US-China Relations: War in 2013?

War between the US and China – an unpleasant thought, for sure…unless you happen to be a defense contractor. The threat of war could be sufficient to power the US defense industry’s profit growth for many years.

We would not be tackling this grim topic – nor engaging in the financial market version of grave-dancing – if the suits and uniforms in Washington understood that China is merely implementing its own version of the Monroe Doctrine.

If you don’t remember the Monroe Doctrine from history class, it goes like this: [US] President James Monroe in 1823 put the European powers on notice that if they meddled anywhere in Latin America, the United States would step in to put a stop to it. It was a big ‘keep out of our backyard’ sign.

OK, it was more subtle than that; an aging Thomas Jefferson congratulated Monroe on achieving a ‘cordial friendship with England’. The doctrine was, indeed, a tacit agreement between the United States and Great Britain. The US took a free ride on the Royal Navy. Its ships patrolled the waters surrounding Latin America, keeping the continental powers far from America’s doorstep.

The original Monroe Doctrine aimed to keep Europeans away. China’s Monroe Doctrine aims to keep the United States from getting closer than it is already.

‘The Pacific basin has long been home to the United States’ largest trading partners, and Washington deploys more than 320,000 military personnel in the region, including 60% of its navy,’ writes Conn Hallinan of the think tank Foreign Policy in Focus. ‘The American flag flies over bases in Japan, the Philippines, South Korea, Malaysia, Thailand, the Marshall Islands, Guam and Wake.’ The US Seventh Fleet routinely sails near the Chinese coast, to the edge of the “12-mile limit” where international waters end.

No wonder Chinese leaders sense – rightly or wrongly – that they’re being encircled.

‘China has made it clear that it will not tolerate the threat to its security represented by a foreign military presence at its gates when these foreign forces are engaged in activities designed to probe Chinese defenses and choreograph a way to penetrate them,’ writes our acquaintance Chas Freeman, the veteran US diplomat who was President Nixon’s interpreter on his groundbreaking visit to “Red” China in 1972.

‘There’s no reason to assume that China is any less serious about this than we would be if faced with similarly provocative naval and air operations along our frontiers.’

Thus are the Chinese asserting their dominion over the disputed Senkakus Islands. ‘China sees the islands as part of its defensive parameter,’ Hallinan explains, ‘an understandable point of view considering the country’s history. China has been the victim of invasion and exploitation by colonial powers, including Japan, dating back to the first Opium War in 1839.’

China also insists it rightly controls a host of islands in the South China Sea – rich fishing grounds and a potential source of oil and gas. These islands, such as the Spratlys and Paracels, are also claimed by… oh, let’s run down the list: Vietnam, Malaysia, Taiwan, Brunei and the Philippines. Maybe the Kardashians too, for all we know.

In addition, China has…

  • Commissioned its first aircraft carrier
  • Developed a whiz-bang stealth fighter jet called the J-20
  • Goosed its defense spending by double-digit percentages every year for the past decade (although Beijing’s defense budget it still one- fifth the size of Washington’s).

A sensible US response would go something like this: ‘Hey, China’s implementing its own Monroe Doctrine. They want to be in charge in their own backyard. Meanwhile, we’re $16.4 trillion in debt. Heck, we owe $1.1 trillion of that to China. Why are we going deeper in debt to keep 60% of the Navy stationed in the Pacific basin? Maybe we should reconsider this whole ‘American lake’ thing.’

Instead, the US government is doubling down.

‘As the war in Iraq winds down and America begins to withdraw its forces from Afghanistan, the United States stands at a pivot point,’ Secretary of State Hillary Clinton wrote in Foreign Policy’s November 2011 issue. ‘One of the most important tasks of American statecraft over the next decade will therefore be to lock in a substantially increased investment – diplomatic, economic, strategic and otherwise – in the Asia-Pacific region.’

In DC wonk circles, this statement of intentions has come to be known as ‘the pivot’.

The same month Clinton published that article – with the presumptuous title “America’s Pacific Century” – the Obama administration stationed 2,500 US troops on Australia’s northern coast for the first time. More encirclement.

This ‘pivot’ opens up an intriguing investment angle. The US defense industry is positively salivating over the pivot.

As 2012 wound down, the Aerospace Industries Association issued its annual industry forecast. Reuters summed it up like this: ‘US sales of warplanes, anti-missile systems and other costly weapons to China’s and North Korea’s neighbors appear set for significant growth amid regional security jitters.’

Not to put too fine a point on it, the pivot ‘will result in growing opportunities for our industry to help equip our friends,’ enthused AIA vice president Fred Downey. Orders from Asia will more than make up for a slowdown in buying by those parsimonious and peacenik Europeans.

And even if the automatic cuts in the US take effect, ‘contractors such as Lockheed, Boeing, Northrop and Raytheon Co. expect regional demand for their products and services to help them offset Pentagon belt-tightening,’ says Reuters.

