internationalisation of trade.  In the 1980s, the world was far less globalized than it is today. As a result, the export restrictions and tariffs imposed on Japan had few effects on US companies and consumers. In comparison, the labour cost differential between the US and China means that the globalisation of supply chains is unlikely to change materially in the near term – meaning that US companies and consumers are going to bear the cost of the tariffs.

Yuan not allowed to appreciate.  The Japanese asset bubble post the Plaza Accord (signed in 1985) was a massive bubble followed by 3 decades of poor economic performance.  The Yen appreciated by 100% within 2 years of the signing. In comparison, the Chinese have learnt the lesson of Japans Accord – they are going to control the Yuan.  We believe the Chinese have been maintaining the US dollar by purchases of Treasuries etc for years.  With USD1.1trillion in US treasuries it takes little effort to manipulate the cross rate.

Bullying isn’t going to work.  The rise of Japan post the US bombing in WW2 is a remarkable story of growth, hardship and everything in between.  The Japanese were seen as a potential threat by the US who imposed sanctions in an attempt to stop the rise of Japan’s power.  The US set out to bully the Japanese to stop the power of the Japanese which in both the short term and long term didn’t work.  But Japan overcame and became an industrial power which today enjoys prosperity that the US doesn’t. 

Today the bullying is towards another nation – China.  Both countries fought back.  Whilst there will be highs and lows along the way – it failed with Japan and we believe it will fail with China.

Recall, the US was reliant on Japan and now is reliant on China.  The US is not financially secure  and the protectionist “tariff war” is harming the US most. The common thread – US bullying is ongoing.  The difference – the bully is about to be bullied.

Lots of moves to come in this trade war

The US-Japan trade war lasted almost a decade. Tensions between the US and China are due to the waning US reacting to the rise of the new Chinese Superpower. This is the new reality.

The rapid industrialisation of China, the increase in living standards and the sheer size of the population is propelling China towards being the biggest economy in the world – with no abatement foreseen. 

The past 500 years have seen 16 cases in which a rising power threatened to displace a ruling one. Twelve of these ended in war.  The current power being displaced is the US, with China the rising superpower.  So far we have a trade war – lets hope it doesn’t escalate from there.

As China challenges America’s dominance, it has led the US into a trap first identified by the ancient Greek historian Thucydides (perhaps a relative of Pythagoras).  America should be humble in the face of an undeniable situation.  The rise of China to be the Superpower.  How long will it be before there are more aggressive moves from China in the South China Sea where they control the shipping lanes?

China now have the US where they want them.  They are the cat and the US is the mouse.  Not only is there no quick fix for the trade war, there is no winning for the US.

Will the trade war force mini powers like Australia to choose between their geopolitical relationship with the US and their economic relationship with China?

If so, what choice will they make? These questions need answers.  China has continually offered a hand (and at times a stick) to Australia.  To reject China could be catastrophic.

China learnt the lessons of the Past. The USA didn’t.

China relies on the predictable short-term reactions of the USA to every move they make, moves made from hubris.  In this respect you can see the difference between the two nations, China is strategic and the USA egotistical.

The potential for supplier, consumer, governmental, currency and investment reactions (to name just a few) create powerful opportunities for retaliation which was not a possibility in the Japanese experience.

There is no winning in a trade war against China. 

Make no mistake, China wants to be Number 1.

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