US and China: The Thucydides Trap.

China
05/21/2020

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This is more of a geopolitical piece, but I want to give my thoughts on the US and China, and especially the Thucydides trap.

First of all I recommend these books. A lot of the material I am covering here are sourced from these four books on China: 

Destined for War by Graham Allison

Crouching Tiger: What China’s Militarism Means for the World by Peter Navarro (who is a part of President Trump’s administration being Assistant to the President, Director of Trade and Manufacturing Policy, and the national Defense Production Act policy coordinator).

AI Super Powers: China, Silicon Valley, and the New World Order by Kai Fu Lee.
https://www.amazon.ca/AI-Superpowers-China-Silicon-Valley/dp/B07G8KYP2Z/ref=sr_1_1?keywords=kai+fu+lee&qid=1590069223&sr=8-1

Stealth War: How China Took Over While America’s Elite Slept by Robert Spalding.
https://www.amazon.ca/Stealth-War-China-While-Americas/dp/0593084349/ref=tmm_hrd_swatch_0?_encoding=UTF8&qid=1590069506&sr=1-1

 

There are plenty of other great US-China geopolitical books out there, but I found these 4 to be the best. I would also suggest watching the interviews by Real Vision on Youtube with Kyle Bass, General Spalding and Chinese Billionaire Miles Kwok ( who claims to be the CCP’s most wanted man).

The big news yesterday was the US Senate passing a bill which allows for the delisting of a Chinese company if they fail to meet US security regulations. As many of you probably know, China does not use the standard GAAP rules for accounting. They also do not follow a lot of the US’ regulations on listing. Why are they still listed then? You can argue political corruption in the US, or the fact it means big money for both sides. The documentary titled “The China Hustle” is a great one to watch on how China fails to comply with US security regulations, and how Wall Street profited by listing fraud Chinese companies, while Main Street lost out by investing into these companies.

This was actually Kyle Bass’ suggestion on how to defeat China, by denying them access to America’s financial markets. Bass believes China needs these markets for money because pension funds and other funds do buy Chinese stocks, but more importantly, it is for China to be a part of the Emerging Market Index.

The other big news was Secretary of State Mike Pompeo congratulating the Taiwan President on re-election. The Chinese did not like that at all. The Global Times, which many consider to be the CCP’s mouthpiece, came out saying the US will bear the consequences. China also demanded the US break all ties with Taiwan and many other demands. Things just heated up today with the news the US has agreed to sell Taiwan 180 Million Dollars worth of advanced torpedoes. In my market posts, I have spoken about a Black Swan event being the only thing to bring these markets down. China’s retaliation to all of this could be that Black Swan.

So there are many who think China wants a multi polar world, and they do not want to be a hegemon. The Chinese elites though do think there is a mandate from heaven to rule. China was the hegemon twice in the past and believe they are destined to be once again. The 4 pillars of President Xi’s policies are:

  1. China to be the largest economy in the world (some say this will happen well before 2030).
  2. China to be the most powerful military in the world (more on this below).
  3. China’s economy to shift from exports to a domestic consumption based model with the growing middle class in China set to become larger than the middle class in the US and Europe combined.
  4. China to be the front runners in AI, and then dictate the terms of AI just as the US dictated the terms for nuclear weapons being the first (officially) to develop them.

As you can see, many of these goals do conflict with Washington. We are in fact in a Thucydides Trap. This comes from Thucydides, an Athenian historian, who wrote about the Peloponnesian war between Athens and Sparta. The main reason for the war was that “It was the rise of Athens and the fear that this inspired in Sparta that made war inevitable”. The rising power (China) and the fear this causes the established and declining power (the US) which can lead to war. Mr. Allison in his book, provides a nice list of Thucydides traps, and around 70% of the time, they lead to a shooting war. The most recent, being the US and the USSR did not, so this gives us encouragement that war can be avoided. I should point out that the US and USSR had a direct line from Washington to Moscow 24/7 so they could chat right away…currently Washington and Beijing do not have this hotline but of course can be done through back channels.

Ray Dalio has spoken a lot about this, and how the world we live in parallels the 30’s and the 40’s not only with economics, monetary policy, and social issues, but the fact there is a Thucydides trap too. Back then he was of course talking about Britain and Germany. Ray Dalio has tweeted in the past that the war between the US and China has already started. We are already in a currency war, trade war, technology war and cyber war with China. The next would be a shooting war, which would begin almost like a Cold War…and hopes that it will remain like the Cold War and see no actual conflict between the two sides. 

In this case, it is worth reading about the history of the Chinese leadership, the CCP. The CCP has a reputation of being deceitful and doing what nobody expects. The CCP has done things militarily against stronger nations. In the past, no one expected the CCP would send troops to help the Communist Koreans in the Korean war. Reportedly General MacArthur asked Washington to drop a nuke on Beijing. The CCP also attacked the USSR at a time when Moscow had the most nuclear weapons, and also the infamous India-China Bhai Bhai move when China attacked Indian troops and took the Northern Provinces of India. I worked at a prop trading firm here in Richmond BC. It was primarily a Chinese firm, and most of them were from Taiwan. My economic history and knowledge was not up to par at the time, but they talked about how China has fooled the world with their economic growth. They also told me to not trust the CCP, since their elites read the Art of War which is all about deception. Being friendly and cozy and then taking your opponent out. The idea that China was trying to take over the world was firm in their minds.

