Australia is in geoeconomic no-man’s-land

For many years I’ve been warning subscribers of Strategic Intelligence Australia that our country risks being caught in no-man’s-land. Our economic ties are to China. But our security ties are to the West. If the two diverge, it’s not clear where we stand.

For most of those years, evidence for my theory was scant. There was only one clear example. China’s trade war attack on Australia because we asked awkward questions about Xinjiang and COVID. They banned Australian wine and beef products.

But lately, there’s been a deluge of examples. Geoeconomic warfare is exploding around the world. Somewhere, a dam must have burst.

But I don’t think Australian asset prices have figured out that we’re especially exposed to this escalation.

If our country must choose between its economic welfare and national security in coming years, there could be a rerating of risk. Which is pundit talk for lower share and property prices in Australia.

Let’s ponder why we might need to make such a choice…

A hybrid world war

Europe is busy waking up to the fact that, ‘We are not at war, but we are no longer at peace either.’ So said German Chancellor Friedrich Merz about the recent spate of suspicious economic sabotage taking place, especially in Europe.

A good example is the outbreak of subsea proxy warfare. A suspicious number of subsea telecoms and energy cables keep getting cut. And Russian ships seem to be spending a lot of time loitering around above those cables too.

Then there’s the drone sightings shutting down European airports. The list of incidents is growing long. With at least one famous economist stuck sleeping on an airport floor overnight, the topic promises to blow up soon.

So far the main suspect has been Russia. But I believe the same applies to China too. Which is a little closer to home for Australians.

It’s not just us, of course. The UK government is embroiled in a scandal over its ties to China. Apparently the UK Treasury prioritised economic ties with China to the point of undermining its own intelligence agencies in a court case!

US police and intelligence agencies recently uncovered several China-linked SIM card farms in abandoned buildings. They were designed to disrupt communications in the area of the US associated with government and international institutions.

The Americans also found kill switches in Chinese made solar power components.

So, it’s all happening!

But Europe and the US perceive their economies to be competing with China. A good chunk of Australia’s stock market, economy and prosperity is reliant on ties to China. That’s a very different setup.

As the economy shifts East,
national security shifts West

The trouble with tying your economy to the next great nation is that they tend to throw their geopolitical weight around.

We used to laugh at the idea of Chinese generals sending their first-borns and funds to Australia for safe keeping. ‘They don’t trust their own government‘, we thought.

But now things seem a little more sinister. Chinese political and economic influence inside our country is surprisingly powerful. And they’re not shy to use it.

Two weeks ago, China announced a ban on new iron ore imports from BHP. So far, there seems to be little disruption. But the threat is clear.

Our enemy’s enemy is not much help either. Trump’s tariffs may be aimed at China, but they hit Australia even more.

It’s not all negative though. China’s restrictions on rare earths exports are putting a whole new spotlight on Aussie firm Lynas. The rare earth miner and refiner is busy expanding operations in the US in partnership with the Defence Department.

If you don’t know who the patsy is…

A recent issue of Strategic Intelligence Australia was all about the idea that geopolitics is currently a three-sided poker game. Which means two sides are always trying to take advantage of the third by teaming up.

The teams in this geoeconomic game are Russia, China and the US. The rest of us are vassals to their spheres of influence.

Right now, China and Russia are trying to take the US for fools. Leaving Australia out in the cold.

Jim Rickards’ advice in Strategic Intelligence Australia was for Trump to realign with Russia against China, to avoid being the mug in the game. But that would leave Australia as collateral damage too…

What should the Australian government do? For once, I don’t have any good answers. I was shocked and proud when we called out China over Xinjiang and COVID. But that was a flash in the pan that cost our exporters dearly.

The Dutch recently took over a Chinese-owned Netherlands-based semiconductor manufacturing firm for national security reasons. The Americans and Europeans are trying to confiscate Russian foreign currency reserves. Japan is investigating China’s presence in its subsea-cable supply chains. And then there’s the trade war, which caused a lot of damage over the weekend.

But can Australia’s government really take on our biggest export market? How best to choose between national security and the economy?

We don’t need to answer that question. Instead, consider what it means for your portfolio…

It’s certainly time for us to invest in high-tech defence stocks.

Recently, drone stocks have taken off. The Australian government also announced it’s buying subsea drones called Ghost Whales. ASX listed Droneshield is one of the top performing stocks in the world over the past few years.

It’s also likely that LNG ships will play an increasingly important role. It seems to be easy to get away with sabotaging subsea pipelines and cables. But nobody is game to sink an LNG carrier.

LNG shipping’s flexibility kept Europe’s lights on in 2022. The world is going to need more of that. Especially as the green energy transition continues to falter.

So perhaps we should divide the ASX into the stocks that’ll benefit from the geoeconomic challenges of the future and those that stand to lose too much. Our two-speed economy could soon begin spinning in the other direction instead.