Hello. It’s Sam Culper. Welcome to the Forward Observer Daily. ADMIN NOTE: InFocus is my opportunity each week to address subscribers with analysis on whatever topic I choose. This week, I discuss a major shift by the world’s only superpower to stave off an aspiring and revisionist global power. This brief will appear in the Strategic Intelligence Summary for 02 August 2018.
In Focus: This week I want to provide you with an overview of a major shift happening right now. I don’t think this is getting the attention it deserves. We’ve heard of Chinese ascendancy, their economic expansion, the Asian Export Import bank and the Belt and Road Initiative (which now extends to roads and ports in 60 countries), investment across Asia, Africa, and South America, technological and industrial progress aided by persistent and aggressive espionage against the United States (intellectual property theft to the tune of $200-$300 billion per year, conservatively, for over a decade), their long-term military strategy and growing blue water navy — all the things setting China up to be dominant in the 21st century. Late last year we reported that China is on track to have as many fast attack submarines as there are boats in the entire U.S. Navy. That kind of military rise will allow China to challenge the U.S. in the Pacific and disrupt the established order in southeast Asia — not to mention enable their control of the $5 trillion of trade that passes through the South China Sea each year. That kind of power means that the Chinese will use control of the South China Sea to reward the countries who fall in line with China’s vision and bully those who don’t. Rightly, U.S. allies in Asia are worried as they’re forced to choose between reinforcing long-held strategic partnerships with the U.S. or pivoting to fit into inevitable Chinese dominance. Old news, right? Here’s what I’ve been watching as the U.S. response to disrupt China’s rise to dominate Asia.
Secretary of State Mike Pompeo will be in Singapore this weekend at the annual Association of Southeast Asian Nations (ASEAN) ministerial meeting to discuss, among other things, economic security for ASEAN countries in light of China’s military and economic bullying. U.S. allies like Australia, Japan, Thailand, Vietnam, Singapore, the Philippines, and others have increased defense spending as a result. (Vietnam’s arms imports are up nearly 700 percent in the last decade.) To be sure, no U.S. ally in Asia is capable of confronting China alone and, conservatively, they’re probably 10-20 years behind where they need to be to pose a significant challenge. Around this time last year, Secretary of Defense James Mattis called on ASEAN to be the bulwark against Chinese expansion in the southeast Pacific. That means militarily, economically, diplomatically — every avenue available should be pursued to stop Chinese dominance, according to the strategy. One reason: preventing Chinese dominance is better than trying to topple Chinese dominance. If we want to avoid war, the strategy goes, then we can’t allow China to become so dominant that war is the only choice. But China’s rise to dominance means more than just its military. We’re seeing Australia, Canada, Germany, and other European nations veto Chinese bids to purchase farmland and critical infrastructure in their countries on the grounds of national security. Chinese investment is an enabler of espionage and technology transfers. It’s a big, big deal. (Earlier this year, the U.S. Securities and Exchange Commission blocked a plan for Chinese investors to purchase the Chicago Mercantile Exchange.)
Back in May, U.S. Pacific Command officially changed their name to U.S. Indo-Pacific Command (INDOPACOM). Established in 1947, PACOM’s area of responsibility has traditionally included everything from the U.S. West Coast all the way to central Russia (Arctic), the Middle East, and the waters east of southern Africa. As opposed to a decade ago, INDOPACOM’s job is tying India into the Indo-Pacific Strategy to counter China. Talks are on-going to include Japan as a routine member of U.S.-Indian military exercises and the annual Rim of the Pacific (RIMPAC) — the largest military exercise in the world — included 25 nations this year. Notably present: India. Notably absent: China. (China was disinvited by the Trump administration; although China kept a spy ship off the coast of Hawaii to observe and collect signals intelligence during the exercise.)
Former U.S. PACOM commander Adm. Harry Harris, long speculated to become ambassador to Australia, is actually now the ambassador to South Korea. That’s a lot of military experience for an ambassador position, but it underscores how vitally important that relationship is. Adm. Harris serving in a diplomatic role will have positive effects on achieving U.S. strategic security objectives in the region.
