Two weeks ago I unleashed a “China Trade War” meme swarm. And I’m happy to see those memes propagated through this letter by legendary investor Paul Tudor Jones.
For example, on October 16th, I wrote:
“China began this trade war when they devalued their currency and pegged it to the dollar in 1994. They have been winning the war handily ever since.”
A few days later, Mr. Jones wrote:
“On January 1, 1994, China devalued its currency by 50% in a single day, and since then has experienced a manufacturing boom. …the US has already been in a trade war for nearly two decades; and it is the only time in this nation’s history it surrendered without ever firing a shot.”
There are many more such instances of meme propagation, but I won’t belabor the point. And Mr. Jones did indeed strengthen the swarm by adding not only gravitas, but by adding value with additional facts. For example, his point about Brazil is very important. The Chinese act all hysterical when we ask them to relinquish the peg, but the Brazilians let the real appreciate by 34% against the dollar, and there was no calamity.
Now, there is very little to quibble with in Jone’s piece. His grade for the paper is an “A”. It would have been an “A+”, but he only touched very briefly, and lightly upon the role of multinational corporations.
In the quote above, Jones says that we: “surrendered without ever firing a shot.” But both the George H.W. Bush and Bill Clinton administrations cited China as a currency manipulator right at the beginning of this trade war. So, we were trying to fight, but there is no doubt that the multinationals brought pressure to bear and are, in fact, responsible for the peg being maintained all these years. After all, there are stupendous profits from mass-scale sweat-shop operations at stake.
The next assignment for Mr. Jones is to extend his argument by encompassing the “international labor arbitrage” being practice by multinational corporations.
And one last point about Mr. Jones’ final two sentences:
“Japan has an unemployment rate that is half that of the United States and it still runs a trade surplus. Nonetheless, Japan intervened to protect its export industry, and the United States, incomprehensibly, responded with not even a whimper, let alone a bang.”
We do indeed need to address all of our trade deficits, but if you recall, the Japanese were reacting to China purchasing a large number of JGB’s under the guise of diversifying her reserves. In reality, it was an attack to drive up the yen and take share from Japanese exporters.
We are not the only target of China’s mercantilist aggression.
And then there is the geopolitics of China trying to steal islands from Japan and her other neighbors in the Pacific Ocean. There was the fishing-boat dust-up with Japan. Then the rare-earth mineral embargo, which can be considered a military threat to us since so many of our high-tech weapons rely upon them. And when you consider that Japan has been a US ally for 65 years, and the Chinese communists have never been a political ally (except for a brief period during World War 2), it makes sense to cut the Japanese some slack.
If we need to reduce our trade deficit with Japan after dealing with the Chinese, then it would be appropriate to go about it in a diplomatic manner as we did with the Plaza Accord. The Chinese have said that they will resist a similar agreement, so it is they who are making this ugly.
Note: If you can get a copy of the 1987 PBS film: “TRADER: The Documentary”, you can see Jones predicting the 1987 crash. He and his partner used an analog between the 1920s bull market and the 1980s bull to make the prediction. You can also see him day-trading futures and currencies, shouting into the phone at floor-traders, putting on his lucky sneakers, using Elliot Wave Theory, etc. If you are a trader, you will love it.
Note: Jones brought up the subject of “weaponizing financial imbalances”. I have been meaning to post something about that and will try to get it out soon.
