Cold War 2.0 detonates

Where to begin! At home makes sense, with AUSMIN Australia-United States Ministerial Consultations, which have delivered an epochal commitment to ANZUS, via The Australian:

Secretary of State Mike Pompeo says the US-Australia alliance is ­entering a new era in the face of a rising China, declaring “the time is right” for both nations to step up joint efforts to meet security challenges posed by Beijing’s attempts to extend its influence in the Pacific.

Drawing parallels with joint US-Australian efforts to push back against the Soviet Union in the ­Pacific during the Cold War, Mr Pompeo said yesterday a ­“deter­mined effort” was required to “band together” on China.

…He said no decision had been made on the US’s planned location of mid-range missiles in Asia, but he did not rule out the possibility they could be placed in northern Australia, in addition to existing US military bases on Australia soil and the deployment of 2500 US marines in Darwin.

…The second and more immediate test foreshadowed by Mr Pompeo was the Trump adminis­tration’s request that Australia join a US-led “global coalition” to protect shipping in the Persian Gulf.

Expect both to transpire. It’s not really a choice. It is bipartsian in the US, via Domain:

Former president Barack Obama’s top adviser on east Asia and the Pacific says Australia should “link arms” with the US to form a united front against China’s economic “sins” and combat the increasingly serious damage wrought by the rising power’s bad behaviour.

But he also warned against using tariffs to compel China to act more fairly, arguing Donald Trump’s efforts had failed to achieve their objectives and instead started a “dangerous downward spiral in the US-China relationship” that was “far more than a trade war”.

The US is our imperial hegemon. Thankfully it is a liberal emperor which is a better choice than the Chinese illiberal one. After years of ANZUS vacillation, Paul Kelly sums it pretty well:

The symbol of an “unbreakable alliance” with the US pledging it is “here to stay” in the Pacific are the iconic messages coming from a rapidly deepening Australia-US security partnership openly geared to challenging China’s unceasing strategic push.

What emerged from AUSMIN was a deeper and more coherent US strategic response to combat China with Australia as a strong participant. The driving force was US Secretary of State Mike Pompeo, who branded the alliance “unbreakable” and bonded with Australia in calling for “an increasingly networked structure of alliances and partnership” in the Indo-Pacific, the aim being to combat China’s assertiveness.

…Anybody who thinks Australia did not long ago take sides and continues to take sides on a daily basis in the US-China strategic rivalry lives in dreamland. The sheer weight of strategic infrastructure means this will not change.

To wit, at Domain:

The Morrison government is negotiating with the Trump administration to buy millions of barrels of oil from America’s tightly guarded fuel reserve under an emergency strategy to lower the risk of Australia plunging into an economic and national security crisis.

The deal forms a core plank of a new push to shore up dangerously low domestic storage levels, which have left the nation vulnerable to price hikes and rationing in the event of war or disaster in the oil-rich Middle East or increasingly volatile South China Sea.

…In a move that effectively rules out spending billions of dollars to buy and stockpile huge volumes of fuel in Australia to meet the 90-day standard, Energy Minister Angus Taylor told The Sydney Morning Herald and The Age that the government was locked in “constructive discussions” with the US for the right to tap into its enormous Strategic Petroleum Reserve.

The implications are profound. First, consider that the Jacksonian Trump Administration is busy withdrawing from such relationships worldwide. It clearly sees the Pacific as its strategic backyard and Australia is the tip of the spear.

Second, other nations that have deployed US missile systems have been immediately punished by China via economic sanctions.

Third, Australia’s hopes for an endlessly expanding China trade are over. The die is cast. It appears our current trade with China is safe for now, and we should fight tooth and nail to keep it that way, but it would be prudent to expect shrinkage ahead for as far as the eye can see.

The second dimension in the Cold War 2.0 broadening front today is Hong Kong which was violent all weekend, via Bloomberg:

Hong Kong riot police broke up protests blocking roads in Causeway Bay and fired tear gas in the popular shopping district, capping a weekend of violent demonstrations across the city that marked the ninth week of civil unrest in the Asian financial capital.

Earlier Sunday, police used gas to deter hundreds of black-clad protesters, many wearing hard hats, goggles and gas masks, from approaching the China liaison office in Sai Wan.

The protest movement that began as weekend marches has shifted form and become a part of daily life, with disquiet growing in the Asian financial hub. Dozens of people appeared in court last week on a colonial-era rioting charge that carries a 10-year prison term — signaling the city’s Beijing-backed government is heeding calls for a stronger response, bolstered by support from Chinese authorities.

And is about to get much worse, via the FT:

Hong Kong is preparing for its first general strike in more than 50 years on Monday as political unrest spreads following another weekend of sometimes violent protests.

The planned strike, which organisers say will affect industries from finance to technology, is expected to highlight how anti-government discontent is growing among working professionals.

…A large strike on Monday “would be incredibly significant because Hong Kong has never had anything like it,” said Antony Dapiran, who has written a book on the history of dissent in Hong Kong.

“There hasn’t been a general strike [in Hong Kong] since the 1960s when the Beijing-controlled unions called the strikes,” adding that even basic strike actions are very unusual in the Asian financial hub.

Monday’s strike has been heavily promoted across the city, with protesters spray painting the strike date “08.05” on buildings and road barriers in Kowloon, where there were widespread clashes between police and protesters at the weekend.

Beijing is not happy, via Reuters:

In a strongly worded statement late on Sunday the government said the events of the day showed once again that violence and illegal protests were spreading and pushing Hong Kong towards what it called “the extremely dangerous edge.”

Such acts had already gone far beyond the limits of peaceful and rational protests and would harm Hong Kong’s society and economic livelihood, it said.

…China’s official news agency Xinhua said on Sunday: “The central government will not sit idly by and let this situation continue. We firmly believe that Hong Kong will be able to overcome the difficulties and challenges ahead.”

But what can it do? John Lee at The Australian is pointed:

The Chinese Communist Party political narrative of how one achieves national cohesion is based on three tenets: citizens are materialistic beings who value only material things; centralised and authoritarian rule is best placed to deliver stability and order; and only coercion can stave off chaos and discord when dealing with malcontent populations.

Events in Hong Kong show this narrative is self-serving, delusional and counterproductive.
…The Communist Party needs a new narrative, a new approach to national cohesion, and a different approach to winning the hearts and minds of those it seeks to rule.

Good luck finding one. Hong Kong is now the most explosive trigger point for Cold War 2.0 on earth. If China does suppress it then it will alienate the entire Western political system. The US trade war will be vindicated and global sanctions rain down on China across the democratic world, most pointedly in Europe, shoving China out of the global economy at an accelerating rate.

If it does not do so, it appears Hong Kong is determined to illustrate that the CPC’s narrative of control is a fraud with all kinds of implications for restive mainland populations, not to mention Taiwan.

Thus the choice for Beijing is decline either way. Acute or chronic. My best guess is that it will take the latter path. Do some kind of deal with Hong Kong and control mainland information flow via its tyranny to keep any hopes of freedom contained. The fallout from the first path is just too huge. That said, once the blood is up in these things you just never know. Hong Kong may force Beijing to crack down.

In short, it is becoming clear that Beijing has massively overreached economically and strategically. It has foolishly provoked the US hegemon in the South China Sea, on IP theft, and strategic leadership. Having stirred the sleeping giant to anger, it has foolishly failed to reach a deal on trade and gone even deeper on its military build out. Both have now inflamed it’s own internal political contradictions to the point of meltdown.

How long Xi Jinping can remain in control as his strategic blunders pile up is now an open question.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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