The March of (Trade) War?

“I want to go to war with China,” declared a presidential candidate last night on national TV.

Granted, we’re taking this declaration out of context. A little, anyway. “I don’t want to go to a trade war,” said former Sen. Rick Santorum. “I want to beat China. I want to go to war with China and make America the most attractive place in the world to do business.”

Before we begin, we have to say we’ve been dutifully ignoring the “China issue” for months.

Jim Chanos’ dire prediction of a collapse of the red charade amid our own fledgling effort to get a publishing business started in Beijing have put a damper on much of our enthusiasm since spring 2010.

Not to mention the fact that following our trip to China in May of that year, we made a series of stock recommendations for Chinese companies listed on U.S. exchanges… they were about as popular among readers as a pimple on the arse of a bus driver.

Still, the rhetoric among political candidates, and a growing pile of evidence that the rancor between the New World and the Middle Kingdom threatens to dominate the headlines in 2012, has lead us to break radio silence today.

Let’s follow the breadcrumbs…

Yesterday, by a vote of 63-35, the U.S. Senate passed a chest-thumping bill that aims to punish China for “manipulating” the remnimbi.

“The proposed legislation,” explains Singapore’s Business Times Washington correspondent, Leon Hadar, “would replace the current system under which the Treasury Department is required to cite countries that ‘intentionally’ manipulate their currencies.”

Instead, we’d get a system “under which the Treasury would determine whether any foreign currencies are in fundamental misalignment, and propose ways to correct the imbalance with countries that are named. Countries that fail to fix their currencies would be subject to anti-dumping duties and other penalties.”

The reaction from Beijing was swift. The official Xinhua News Agency invoked the ghost of the Smoot-Hawley Tariff Act that helped turn a depression into the Great Depression.

“Comparing the current political and social situation with that of 80 years ago,” said Xinhua, “we can find stark similarities: an economic downturn, a high unemployment rate, marked popular discontent and growing political conflicts, especially when presidential politics is getting hot.”

Thus, hours after the vote were TV viewers treated to the sight of another candidate, Mitt Romney, saying he’d immediately brand China a currency manipulator upon taking the oath of office. But he hastened to add, “I don’t want a trade war with anybody.”

Too late. A different kind of “trade war” is already underway.

China has already outmaneuvered the United States for the postwar oil spoils in Iraq… without ever firing a shot.

“China is the biggest beneficiary of Iraq’s oil treasure,” declares Gal Luft from the Institute for the Analysis of Global Security. “Chinese companies backed up by the Chinese government enjoy serious advantages over the international oil companies (IOC) and also have better bargaining power.”

In the summer of 2009, Iraq awarded contracts to develop seven major oil fields. China’s CNPC was the big winner… along with Russia’s Lukoil, Malaysia’s Petronas and France’s Total. Exxon Mobil got leftovers.

In the summer of 2011, the Iraqi and Chinese governments signed two economic cooperation deals. China builds pipelines and other infrastructure, Iraq gives China access to oil.

PetroChina is already planning two pipelines that would stretch from Iraq all the way to China. “Exxon, on the other hand,” says Morningstar analyst Allen Good, “has shareholders to answer to and can’t simply bid up resources without regard to return on investment.”

“China has the money and is clearly a rising power,” explains Cameron Hanover analyst Peter Beutel. “It can offer political help, technological help in some cases, military aid — which none of the major [oil companies] can.

“So take Libya, for example. China can offer guns and weapons and can offer political protection to the new government. So can France, but the majors can’t. That’s the biggest difference right there.”

That would be ironic, considering how some experts believe the Libya war was a Western attempt to checkmate China. “China has extensive energy investments and construction investments in Libya,” said former Reagan Treasury Department official Paul Craig Roberts last spring. “They are looking to Africa as a future energy source.”

In November 2006, China invited leaders of 48 African countries to Beijing to discuss economic issues. No. 1 on the agenda was access to energy and minerals:

Chinese Officials
China’s big move…

The following month, the Bush White House authorized the formation of AFRICOM — a new U.S. military command with oversight for Africa. Previously, the duties were split among three other regional commands.

Discussing it during congressional testimony in late 2007, Defense Department adviser Peter Pham was explicit about AFRCIOM’s aims: They were “protecting access to hydrocarbons and other strategic resources, which Africa has in abundance… a task that includes ensuring against the vulnerability of those natural riches and ensuring that no other interested third parties, such as China, India, Japan or Russia, obtain monopolies or preferential treatment.”

…and America’s countermove

AFRICOM had its first “big war” this year… in Libya. “Washington is trying to cripple its main rival, China,” declares Paul Craig Roberts, “by denying China energy. That’s what this is really about: a reaction by the U.S. to China’s penetration of Africa.”

There’s also a looming U.S.-China conflict in China’s own backyard.

“Today, America maintains the most powerful military in the Pacific region,” writes John Feffer of the Institute for Policy Studies, “ supported by a constellation of military bases, bilateral alliances and about 100,000 service personnel.”

“To Be Specific, It’s Our Pacific,” was the title of a popular American song during World War II. American leaders still see it that way. And they don’t like what’s building right now in the South China Sea.

“The time to use force has arrived in the South China Sea,” declared the Communist Party newspaper Global Times on Sept. 27. “Let’s wage wars on the Philippines and Vietnam to prevent more wars.”

China has a long-standing territorial dispute with the Philippines and Vietnam over two clusters of islands, the Spratlys and the Paracels. The region is estimated to hold 7 billion barrels of oil and 900 trillion cubic feet of natural gas.

“We expect South China Sea tensions to continue,” says former Philippine president Fidel Ramos. “China’s proximate aim, it seems to me, is to limit American freedom of access” and “erode the credibility of Washington’s security guarantees to the East Asian states.”

Not that the Pentagon would stand still for this. It has ambitious plans to build up U.S. forces on Guam — “a new aircraft carrier berth,” says UPI columnist Martin Walker, “submarine and logistics bases, facilities for more stealth warplanes, B-2 and B-52 bombers on Guam and to move 8,600 U.S. Marines to the island.”

“This could be terribly, terribly dangerous if we turn into a trade war,” says Vancouver veteran and China bull Jim Rogers. “Whenever people get slapped in the face, they always think they have to slap back.”

And it wouldn’t even take a shooting war to do lasting damage. “If America does put tariffs on the Chinese, the Chinese have various weapons at their disposal; they can stop buying American government bonds; they can sell American government bonds.”

“If they did that, interest rates in America would go through the roof.”

Overnight, the rates the U.S. Treasury pays on its long-term debt would explode. Government would have no choice but to drastically cut back services or simply print money.

The U.S. Senate just took us a step closer to this scenario. Perilous times, indeed.

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning