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Trade Is Politics by Another Means, with Apologies to Carl von Clausewitz

Power of Ideas - Asia Summit 2018
Trade Is Politics by Another Means, with Apologies to Carl von Clausewitz

One of the major themes that will define the geopolitical, geo-military and geo-economic landscape over the coming years is the positioning for global power and leadership between the U.S. and China. My sense is that China’s vying for its position will result in an intense rivalry. To borrow Carl von Clausewitz’s definition that “war is the continuation of politics by other means,” I believe what we are seeing today is that ‘trade is the continuation of politics by another means.’ What does this mean for Asia from a geopolitical, geo-economic, and markets perspective?

My assertion is that technology and data have changed the dynamics of hard and soft power; those countries with big data and AI will determine longer-term success. Data is the oil for the new global economy. If the global technology sector were an independent nation, it would be a USD 6.3 trillion economy, surpassed only by the U.S. and China. To place that into context, global nominal GDP was estimated to be USD 79.5 trillion in 2017. Estimates are that AI alone will contribute as much as USD 15.7 trillion to the world economy by 2030

Wars have historically been about resources. Today, I believe they are about leadership in tech and data. The battle ground for this rivalry between the U.S. and China is trade tariffs and sanctions. Under President Trump sanctions and tariffs are being utilized as tools for U.S. geopolitical and geo-economic objectives. Tariffs and non-tariff barriers have always been a feature of the world’s economy, often to the advantage of developing nations. Now that China is as large and effective as it is, its structural advantage matters to the U.S. Trump's protectionist agenda initially appeared through Section 232, which applied tariffs on steel and aluminum. However, it was Section 301 that made the geopolitical and geo-tech rivalry clear. On this issue, President Trump has State Department, Defense Department, and bipartisan political support. I can see an ongoing, tough U.S. stance on protecting its intellectual property and its commercial interests.

I believe one needs to make a distinction between trade tariffs and the ‘geo-tech’ conflict. My sense is that any deal on the U.S.-China trade imbalance will be impacted by timing of the November mid-term elections in the U.S. However, I see the ‘geo-tech’ war as separate and more significant for the long-term. 

So what does this mean for Asian capital markets and currencies? I believe there is value appearing in many emerging markets. China’s Belt and Road Initiative has created growth opportunities for many developing nations. In addition, there has been recent downside market volatility. I am optimistic about their prospects in the medium-term, however, in the short-term I am cautious as they are potential casualties of the trade conflict between the U.S. and China, and elsewhere. One need not look further than at recent events in Turkey to appreciate the impact of geopolitics on market volatility. The U.S. dollar is being used as a unit of politics, as well as a unit for trade and commerce. Combined with China’s position as the driver of the growth in global trade, in the long-term, has the potential to undermine the U.S. dollar’s status as the global reserve currency.

The rivalry between the U.S. and China is one of the defining issues of our day. It will shape the world we live in, and it is in Asia’s and other emerging market economies and capital markets where its greatest effects will be felt.