How Trump can bring China to its knees
By Ambrose Evans-Pritchard
June
3, 2019 — 10.48am
·
China's leaders are
tormented by the "Malacca Dilemma". Their country is the world's
largest importer of oil and natural gas. It is acutely vulnerable to an energy
squeeze on seaborne supplies.
China
knows Trump has a card up his sleeve.CREDIT:AP
More than 82 per cent
of China's total crude shipments and much of its liquefied natural gas passes
through the Malacca Strait between Sumatra and the Malay Peninsular. The US
navy has supremacy over this maritime choke-point, though not necessarily for long.
Energy security has long been a nagging worry among China's defence
strategists. They have studied the Royal Navy's "limited blockade" of
the Falkland Islands in 1982 as the modern textbook case of how maritime powers
can tighten their grip.
The issue became all
too real last week when Fu Chengyu, ex-head of the state oil giant Sinopec,
said the country must prepare for the awful possibility of a US oil blockade.
"It is not to be alarmist. It is an urgent reality," he told a forum
in Shanghai.
China's
strategic petroleum reserve will not be complete before the early 2020s. State
media says stocks are barely enough for 40 days useage - Platts analysts think
Japan can last 222.
The
Malacca Dilemma is a metaphorical term. The US would first try to achieve its
objectives through control over the world's dollarised payment and lending
system. Even so, a commodity squeeze would entail a worldwide recessionary
shock and an economic crunch in the US oil patch.
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"It
would cause the price of West Texas crude to crater. The Trump administration
has absolutely no interest in doing that," said Ian Bremmer from Eurasia
Group, the political risk firm.
"Trump
has already rattled the cage with Huawei. This is all about technology, not
resources - and the one place where China really is vulnerable is on
semiconductors.
"There
are two tech superpowers out there that can't be reconciled. Countries like Britain
are going to have to choose one," he said.
Yet the Chinese leadership has brought the Malacca Dilemma into
sharp focus by threatening - through state-controlled media - to restrict exports of rare earth minerals. This would
purportedly cut off the life-blood of the US technology industry. Yet it is a
high-risk gamble. The more that Beijing plays the commodity card, the greater
the risk Donald Trump will play it back, with interest.
The trade spat continue to bubble along.CREDIT:ANDREW HARNIK
What is
clear is that the Sino-US trade war is taking a dangerous turn. Mr Trump may
have pushed China too far in demanding changes to the country's domestic law
and a unilateral enforcement mechanism. This smacks of the "unequal
treaties" imposed on the Qing dynasty in the 19th century.
China
is drawing up its own "unreliable entity list" to fight back against
the US suffocation of Huawei. Google, Intel and Qualcomm will almost certainly
be on it, since they have begun halting critical dealings with Huawei. British
firms may be caught up in the sweep. Any foreign executive or employee working
for these entities could be prevented from leaving the country or face arrest
on dubious charges.
This
has already happened to two Canadian citizens detained on espionage charges,
deemed in Ottawa to be blatant hostage-taking. "If I were still living in
China with my family I would be far along with my exit plan and ready to
execute it at very short notice," said Bill Bishop of Sinocism.
Mr
Bishop said the People's Daily has pointedly revived an expression with
powerful symbolism in Chinese revolutionary history: "Don't say I didn't
warn you". It was used in the Sixties when Mao Zedong's China attacked a
Soviet border post, almost precipitating a third world war. The Soviet Union
had earlier cut off oil supplies to China, causing drastic rationing. That
trauma is not forgotten. The term was also invoked just before frontier wars
with India and Vietnam. The episodes are known in China as the "three
self-defence counter-attacks".
The
more that Beijing plays the commodity card, the greater the risk Donald Trump
will play it back, with interest.
While
the quarrel with America has not reached such a combustible stage, it could
escalate fast if the US Congress presses ahead with a bill mandating sanctions
over the alleged incarceration of 1m Muslim Uighurs from Xinjiang in political
re-education camps.
Laban
Yu from Jefferies says the Chinese leadership is afraid that the US could try
to quarantine the country. "China is now looking at its oil supply
situation from the worst-case scenario, like what the US has done to
Iran," he told Bloomberg.
Sinopec's
Fu Chengyu said China must accelerate the switch to electric vehicles, double
down on domestic "clean" coal and launch shale gas fracking in
Xinjiang and Sichuan on a vastly expanded scale with cheap credit. This would
not come soon enough to make any difference in the current trade war.
China's
leaders know what happened to Japan in 1940 when President Franklin Roosevelt
began to restrict oil export permits for the Tojo regime. It set off a spiral
that led ineluctably to the Pacific war.
The
Malacca Dilemma renders China's rare earth weapon dangerously double-edged. The
minerals are certainly a potent tool. China not only mines 80 per cent of world
production, it has near total control of the global processing chain.
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Beijing
has systematically pressured foreign companies into locating facilities in
China to secure rare earth supplies. Whole components of US manufacturing - car
starters or aircraft parts - are pre-finished there before shipping to America.
The US General Accounting Office says it would take seven to 15 years to set up
a parallel supply structure.
"They
know our supply-chains. They can target industries," said Clint Cox, a
rare earth expert at Anchor House. "Basically, anything that moves in your
car has rare earths in it. Most of our companies don't have significant
inventories," he said.
The
metals are critical for smart bombs, precision-guided missiles, lasers,
submarine sonar and the F-35 joint strike fighter. "They are used in
everything but bullets," said James Kennedy of ThREE Consulting.
Yet
China cannot embargo the US without disrupting the world's inter-twined supply
chain and hurting everybody else. When Beijing cut off rare earth supply to
squeeze Japan over the Senkaku Islands in 2010, the price of lanthanum (a
catalyst in oil refineries) rose 30-fold in panic buying. To play this card
would cut across Beijing's other goal: to stake out the moral high ground in
its dispute with Mr Trump and displace Washington as the arbiter of 21st
century globalisation.
Yet
President Xi Jinping undoubtedly issued a veiled threat in late May when he
combined a pilgrimage to the Jiangxi shrine of the Long March with a tour of a
rare earth magnet factory.
The
elemental problem for Mr Xi is that Washington could bring the Chinese economy
to its knees by commodity strangulation before China's rare earth blockade had
seriously crippling effects on the US. He can try to ratchet up the pressure
with a carefully calibrated constriction of rare earth components, but if he
pushes too hard against the volatile US president, he risks exposing the hard
truth that the leverage of the two countries is not symmetric.
Whoever
you are, you must always assume the Donald Trump might out-escalate you.
Telegraph, London
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