It Looks Like The U.S. Really Does Want To Isolate Russia And China
Three long years ago, a bunch of investors — mostly men from the U.S., Europe and Russia — told CNN host Richard Quest that they expected sanctions to remain intact forever against Russian banks and energy companies. They were attending the VTB Capital Russia Calling! conference in Moscow. Quest was taking an informal survey during a live broadcast on stage at the event. I picked two years, figuring a new U.S. president would change that. I was in the minority. I remember well over 60% said that the U.S. and Europe would not lift sanctions from Russia anytime soon.
Fast forward to year two of the Trump Administration. For a man who is supposed to be Vladimir Putin’s sock puppet, sanctions have indeed remained and increased. And now the U.S. has pulled out of intermediate range nuclear forces treaty that promises to jump-start the arm’s race. Indeed, Putin has already responded saying that he would also leave the treaty.
Last week, China’s premier privately held telecommunications systems firm, Huawei, saw CFO Meng Wanzhou in trouble with the Department of Justice. They called for her extradition to the U.S. to stand trial on breaking sanctions laws on Iran and intellectual property theft.
I was in China in October. I met with spokespeople from the Ministry of Foreign Affairs. It was an off-record conversation, mostly niceties about China not wanting a Cold War or a Hot War or even a Luke Warm War with the United States. Let’s be friends. We are (mostly) innocent victims of Washington politics was their view. When I mentioned the U.S. sees China as a rival. They scoffed. When I mentioned Huawei, it was like they never heard of the company. It rivals Cisco Systems not only in Asia, but globally.
In the latest Huawei indictments, the U.S. has found their example of Chinese foul play. Something akin to a weapon of mass destruction.
On Jan. 29, the Director of National Intelligence released their Worldwide Threat Assessment. Syria, a favorite punching bag of Washington’s infamous regime changers, was mentioned 32 times. That’s more than ISIS. They were mentioned 29 times. Even North Korea was mentioned less, at 27 mentions. Iran, always the bad guy, got 72 mentions.
The winners were China and Russia. China as a strategic competitor for American corporate power in Asia, and a rival for soft power in the region was mentioned 87 times. Russia came in a close second at 85.
Let’s call a spade a spade: we are in a new cold war. And it is hard to see how a President Trump and Xi Jinping meeting suddenly changes all that. The table has been set, making China and Russia the new bad guys; badder than Baghdad. Worse, even, than ISIS. China and Russia are big countries with real ambitions and millions of mouths to feed. Just like us.
The DNI’s view is that China is seeking to propagate “authoritarian capitalism” to counter democratic capitalism. The word “communism” appears nowhere in the 42 page report, though the ruling Communist Party was recognized for making Xi Jinping president for life last year.
The report also mentioned a “coming ideological battle” between the two sides, a nice way of saying the “coming Cold War.”
“That is far more than a set of differences over tariffs or subsidies that can be settled transactionally,” writes Michael Every, a research analyst for Rabobank. “If the U.S. authorities now see China is pushing for an authoritarian model globally that is inimical to U.S. interests, how does it help the U.S. to do a trade deal that allows said ideological system to survive and thrive? There’s no logic in it.”
Every from Robobank was already doubtful that the 90-day trade war ceasefire would be productive. Last week’s threat assessment seems to have confirmed his biases.
On Dec. 3, Every wrote in a note to clients that the trade truce would be used to buy time for further escalation.
“We already have some indications that both countries seriously take such a scenario into account,” he wrote. China recently announced a number of fiscal stimulus packages to offset a slowing economy. The Robobank analysts think this package could also be viewed as a “mobilization operation” in anticipation of Washington escalating the trade war. As it is, the ceasefire expires March 2.
If China is public enemy No. 1. Russia is public enemy No. 2.
Russia is the biggest Middle East policy risk Washington faces, as Putin stands in the way of eliminating governments there that Washington deems unfriendly, namely Syria and Iran. Russia is also a great way to for any U.S. Commander-in-Chief to keep the funds flowing into defense and intelligence budgets and into private sector contracts related to both.
