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Old 10-23-2018, 08:36 AM
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Arrow The Most Dangerous Geopolitical Fault Line Just Got Deeper

The Most Dangerous Geopolitical Fault Line Just Got Deeper
By: Randy Brown - Contributor for Forbes
RE: https://www.forbes.com/sites/randybr.../#7e672b861917

The U.S. and China’s relationship is quickly deteriorating, and is likely to result in all trade getting hit with tariffs by early next year. But that is just the beginning of a confrontation that is moving beyond trade to include conflicts in the South China Sea, cyber hacking and high-tech espionage.

Recent U.S. administration pronouncements that broadly snuck under the radar openly characterize China as a national security threat. This escalation in trade and military tensions runs the risk of unraveling global economic growth.

Growing Naval Aggression And National Security Threats

On October 4, U.S. Vice President Mike Pence spoke at the Hudson Institute and delivered a blistering attack on China. He railed on China’s suspected efforts to interfere in the upcoming midterm elections. He highlighted recent provocations in the South China Sea, as a Chinese vessel tried to block a U.S. destroyer in international waters, which narrowly avoided a collision.


That same day, Peter Navarro, a trade advisor to the U.S. President, ran an op-ed piece in The New York Times. He outlined a Department of Defense report that highlighted vulnerabilities in military manufacturing. It specifically identified China as a significant national security risk in supplying critical materials. He emphasized that an immediate next step would be to improve domestic fuel cell and battery production to support underwater vehicles. This seemed like a veiled reference to improving capabilities in the South China Sea.

On that same day, Bloomberg reported a chilling story of Chinese espionage, as stealth chips were inserted into U.S. bound hardware. The chips were installed by operatives of the People’s Liberation Army with the intent of spying, according to multiple sources from the intelligence and business community.

This new characterization and public pronouncement of China as a significant U.S. national security threat is a seismic shift in the relationship.

“Poison Pill”

In another sign that the U.S. is looking to isolate China, the United States-Mexico-Canada Agreement (“USMCA”) trade agreement includes a provision that restricts new trade deals with non-market economies. While not explicitly named, this was primarily aimed at China. The U.S. demands that Mexico or Canada notify it of any talks with China and, if a deal were completed, then the U.S. can walk away from the USMCA agreement. The U.S. argues that this prevents China from avoiding tariffs by accessing the U.S. through indirect routes.

Days later, Wilbur Ross, the U.S. Commerce Secretary, called the clause “kind of a poison pill”, and indicated the U.S. would look to insert this into new agreements with the E.U. and Japan as well.

Putting On A Military Show

In September, China did something unprecedented by conducting military drills with Russia. This show of cooperation and military strength was to remind the U.S. that adversaries could bury their differences and mount an offensive.

Russia and China are reluctant allies. Russia may be trying to persuade the U.S. to lift sanctions by flouting a willingness to adopt China. Meanwhile, China, fearing that the U.S. will consolidate international support to contain its trade and influence, wants to demonstrate its willingness to align with a U.S. adversary.

Not to be outdone, the U.S. is expected to showcase its military might with an exercise in November. While details are scant, the exercise is likely to be concentrated in the South China Sea. However, it may include South America – where China is heavily investing in trade and political relations – and the North Sea, to remind Russia that the U.S. can support a global confrontation.

U.S. Ramping Up Soft Power

One of Xi Jinping’s signature initiatives has been the “One Belt, One Road” global infrastructure program to connect China to Europe and Northern Africa. Now, the U.S. is stepping up with its own “Build Act” to counter China’s influence in nation building.

The U.S. and China are quickly expanding the scope of their confrontation, making it very difficult to deescalate trade differences, raising the risk of a serious miscalculation. China may also align more substantially with Russia creating a multipolar world.

Geopolitical Risk To Markets

Markets need to pay more attention to this changing landscape.

We could soon start to see multiple rounds of brinkmanship, as neither leader is politically constrained. In the U.S., President Trump has significant executive powers relating to trade and national security and, across both political parties, China is viewed as a threat. Meanwhile, China recently changed its constitution to allow President Xi Jinping to hold his job for life.

Global trade uncertainty will increase as conflicts escalate in the South China Sea, a $4 trillion hub for international trade. Asian trade and supply chains are at risk of disruption, which would increase global market volatility. While U.S. companies will look to manage around any supply chain breakdowns, delays and inefficiencies will invariably impact profits.

Extended conflicts are a serious risk to long-term growth, as trade spheres of influence could become more bifurcated. For example, if China were to trade more with emerging markets while the U.S. focuses on trading with the developed world, aggregate trade would drop.

This poses a serious risk to markets that have not yet factored it into pricing.
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O Almighty Lord God, who neither slumberest nor sleepest; Protect and assist, we beseech thee, all those who at home or abroad, by land, by sea, or in the air, are serving this country, that they, being armed with thy defence, may be preserved evermore in all perils; and being filled with wisdom and girded with strength, may do their duty to thy honour and glory; through Jesus Christ our Lord. Amen.

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