On December 7, 1941 Japan launched a surprise attack against the USA at Pearl Harbor and dragged a reluctant USA into WWII. So say the history books and the eventual US win has since been immortalised in popular culture. But we rarely look at the lead up to what caused the Empire of Japan to make such a bold – but ultimately suicidal – strategic decision.
First, Japan’s growth was restricted by their lack of natural resources. Namely oil and minerals. In a tragic mimicry of European empires, in 1931, they invaded Manchuria and ultimately most of China.
Second, in 1939 President Roosevelt moved the US Pacific Fleet from California to Pearl Harbor. This was meant to be a warning to Japan. It was not ignored as Japan started to weigh up its options.
Third, in 1940 Japan invaded Indochina in an attempt to stop US supplies being transported to a Chinese rebel army.
Finally, the US embargo of oil to Japan (and the use of extensive tariffs) leaving them with less than 2 years of energy reserves. The US also tore up commercial treaties which had been in place for decades.
Compare that to what’s going on now between the US and China.
First China has tried to dominate the argument over territorial sovereignty in the South China Sea and has embarked on a militarisation of the region.
Second, the US and its allies have tried to navigate the same waters arguing that they are international waters. They have international law on their side which China has ignored.
Third, the Chinese Communist Party’s survival is dependent on keeping the never-ending bull run in the Chinese economy going.
Finally, the trade restrictions placed on China by the US (with tariffs) and China’s retaliation this week by manipulating its currency lower.
What does that last point mean for you and me? Lower prices for sure. Good news right? Wrong.
The problem with China’s move is that deflation will be exported to the west. Most Western countries are already struggling with low inflation and zero interest rates. So what you say, surely that’s a good thing. It could’ve been in the short term but the market has already traded our dollar lower so any advantage is wiped out.
Modern firms will place their businesses where labour is cheaper. The concern in the west is that China’s move will cause higher unemployment and devastate advanced economies. Which in-turn means western markets (China’s major export targets) will buy less of their goods. So, like the attack on Pearl Harbor, this bold move by the Chinese, may yet prove to be equally suicidal.
Lower prices are great as long as you have a job. The last time a trade war approaching this scale took place we had unemployment of 30%. That was in 1932. Then Germany kicked the whole show off by re-militarising and the Reichstag passing the Enabling Act which gave the powers of a dictator to a madman, Italy invaded North Africa, Spain turned into a dictatorship that was still in place 50 years later, oh and 3% of the world’s population lost their lives in WWII.
In the short term, with tariffs placed on Chinese goods US citizens will pay more for goods made in China. China’s attempt to manipulate its currency lower is an attempt at reducing the impact of those tariffs and to punish the US. As a corollary goods manufactured in the US which have parts imported from China are also being hit (with some exemptions). However, and as stated above, it’s a short-term solution as goods imported by China will also be more expensive.
Enjoy your lower interest rates as they may be around a while as Central Banks attempt to stimulate nervous economies. But they will soon be out of bullets. Then it’s up to Government and fiscal policy.
There are no winners from this. Let’s just hope that 3% of the world’s population is not wiped out this time around and that the madmen who are sending each other economic dickpicks come to their senses.