An ‘unprecedented escalation’.
That was China’s response to the United States’ latest strategic blow to the Middle Kingdom.
A response that came after the US ‘abruptly demanded’ China close its US consulate in Houston.
According to the state department, the decision behind the closure was a defensive one. As they state it was ‘to protect American intellectual property and Americans’ private information.’
I’m sure that’s partly true.
After all, the past few days we’ve been seeing plenty of news about Chinese hacking in Australia. So, it doesn’t surprise me that the US is wary of the same situation.
Having said that, it is pretty clear that there is more to this story than just security. It is undeniably an escalation between the two superpowers, one that will strain an already tenuous relationship.
As for whether it is justified, the answer may vary depending on who you ask…
No matter what anyone thinks though, it is clear that the US is drawing a line in the sand.
As US Secretary of State Mike Pompeo remarked:
‘We are setting out clear expectations for how the Chinese Communist Party is going to behave. And when they don’t, we are going to take action to protect the American people, protect our national security and also protect our economy and jobs.’
Don’t expect that stance to change anytime soon either. With the US presidential election still on track for later this year, Trump will almost certainly be relying on his anti-China platform. It was a big part of his 2016 win, and it could net him another four years come November.
This is simply a continuation of the biggest and bitterest economic break-up in recent history.
And the ramifications will be massive…
Don’t call it a cold war
None of this is likely to come as much of a surprise.
As I said, Trump’s administration has been pursuing this decoupling for years now. With the ongoing trade war (which started in 2018) forming the centrepiece of his strategy.
Then the coronavirus came along and threw a spanner in the works.
With a global pandemic upon us, the trade war took a back seat. At least, it did in regard to our attention.
The virus became a much bigger threat, not only to the global economy, but people’s lives.
Now though, despite the fact the pandemic is far from over, tensions are rising again. In fact, the pandemic and the subsequent lockdowns are actually fanning the flames. Raising questions over the possibility of a new ‘Cold War’.
Mark my words, there will be nothing cold about it.
But that also doesn’t mean we are destined to see the US and China engage in a direct military confrontation. It is a possibility that we can’t rule out, but it doesn’t mean it has to happen.
Instead, what we are currently seeing unfold is likely to be the real ‘war’.
This decoupling is an effort by both sides to assert their dominance without bloodshed. Leading to a fight in the market, rather than on the battlefield.
As CNBC reports:
‘Wall Street firms have been examining the implications of the reversal of a decades-long effort to form a more symbiotic relationship between the world’s two largest economies. One consistent view is the world will be far more polarized, with economies and companies gravitating toward either a Chinese or an American orbit.’
This is the real end game, dear readers.
A conflict that won’t be won with bullets or tanks, but rather economic dominance. And it is time to pick a side.
Winners and losers
For us, as Australians, we’re now in a very awkward spot.
Obviously, we rely heavily on both the US and China. They’re our two biggest trading partners.
That makes picking a side a very daunting choice. But I suspect it is a choice we will have to make eventually.
In fact, my colleague Greg Canavan believes it has already been made. He has already seen the writing on the wall and is preparing for what comes next. Suffice to say, he believes it won’t be pretty for some of our biggest industries and the companies within them.
More on that tomorrow…
Because while I do agree with Greg for the most part, nothing is certain in war. And make no mistake about it, we are in the middle of a war.
It is just that up until now Australia has tried to remain neutral. Or at least, as neutral as possible.
Picking to side with the US or China outright, right now, would be economic suicide. We’re in a fragile enough position as it is with this pandemic.
Because of that, I can’t see a commitment occurring anytime soon.
However, things can’t stay the way they have been.
The world is changing, economies are changing, markets are changing. That means we must change with it.
Like any big change, this will create both winners and losers. And I’m not talking about the US and China. Because truthfully, I expect both sides aren’t going anywhere anytime soon.
Instead, it looks as though we’re headed for a split world. One that will revolve around two independent spheres of power and influence. Each with its own winners and losers.
So, even if Australia does follow the US’ lead, we have to remember where we are. And I mean that in a very literal sense.
Because at the end of the day we are a part of the Asia-Pacific.
No matter what happens with China, we can’t walk away from our region.
Fortunately, that is likely to be a blessing rather than a curse. Tune in tomorrow to find out why.
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.
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