Markets fluctuated this month but ended up flat, with the MSCI AC Pacific Index being flat on the month but remaining down 7% over the three months since Pacific Wealth started. The major influence was China, which recovered partially from the 32% fall in the Shanghai stock market, helped by massive state intervention, before roiling global markets with a devaluation of the renminbi (yuan).

The Pacific Region has been beset by currency wars before, notably in 1997–98. However, this time around, if they stay mild they may actually prove helpful to its vigorously exporting companies. If they intensify, their influence would be much less benign.

Over the past year, the dollar has been strong against almost all the world’s currencies, while many of our Pacific Basin currencies have been especially weak. Japan’s yen has declined 18% against the dollar, pushed by the policies of its government, while the Australian dollar has declined 21%, led by weak mineral prices. The Indonesian rupiah has been less weak than these currencies, losing only 14%; the Malaysian ringgit has lost 15%; and the South Korean won declined 12%.

Even the rock-solid Singapore dollar has lost 9% against the U.S. currency. On the other side of the Pacific, the Mexican peso has lost 19% of its value against the U.S. dollar, the Chilean peso 15% and the Colombian peso as much as 36%, fueled by declining oil prices. The Philippine peso has lost less than 5%.

Two agribusiness companies in our portfolio reporting results this month showed the diverse effects of currency wars on operating businesses. PT Indofood Sukses Makmur Tbk (OTC: PIFMY), our Indonesian food and agribusiness company, increased net sales by 4% in the first half of 2015, but net income declined by 25% due to unrealized foreign exchange losses from rupiah depreciation.

On the other hand, Industrias Bachoco S.A.B. de C.V. (NYSE: IBA), our Mexican poultry producer, announced second-quarter sales up 12% from the previous year, with volume up 11% and net income up 28%.

Indofood illustrates the classic problem that Indonesia and several other countries suffered from badly in 1997–98: If you have dollar debt and most of your assets are in a weak-currency country, the accountants will make you write off the increase in the domestic value of your debt against profits, even if on a cash-flow basis you may be operating highly profitably. If the Indonesian rupiah stabilizes now, Indofood’s profits should rebound, as its costs have declined against its competitors’. If, however, the rupiah went into freefall, as it did in 1997–98, Indofood’s debts could become unmanageable.

Bachoco illustrates the other side of the coin: If you are producing a product in a weak-currency country and exporting much of it to the United States, your profits will increase strongly, and you will become steadily more cost-competitive against your domestic U.S. rivals. However, even if the Mexican peso went into freefall, Bachoco would be fine—it had only $166 million in debt and $749 million in cash items as of December 31, 2014.

On balance, most Pacific Basin companies have relatively little foreign-currency debt; the memory of 1997–98 is still too recent for them to have forgotten what can go wrong. Even Pacific Basin consumers, whose debts have risen rapidly in recent years, tend to have their debt in domestic currency, unlike the unfortunate mortgage borrowers of Eastern Europe.

Thus the decline in Pacific Basin currencies against the dollar should be good for their companies’ profits, especially for firms such as tech companies that export heavily to the United States. Of course, if their share prices are denominated in a weak currency, they will temporarily fall in dollar terms, but the profits effect should outweigh the share-price effect for most companies, whose domestic costs form a large percentage of their revenues.

The TPP Hits a Snag

In other news, the Trans-Pacific Partnership agreement ran into difficulties this month as negotiations stalled. One problem with the deal I have previously identified: It cements into place in TPP countries the (in my view, excessive) copyright and patent protections of current U.S. law, thus making U.S. pharmaceuticals, for example, far more expensive than they need to be. I believe 99-year copyrights and ever-escalating patent protections are, in reality, barriers to free trade rather than examples of it. I would therefore welcome a revised TPP that reduced these, both in the U.S. and worldwide.

We shall see what happens. Our portfolio will benefit from a TPP conclusion, since we hold several owners of massive intellectual property (for example, Yaskawa Electric (OTC: YASKY), LG Display (NYSE: LPL), Nintendo (OTC: NTDOY), Trend Micro (OTC: TMICY) and now Hon Hai Precision Industries (OTC: HNHPF). We don’t own the losers in cases of excessive intellectual property rights, which are mostly consumers.

The real danger to free trade would be a true currency war, in which countries competed to devalue their currencies as they did in the 1930s, while erecting tariff and non-tariff barriers to other countries’ exports. In that decade, world trade declined by two-thirds; we can only imagine what such a decline would do to world economies, in the Pacific Basin and elsewhere.

The monetary policies of the last few years, with interest rates worldwide below the rates of inflation, have brought such a currency war closer. There is no doubt that China, for example, is suffering from competitive devaluation by many of its trading partners.

However, economically if not geo-strategically, the Chinese government is quite careful, so we can at least hope that their mini devaluations are not the precursor to something larger.

Pacific Basin companies are highly competitive, and as investors we can benefit from this, but they need an open global economy in which to compete.