There is a horror movie unfolding whereby the Hollywood hero, after trying garlic and all, is now driving a stake at the heart of the Chinese Dracula. President Biden’s imposition of 100 per cent tariff on Chinese EVs, 50 per cent tariffs on semiconductors and solar cells, plus 25% on a range of batteries, gloves and certain steel and aluminium products is another blow to free trade.
Taken together with US Treasury Secretary Janet Yellen’s comment about Chinese “overcapacity”, you get the feeling that if anyone begins to challenge Western dominance in any field, they will face a barrage of weaponized tariffs, non-tariffs and containment measures. So far, everyone is waiting for some clues about China’s next move in this tit-for-tat game of US-China rivalry. The world is now at a dangerous phase of electioneering excesses, whereby if anyone loses his cool, we could be on the way to nuclear war. This Tik Tok stage of US-China rivalry is downright dangerous.
On 13 March 2024, the US passed the Protecting Americans from Foreign Adversary Controlled Applications Act, which effectively meant that if Tik Tok owner Bytedance does not sell the app to American owners, Tik Tok will be shut down. The Great Powers are preparing for “War Unbound”, in which competition means “no holds barred” retaliation on any move by the other side that is seen as an existential threat. Despite the demonizing of nonWestern leaders, they are far more rational than the current war-rattling rhetoric of Western leaders. A more sober reading of the conflicts in the Middle East has shown that it is the West that is emotional, whereas the Middle East countries – except Israel – are being rational and strategically patient despite the atrocities in Gaza.
If there was a real jihad, the Middle East would be in flames, but governments from the Gulf to Iran have shown remarkable restraint, knowing that any war escalation would disrupt their search for peace and prosperity. When you read what former US Deputy National Security Adviser under the Trump Administration Matt Pottinger and US Congressman Mike Gallagher write about “No Substitute for Victory” against China in the influential journal “Foreign Affairs”, you wonder whether the Washington elites have learned anything from the ongoing Ukraine war? What does victory mean when NATO is fighting to the last Ukrainian? Or when Israel can commit outright venocide (vengeance of 24,686 fully identified deaths out of the total 34,622 fatalities recorded in Gaza as of April 30 versus 1,200 Israeli deaths and 250 hostage) with the US blocking UN resolutions for ceasefires? In the past, wars stopped when the protagonists ran out of money or arms.
But in this day of central banks printing money, wars will only stop when there is so much inflation, debt or deaths that nations literally go bankrupt. Britain was able to finance its Napoleonic wars because it could raise long-term bonds, but by fighting to exhaustion in two World Wars on debt and Lend-Lease, it forfeited its reserve currency status to America. Perhaps drawing on the lesson to have more bang for the buck to fund an escalating defence expenditure, Vladimir Putin has appointed an economist to be his new defence minister. America also has a problem with rising defence expenditure, which is larger than the next nine countries combined.
The United States accounts for 40 per cent of the world’s military expenditure, because it also accounts for 40 per cent of global bond markets and 40 per cent of the stock market capitalization (SIFMA Fact Book 2023) that can fund America. In the first seven months of this year, net interest on the federal debt surpassed defence spending, health and social welfare. The US is funding its military spending out of debt. But as the British empire found out, lenders do not take kindly to losers. So we come to the Tik Tok question of what does losing mean for global financial markets? The difficulty of discussing nuclear war is that there are no winners, only losers.
But even in a conventional war before reaching the nuclear stage, both sides will cut each other’s undersea optic-fibre cables that carry all internet traffic, including destruction of space communications satellites, in order to make the other side blind. With the internet down, goodbye cyber-currencies and financial transactions. The cloud may not survive under such an extreme but plausible scenario. The only asset with no counterparty risks is physical gold, provided you have it within your national borders. All other financial assets that thrive under digital markets may disappear because the underlying infrastructure will be gone.
What I am saying is that those who play with fire in curbing real trade and putting financial sanctions do not understand that it can only have a MAD (mutually assured destruction) outcome. It would be too much to hope that the silly season will be over when the US Presidential elections are concluded in November. Donald Trump has promised to increase tariffs on Chinese cars to 200 per cent. That means Chinese car companies will shift production to Mexico, Brazil or Asean to export to a West that is hungry for green energy transport. For every Tik, there is a Tok that counters the first move, making the whole game more messy, complex and unpredictable.
The Rest of the world is learning how to respond rationally with an emotional West that is wrecking the foundations of its own prosperity. How does that Hollywood movie end? In the Vietnam war classic Apocalypse Now, a re-telling of Joseph Conrad’s classic Heart of Darkness, the hero is sent to kill the renegade Colonel Kurtz, who saw so much of the futility of war which he waged on behalf of America that he uttered in his dying lines: “You have to have men who are moral and at the same time who are able to utilize their primordial instincts to kill without feeling, without passion, without judgement. Without judgement! Because it’s judgement that defeats us.” As Willard kills him, Kurtz (played by Marlon Brando) whispers the end, “the horror… the horror.”
(The writer, a former Central banker, writes on global affairs from an Asian perspective.)