The US-China Power Rivalry Accelerates
This was an epic week in the US-China Power rivalry with many of the trends unfolding as highlighted in my book: Power Rivals: America and China’s Superpower Struggle.
Let’s begin with a quick overview from the Chinese side of the fence.
China believes that America is distracted, divided, and in decline.
China seeks every opportunity to tarnish America’s brand of “dynamic stability”.
America’s financial system and stock market is both its greatest strength and greatest weakness and vulnerability. Our economy is focused almost entirely on stock prices rather than measures to improve economic and national security.
The American market now represents only about 14% of Chinese exports and China’s roughly $20 trillion economy can with difficulty adjust to a loss of exports to America.
Right now Secretary Xi Jinping is standing firm while President Trump climbs down from aggressive positions such as making exceptions for smart phones and computers. Cornell University reports that 73% of smartphones, 78% of laptops, 87% of video game consoles sold in United States come from China.
He has repeatedly stated his belief that the age of American dominance is nearing its end, due to unstable politics and capitalist excesses of the very consumer-driven economy.
A spokeswoman for China’s Foreign Ministry posted a message this week: “We are Chinese,” she wrote. “We don’t back down.”
Beyond talking tough and signaling a high threshold of pain, China has some other cards to play as well.
China’s central bank also holds roughly $760 billion in U.S. Treasuries. China has some $6 trillion of foreign exchange assets, if you include the holdings of state-owned banks.
China has also ordered its airlines not to purchase any Boeing (BA) jets and halt purchases of aircraft-related equipment and parts from US companies.
China is also pushing back by restricting rare earths.
Chinese state-owned companies have taken over all foreign-owned rare earth refineries in the country and have designated its techniques around rare earth mining and refining as state secrets. China will now require special export licenses for six heavy rare earth metals, which are 90% refined in China, as well as rare earth magnets, again 90% of which are manufactured in China.
According to the Defense Department, an F-35 fighter contains around 900 pounds of rare earth materials and strategic submarines need more than 9,200 pounds.
This is a dangerous and high stakes game of chicken.
Markets, U.S. allies, and the Independent Republican are watching closely.