US foreign policy experts Hal Brands and Michael Beckley raised this possibility in an article in Foreign Affairs in October 2021. It’s not that China believes it’s superior to the US. It’s that China has realised this is as good as it gets. If you want to take Taiwan, you have to try now, because your chances of success go down from here.
This was the same dynamic that drove Germany to launch the First World War in 1914 and Japan to attack Pearl Harbor in 1941. In neither case was the aggressor stronger than the target nations. It was simply the case that the odds of success had peaked, and the time had come either to attack or accept a subordinate position. For an ambitious expanding power, the logical choice is to attack.
This is where Edward Luttwak’s definition of geoeconomics casts a new light. In a pre-globalised world, China might well attack. In the post-globalised world, China might refrain militarily while continuing its progress in technology, natural resources, and value-added manufacturing. This path requires cooperation, not confrontation, with the US and Western Europe.
Our estimate is that China will refrain from an invasion consistent with the geoeconomic thesis. At the same time, Xi Jinping will continue threats and economic confrontation with the West. This is the least beneficial path for China. They fail to gain the prize of Taiwan, while they also fail to gain maximum economic benefit from the West.
Still, it may be optimal for the Chinese Communist Party because it feeds their greed and corruption while buying time for the ideological indoctrination of the world’s largest population. The state and the party are different entities. Analysis falls short when viewed through the lens of the state. One must first consider what’s best for the party.
We cannot rule out invasions of some of the smaller islands controlled by Taiwan that are quite close to the Chinese mainland, including Quemoy and Matsu. A Chinese takeover of these islands would cause further rupture with the US and Europe but would not be a casus belli with the West (and therefore not in contradiction of the geoeconomics thesis). It might be enough to enhance Xi’s reputation without major negative side effects.
The investor outlook for global markets
Investors should expect the following from this unstable confrontation…the US and China will continue to decouple economically. Supply chain disruptions will grow worse before they get better. A new supply chain configuration will emerge, involving more onshoring and shorter transportation lanes. China’s growth will lag, and it will be unable to make the technological leaps it needs to escape the middle-income trap and become a high-income developed economy. Over time, excessive debt and adverse demographics will overtake China’s ambitions and leave it as an ageing and low-productivity shell.
The good news is that onshoring will result in more high-quality jobs in the US and other Western nations. Intel and Taiwan Semiconductor have announced plans to invest almost US$25 billion in building new state-of-the-art semiconductor fabs in the US. Of course, these new plants will take five years to build, so the impact is not immediate. Still, the trend favours the US.
China’s economic problems will sustain its demand for energy and put a floor under energy prices. Manufacturing costs will rise as China’s labour pool evaporates. Investors shouldn’t rule out a financial crisis in China that would spread to a global collapse in capital markets, probably worse than those of 2008 and 2020.
What diverse geoeconomic threats have in common is uncertainty. The threats can be analysed rigorously but forecasting is inherently difficult because of the uncertain intentions of diverse global players.
Will China actually invade Taiwan, or is the bluster for internal consumption at a time when Chinese growth is slowing? Does the US care as much about Ukraine as it says, or is the concern a pretence to help solidify a Western alliance against China?
While the answers to these questions are uncertain, some facts that are most interesting for investors are far more certain. The threat matrix will be a contributor to disruption in global supply chains, which will result in higher input prices and transportation costs. That’s a recipe for inflation and higher interest rates. And any form of uncertainty is a plus for the one safe-haven investment that never fails — gold.
The geoeconomics situation now
What these threats — from Russia, China, and others, including North Korea, Iran, and Venezuela — have in common is perceived weakness on the part of the US. Russia would have been unlikely to bring matters in Ukraine to a head if the US had acted earlier to address Russian concerns and impose costs on Russia before, not after, an invasion.
China would not be acting in such a bellicose manner toward Taiwan if the US had supplied more arms to Taiwan, confronted China more directly in the South China Sea, and made its intentions clearer to China, while at the same time extending an olive branch in terms of technology transfers and possible tariff relief.
There are many other policy options open to the US. What seems most dangerous is policy drift, inconsistency, and delay on the part of the US in defining and pursuing these options. US policymakers seem more enamoured by process than substance.
More time and effort have been devoted lately to frivolities such as climate alarm, rather than issues of war and peace. In the wake of the Afghanistan debacle, Putin and Xi cannot be faulted for pressing their advantage against a perceptibly weak US. The question is whether they will push too far and abandon the new geoeconomics for a return to age-old physical conflict. We find this unlikely but not at all out of the question.
Strategist, The Daily Reckoning Australia
This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.