Just as important, Russia is the most powerful non-OPEC member. The other most powerful non-OPEC member is…the United States. Russia has as good a relationship with OPEC nations as does the U.S. and in some cases, Moscow is viewed more positively than Washington. This is surely true in Venezuela and Iran, and maybe so in Iraq. The Saudis could be on the fence, and the U.S. knows it.
But China is the commercial rival by far. No one else compares to its scale and pricing power.
Huawei, ZTE, billionaire Jack Ma’s financial giant Ant Financial and a myriad of companies you’ve never heard of are now serious contenders. Chinese brands are getting bigger in Asia. China investments are expanding throughout Asia. This used to be America’s role. Now they have competition.
The smart city that Bogota, Colombia is building is based largely on Huawei systems, not Cisco Systems. Whether or not Huawei did steal American or European technology to rise to power so quickly is up to the courts to decide. The U.S. government, however, has already judged the merits of that case: the Chinese steal. That’s why their tech has come so far, so fast.
“Most U.S. companies previously were reluctant to take this sort of aggressive action against China IP theft because of concerns doing so would impact their business in China,” writes Steve Dickinson for the China Law Blog. They feared that if they complained, they would be ostracized and lose market share. Meanwhile, new rivals and former business partners built similar products without them.
“I can make a chemicals product and partner with a Chinese firm and watch that partner leave and make my same product,” says Ravin Gandhi, CEO of GMM Nonstick Coatings, which was acquired by Japanese chemicals engineering firm Showa Denko in 2016. GMM makes proprietary chemical formulas for the use in kitchen appliances like the George Forman grill. China is one of their biggest manufacturing centers.
The main concern for foreign companies in China is not a weaker economy; it’s unfair trade and business practices. Competition is getting fierce. And now many are willing to call it unfair, at least in the past. It’s getting better now but some players in the market see it as being a bit too late.
“With the deterioration of U.S.-China relations, this concern seems to be melting away and decades of pent-up resentment against China’s IP practices could well spill out in a cascade of claims from the U.S. and the E.U. and others,” Dickinson says about Huawei. He calls it the “new normal”.
Last week, a Chinese employee of Apple was busted by the FBI for stealing the company’s autonomous car trade secrets.
On Tuesday, BlackRock Investment Institute listed three of the biggest political risks for this year. Trouble in the eurozone was the lead, something the Kremlin is continuously blamed for, by the way. After that was NATO tensions with Russia, including those centered around actions in the Middle East.
All of this sounds like the bedrock of a new Cold War.
The effect of geopolitical shocks on global markets can be short-lived, BlackRock report authors led by Tom Donilon wrote yesterday. They based their assessment on 50 risk events since 1962, the middle years of the first Cold War.
“Markets are more sensitive to geopolitical risks as global economic growth slows,” they wrote.
From the DNI’s report of Jan. 29:
Threats to U.S. national security will expand and diversify in the coming year, driven in part by China and Russia as they respectively compete more intensely with the United States and its traditional allies and partners. This competition cuts across all domains, involves a race for technological and military superiority, and is increasingly about values. Russia and China seek to shape the international system and regional security dynamics and exert influence over the politics and economies of states in all regions of the world and especially in their respective backyards.
- China and Russia are more aligned than at any point since the mid-1950s, and the relationship is likely to strengthen in the coming year as some of their interests and threat perceptions converge, particularly regarding perceived U.S. unilateralism and interventionism and Western promotion of democratic values and human rights.
- As China and Russia seek to expand their global influence, they are eroding once well-established security norms and increasing the risk of regional conflicts, particularly in the Middle East and East Asia.
The development and application of new technologies will introduce both risks and opportunities, and the U.S. economy will be challenged by slower global economic growth and growing threats to U.S. economic competitiveness.”
And there you have it. Welcome to the 1980s.
–– for those of you not alive in the 1980s.