Secretary Pompeo, along with Japanese and Australian officials, recently announced a new trilateral economic investment project for Asia in order to build up the economies of U.S. allies in competition with China. Its direct purpose is to prevent China’s regional dominance. Said Secretary Pompeo: “These funds [$112 million] represent just a down payment on a new era in U.S. economic commitment to peace and prosperity in the Indo-Pacific region… We have never and will never seek domination in the Indo-Pacific, and we will oppose any country that does.”
And that brings us to the export-driven Chinese economy. Early on, the Trump administration reckoned that if it were going to use tariffs to curb Chinese espionage and flatten out the U.S. trade deficit, the time to do that is when the U.S. economy is booming. The U.S. economy grew at 2.2 percent in the first quarter of 2018, followed by 4.1 percent in the second quarter. It could always be revised down, but the Atlanta Federal Reserve published their third quarter estimates at 4.7 percent. The the time to impose tariffs and use a trade war to bring China to the negotiating table is when a growing economy can absorb the downside. And that’s why we’re seeing aggressive tariffs now (the Trump administration may raise tariffs from 10% to 25% on roughly $200 billion of Chinese goods later this month), which is starting to weigh on the Chinese economy.
Despite official numbers from China at 6.7 percent annual growth (year over year from the most recent numbers available), the actual growth might be half of that. We’ve previously covered the trillions in off-the-books debt from the central government to bail out state-owned enterprises, and the private sector may be facing a debt crisis. In the first seven months of 2018, there have been 20 private sector bond defaults. To put that in perspective, there were 20 defaults in all of 2017. This is unlikely to be a result of trade tariffs, but it does underscore two fundamental truths: 1) China has exploitable vulnerabilities, too, and 2) Economic warfare is a central part of China’s war against the U.S., and the Trump administration is willing to meet that threat and expose Chinese weakness. A Tuesday meeting of the Chinese Politburo outlined the health of the Chinese economy and pointed out ‘external challenges’ to growth. The Politburo acknowledges that the Trump administration treats the trade deficit as a national security issue, especially as the Chinese continue to steal intellectual property from U.S. corporations. We have to recognize that, as a former U.S. intelligence official put it, China is at a cold war with the United States. The U.S. government under the Trump administration is no longer turning a blind eye.
Previous administrations did little to curb the trade deficit because, starting under Bill Clinton and George W. Bush, the belief was that China’s economic rise would force it to adopt more open and democratic governance. Wrong. And then the Obama administration followed that line of thinking. In 2011, Obama met with then-president Hu Jintao and said,“There has been an evolution in China over the last 30 years since the first normalization of relations between the United States and China. And my expectation is that 30 years from now we will have seen further evolution and further change.” There are financial talking heads like Jim Cramer, who said on his “Mad Money” show on CNBC several months ago: “Sure, the Chinese may steal our trade secrets. Yes, they take our manufacturing jobs, but boy, oh boy, do our companies make money there. Starbucks is huge in China. FedEx is the shipping company of choice for their exports,” so of course U.S. corporations doing business there have a vested financial interest in allowing China to operate however it wants — just as long as they get access to the Chinese economy. And so for eight years, Obama did basically nothing, either to retaliate against Chinese theft or to make America more competitive. In that same 2011 speech, Obama went so far as to defend China, saying: “China has a different political system than we do. China is at a different stage of development than we are. We come from very different cultures with very different histories.” China took that as a signal to continue what they were doing because, hey, we just have a different culture and that’s okay. Treating China for eight long years as a developing democratic peer instead of an economic and military competitor was extremely short-sighted, and America continues to pay the price for that oversight. For all the hand-wringing over the demise of the post-1945 international order, few will publicly acknowledge that the decline of that “order” actually began under Obama when China started re-writing the rules in Asia.
And I should mention again that last month, Chinese officials approached the European Union to strike a trade deal that would drive a wedge between the EU and the United States. Chinese diplomats proposed a deal to jointly wage action against the U.S. at the World Trade Organization, and sought trade deals that would re-align European interests with China’s future. EU officials, of course, politely declined the alliance. But that’s the kind of power China wants to yield; they want to create their own world order and shape global politics in the image of China. That’s a bad thing for Americans but that’s a world the next generation risks inheriting. That’s why I’ve described President Trump’s job as “saving Pax Americana”. (InFocus; Strategic Intelligence Summary for 23 March 2018) We’ll see if he can do it without going to war, either at home or abroad.
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