The AIA didn’t put numbers on its forecast, but pressed by Reuters, the industry group disclosed that sales agreements with countries under the US Pacific Command’s umbrella grew 5.4% in fiscal 2012 – to $13.7 billion.

Nevertheless, J.P. Morgan recently downgraded several of the big defense-sector names: ‘We believe,’ said its report, ‘that Republicans as a group put a higher priority on spending cuts than they do on preserving the defense budget.’

We have our doubts… but even if that turns out to be true, there’s still money to be made from the pivot.


Addison Wiggin
for Markets and Money

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Addison Wiggin

Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He's the creator and editorial director of Agora Financial's daily 5 Min. Forecast and editorial director of The Daily Reckoning. He is also a contributor for Markets & Money

Addison Wiggin

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9 Comments on "US-China Relations: War in 2013?"

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The problem with these two decadent, badly-ran superpowers is they spend far too much time telling everyone else what to do while their own nations slide into decay. The USA is literally bankrupt is is more likly to end up having a second civil war. As for China and its idiotic, racist dream of a black-haired, brown-eyed world under Chinese domination is that they would be resisted and ultimatly obliterated by an alliance of enemies if they try the old Tojo-thing. Besides, if China has not conquered the world by 2030, then it will never happen…unless they unleash an army… Read more »
There is no single greater thing that the “progressive” US empire relies upon than ignorance and collective memory loss. This act of disenfranchising China and following the Sun west beyond the US mainland started in the 19th century. Yes we speak of those loonies that have woken up each morning and headed out on their bearing toward those mountains that they believed birthed the Aryans in the north of Persia. On these pages we’ve done the “progressive” racist social Darwinism underpinnings and we’ve done LeGendre setting sail with the Japanese on March 12, 1873 on the course that would have… Read more »

Despite the detailed and scholarly comments above, why should China embark on a costly and bloody war, they already have the world in its pocket. China exports most of its manufactured goods, although there is a downturn in the markets at the moment, it can afford to wait till the next surge. Its internal problems will be sorted out, whereas the USA is fighting on all fronts, Militarily and Financially, and is bleeding money. Buy gold, China can’t get enough of it, must be a clue somewhere there.

Ashim Kumar Chatterjee
Ashim Kumar Chatterjee

US need not fight a war with China after encircling it. US just has to stop buying it’s very low technology products to create a glut in manufacturing sector and persuade it’s allies not supply coal and iron etc. If manufacturing slides, jobs will vanish creating conditions for internal unrest in China.

Ashim, I don’t think the US has the clout any more, it might think it does, but ‘global business’ is showing the world whose boss. The US will buy whatever is cheapest, and Wallmart etc will sell, because that is what the people can only afford. Ditto for supplying the minerals and coal, can you imagine the devastation to Aus if it stopped mining. China is building at least one new power station every week, it has its own coal fields, and it ‘s been stock piling coal for years. It also buys minerals from South America which it stock… Read more »
Wonder when the great war will start Ross. Quotes from the Gomberg map link. “At the bottom of the map was program is also included in 41 points, which begins with the words “This will be our policy” (Our Policy Shall Be this)” Point 23… “23rd The areas known as China, Inner Mongolia, Tibet, Thailand, Malaya, Indo-China and Korea, Shall be unified as a demilitarized, federated “United Republics of China”. Cecil’s legacy. SC, I guess China don’t like the idea of point 23. But I see the, greater political imperative, the US and her mates largely still are “global business”… Read more »
Thuan Anh Lam
Those are Chinese islands. The Airhead American Dogs don’t know what you are talking about. Go ahead get ready for war. The Airhead American Dogs have nothing to stop China ICBMs, intercontinental stealth bombers, intercontinental stealth fighter bombers…and can’t stop the Chinese sinking their aircraft carrier battle groups, nuclear submarines. While China has technologies to stop the airhead American Dogs ICBMs, stealth bombers, stealth fighters…and sink their aircraft carriers battle groups, nuclear submarines with no problems. How can the Airhead American Dogs and their followers confront China and stand a war, nuke war with China. China will destroy the piece… Read more »
Lachlan, thanks for that links. It will take some time but I will get through those reports Thuan Anh Lam, China is being smarter than that… you might try to keep up with their leadership in that respect. Overseas Chinese have also made some bad choices historically and this is part of the mix. The South China Sea undersea and uninhabitable assets will either be carved up according to an agreed formula among the claimants or all the parties will suffer the consequences. Of particular concern politically, though, is the recent ICJ decision on the Columbia and Nicaragua maritime border.… Read more »

The Gomberg Map was great thanks Ross.
Within the link to the money trust investigation the final link is very good…. for anyone wanting to quantify political/corporate/banking realities.

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