I am not going to speak about whether I think war is inevitable or not. I truly hope both sides can come with a way to avoid this. But I must say that both sides, the US and China, have hawks, who are pushing for military action in the form of a pre-emptive strike.

On the US side, the Americans know in perhaps 2 years, the Chinese will be equal in military strength. On the Chinese side, one of Xi Jinping’s four goals for China as mentioned above, is to have a strong military in which China cannot be threatened by the West as China has  been in previous centuries. Another one of his goals is to bring back Chinese land, especially Taiwan and Hong Kong before the integration after 2030. This is also where likely we will see a test of America’s resolve in confronting China. In the past, President Bill Clinton sent in an aircraft carrier group to Taiwan when China threatened the island nation. In the present day, Taiwan is beginning to become the central topic in the spat between the two nations.

We also need to talk about the South China Sea. 

The Chinese do have an island chain defense strategy. It is to protect her shipping lanes. Especially of the Malacca strait. China needs ships in and out constantly to keep her economy running. The way the Chinese are preparing for a potential American intrusion of their shipping lanes, is by the belt and road initiative, sometimes dubbed the new silk road.The Chinese pretty much have the first chain set and protected with their anti-carrier missiles.This is what I want to talk about.

Before that, a quick side note. China fooled the Obama administration. For 8 years, the Chinese came to Washington saying these islands were for scientific experiments…while they moved in missiles and naval ships and other armaments. The CCP would love to have a Democratic President in office again, there is no doubt about this.

So first of all, we need to realize that a war between these two nations would not be about occupation, but more about putting a nation back a few years, and taking out her offensive capabilities preemptively. The Americans have B-52’s on Guam and other bases in the Pacific that are essentially sitting ducks if the Chinese decide to strike first. The Americans rely on their aircraft carrier groups. The air and sea approach is the current American strategy to subdue China. The Americans spend about 8 billion dollars each on their aircraft carriers. Chinese anti-carrier missiles cost about 100 million or less. 

Without delving into the economics about China countering an indebted American government to spend more on their military, the Chinese will find cost effective ways to take out American threats. Remember it is not about occupation. American strategists have spoken about how their preemptive strike would require a combination of air and sea operations. Essentially, American reconnaissance knows where these anti-carrier positions are. They will be taken out swiftly first, which would then allow American aircraft carriers to encroach in Chinese waters and continue a land and naval assault.

Just a quick side note into cyber warfare. Many nations do not really know the extent of each other’s cyber arsenal, but IF warfare does occur, we will see a cyber attack.Nuclear missiles have the unfortunate effect of when you use them, your enemy can fire their nuclear missiles back. This is why now missiles are loaded into submarines or land platforms which are constantly moving. So the enemy cannot target these platforms on the first strike since they may not be able to locate them under the ice caps or in forests etc.Cyber warfare is a use it or lose it type of weapon. If you take out an enemies power grid, it is very likely they will not be able to respond. Again, we do not really know the cyber arsenals possessed by these nations, and if they do have a second strike (uhm hack?) capabilities. There is also the threat of another nation, say Russia, being able to initiate a cyber attack on the Americans but making it look like it was coming from Beijing…which would add more fire to the two nation’s and the hawks pushing for action in their respective governments.

Back to traditional warfare. America’s real power is in her military satellites which allows America to strike targets with pinpoint accuracy. In fact all of America’s military weapons and arsenals essentially rely on these satellites. We saw this used in devastating style with America’s “shock and awe” campaigns in the Middle East where Iraqi soldiers did not stand a chance. Currently, the Russians have the ability to knock these satellites down if they want too…but the Russians are really not emerging as a threatening hegemony in terms of economics as the Chinese. I think the Russians have played the chessboard really well for themselves and have guaranteed they come out on top in many possible situations but that is for another post. Remember the part about China finding cost effective ways to counter the Americans?

Well, the Chinese are developing a missile, capable of taking down these American military space satellites. This is a cause for concern for the Americans, and adds more cause for the hawks in Washington to demand action quickly before China gets this capability.This is also why President Trump announced a space force. It is a force to protect these vital satellites and remain ahead of the Chinese. 

Once these satellites are taken down, the American military is essentially blind. This is key for the Chinese. Knowing this, the Thucydides trap becomes a bit grim between China and America.

We know the Americans have a debt problem, in fact the Chinese do as well. But the Chinese have essentially forced the Americans to spend much more in protecting her military hegemon. Now look at how much more debt the US government has added today with response to Covid-19 where people and businesses are struggling and require more government assistance. This is where my “Tale of Two Dollars” comes into play. China’s war has been economic for the most part. They know now with all these Dollars being printed, if the US was to lose reserve status, it would cause a massive hyperinflation as the Dollar loses the artificial demand for it. What am I watching? I am watching the US Dollar because to be honest, the Chinese (and Russians) could use dark pools to attempt to bid up the Dollar, although I do not think they would need much help. 

 

 

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