A cyber-curtain is set to divide the world

US-China flags

A new Cold War looks likely as the US and China increasingly diverge and fall into dispute. What are the implications for investors?

The strong exchanges on technology between the US and China point to a world where there are two different systems, with a cyber-curtain descending between them both. Meanwhile, in a series of regional conflicts from Yemen to Kashmir and from Syria to North Korea a more pronounced cold war is emerging between a China-led coalition and a US one. China claims to offer “socialism with Chinese characteristics”, whilst the US puts self-determination and free enterprise on its banners. The realignment of the world is relevant to investment markets.

Markets got a shock with the news that 5% of the world’s oil supply had been put out of action from drone strikes. The inability of the Saudi air defence systems to prevent drones or missiles damaging two crucial oil installations will doubtless cause some rethinking about the disposition of protective measures. Russian leader Vladimir Putin’s merciless humour led him to offer to sell better systems to Saudi Arabia, to rile the US and to remind the world that Russia has some weaponry that it would be willing to sell. He has already sold the S-300 air defence system to Iran and the S-400 to Turkey.

A changing world

Although the US has many technological advantages, there is some realignment underway as Russia makes offers former western allies feel they cannot turn down. When Turkey, a NATO ally of the US, turns to buying Russian equipment there are problems for the alliance. How much of NATO’s best technology and ideas can they share with Turkey, given their greater proximity to Russia? Pakistan now buys the bulk of its weapons from China and is looking at the Russian offer more seriously.

The main diplomatic battles are between the world’s two largest economies, China and the US. President Trump has alerted the US administration to the success China has enjoyed through asymmetric tariffs and barriers to trade under World Trade Organisation rules. The West allowed Chinese membership on very favourable terms. This has allowed China to grow fast and to amass considerable financial and industrial strength. It is now seeking to project its power outwards, through its much advertised Belt and Road initiatives. China is pressing through Asia and the Middle East to Europe by both overland and sea routes. She finances ports and airports, minerals and oil, industry and commerce on the way. She is creating a string of ports and facilities that give her outlets and interests over thousands of miles of the globe. She seeks dominant positions in raw materials that are important for production.

Sino-Russian alliance

Russia has allied itself with China and between them they have increased their influence substantially. Russia has backed Bashar al-Assad, the autocratic ruler of Syria, in his military actions to reassert control of a war-torn country. Mr Putin seeks friendly relations with Iraq. Russia has shifted the pro-western stance of Turkey, has some influence with Iran, has taken back the Crimea from Ukraine and is seeking to extend influence in a number of former USSR states in Eastern Europe and Asia.

China, meanwhile, has announced a big investment into Iranian oil, offering Iran a way round US sanctions that threatened to damage the country by denying Iran access to oil markets. It is seeking friendly relations in Pakistan and other “Stan” states to her west.

So where does this leave the USA?

The US has important allies in Asia, with Australia, Japan, the Philippines and South Korea central to its interests in the China Seas and wider region. In the Middle East, the US has Saudi Arabia as her main ally, alongside the UAE, Qatar, Oman, Bahrain and Kuwait. It also has a very close military and political relationship with Israel.

In Europe, the US has the NATO alliance extending to most of the European countries. Traditionally, the US was an ally of Pakistan, but more recently China has given Pakistan more backing than the US. The US has to decide how it can strengthen its alliances. Will India continue to straddle the two sides or will she be forced to choose? Will Turkey move more decisively away from the West? Will Pakistan be dragged into a stronger pro-China position?

President Trump signalled he does not wish to launch a war against Iran, and wishes to have more information about who was behind the attacks on Saudi oil facilities. The markets stayed relatively calm as a result. Some in the Administration seem to strain to tackle Iran by military means, but so far cannot persuade their Supreme Commander. The President’s weapons are tariffs and trade barriers, where he has been trying to bring Iran to the table on his terms through an oil embargo.

This latest attack coupled with Chinese backing for Iranian oil has just made that strategy altogether more difficult. It seems destined to push the world further towards two rival systems, with competition between China and the US for influence as they build and look after their respective alliances. It will make Donald Trump turn to a more protectionist stance – as security arguments are added to trade arguments over technology, weapons sales and control of energy and raw materials. We will watch carefully how the oil attacks play out. Military retaliation would endanger oil supplies more and cause a further fright in markets.

 


The above article was previously published by Charles Stanley on 17th September 2019