THE GREATEST GEOPOLITICAL CATASTROPHES OCCUR AT THE INTERSECTION OF AMBITION AND DESPERATION

By Jeffrey Cartwright, Shoreview Advisors | 8 min read

China has emerged spectacularly from being a technologically backward, poverty-driven backwater country, as it was prior to the Communist Party prevailing in 1949 with the Nationalist Party’s defeat and flight to Taiwan.  China has become a true economic superpower. As it has grown, the financial welfare of its population has improved phenomenally.  The United States and the West hoped that as this happened, China would become more democratic and adopt more of the norms associated with globalism, but the reality has proven to be vastly different.

The Chinese Communist Party (CCP) maintains its iron grip on power.  Since 1949, the Chinese regime has always seen itself as being locked in an existential struggle with domestic and foreign enemies. Paranoia is a virtue rather than a vice as it pertains to both its people and the broader world.  Its leaders are haunted by the collapse of the Soviet Union, another great socialist state. Wen Jiabao, former head of China’s government, once said, “To think about why danger looms will ensure one’s security. To think about why chaos occurs will ensure one’s peace. To think about why a country falls will ensure one’s survival.”  The CCP has historically gone to enormous lengths to protect its power. The Cultural Revolution, Tiananmen Square, suppression of Hong Kong democracy demonstrations, and the treatment of Uighurs are just some examples of “ensuring the leading role of the Communist Party in all aspects of life.”

China desires not only to be a superpower but the superpower. As such, it wants to make China whole again by regaining Taiwan.  It also has outstanding border disputes with countries from India to Japan. “We cannot lose even one inch of territory left behind by our ancestors,” China’s President Xi told the US in 2018.

There is no foreseeable end to China’s ambition. The proof of China’s policies is not in words but in actions, such as an unrelenting military buildup. China’s inflation-adjusted military spending has grown 10-fold between 1990 and 2020.  Building artificial islands with air bases and missiles are one visible sign. Additionally, since 2014 Beijing has launched more military ships than in the combined navies of Great Britain, India, Spain, Taiwan, and Germany.

In short, as President Xi said in 2019, the CCP faces a “new long march” in its relations with America – a dangerous struggle for supremacy and survival. “No force can shake the status of our great motherland.  No force can stop the advance of the Chinese people and the Chinese nation.”  If the advance of the Chinese nation was economic in nature, then one must question the statements considering the increase in military capabilities and actions.

INCREASING REALIZATION THAT CHINA HAS PEAKED

America is not the only menace that the CCP worries about. It is gravely concerned about its population size. A shrinking, aging population cannot deliver robust growth. Consider the following:

  • The One-Child Policy and economic factors have resulted in a birth rate of 1.16, which is far below the 2.1 required for a stable population. This is despite relaxation of the One-Child Policy to two children in 2016 and later, three children. The birth rate has decreased by 50 percent since 2016.
  • In the early 2000s, there were ten workers for every retired person. By 2050, there will be two.
  • By 2050, there will be two hundred million fewer working-age adults and two hundred million more retirees.
  • There are forty million more unmarried women today because of abortions of girls in favor of boys during the One-Child Policy. Additionally, women are marrying later.
  • China is actively discouraging divorces and abortions to address the birth rate issue.
Another reason for CCP’s concern is dwindling resources. The following trends are alarming:
  • 50% of China’s river water and 60% of its groundwater are so contaminated that the government has declared it “unfit for human consumption.”
  • In 2011, China became the world’s largest importer of agricultural products after having been a net exporter.
  • In 2014, Xinhua reported that more than 40% of China’s arable land was suffering from “degradation” from overuse. Pollution has destroyed 20% of the arable land and one million square miles of farmland have become desert.
  • Beijing imports 75% of its oil and 45% of its natural gas. China has addressed shortages of power through a variety of energy sources, including large additions of coal.

THE CLOSING RING

China has alarmed those countries around them. The Chinese reaction to the visit by the Speaker of the US House, as well as the Russian invasion of Ukraine has many countries re-thinking their defense strategies. Included in this are:

  • India building and launching aircraft carriers.
  • Japan increasing defense spending ten years in a row and now extending its missiles by another one thousand kilometers in range. This is in addition to adding high-quality submarines and F-35 fighters armed with long-range anti-ship missiles.
  • Vietnam acquiring mobile shore-based anti-ship missiles, attack submarines, advanced surface-to-air missiles, new fighter aircraft, and surface ships with cruise missiles.
  • Indonesia increasing its defense spending by 20% to buy F-16 fighters and long-range anti-ship missiles.
  • Australia partnered with the United States in developing nuclear-powered submarines.
  • The European Union labeling Beijing “a systematic” rival.
  • The United States 301 tariff regime imposed by President Trump and extended by President Biden. Beyond those restrictions on 5-G and other technologies, the CHIPS Act to invest in US semiconductor manufacturing, re-examination of other key supply chains like rare earth minerals and pharmaceutical production.

RISK OF INTENTIONAL OR ACCIDENTAL CONFLICT

Given the increasing posturing over Taiwan and the long-term desire of China to recover its perceived historic territory, there is increasing risk of an invasion or blockade of Taiwan. President Biden has recently made explicit that which previously was implied – that US forces would be committed to the defense of Taiwan in the event of an invasion. Since the US is providing additional weapons to Taiwan and the Taiwanese are shifting military tactics as they observe Ukraine’s military success in defeating the Russian invasion, should China choose to act before Taiwan and the US have increased the ability to defend Taiwan successfully?  Might they act now while still an economic superpower and before economic stagnation and eventual decline?

There is great danger when a rising power has reached its limits and looks into the future.  Germany made that mistake with its unification and rise to become Europe’s strongest economy and military. When stagnation looked likely, its strategy became the concept of Mittel Europa (domination of Europe). The nations around it became alarmed and allied against it, resulting in World War I.  Similarly, Japan rose in the late 19th and early 20th century and dominated Eastern Asia until it overreached into China and trade embargoes were imposed.  Japan attacked the United States at Pearl Harbor to secure its resource base in southeastern Asia.  Both countries faced diminished futures and sought to dominate those around them to sustain their economic miracles.  Both resulted in catastrophic wars.  Perhaps the world has changed but given President Putin’s effort to restore the Russian empire through the invasion of Ukraine, it is more likely just hopeful thinking.

Another possibility is an unintentional military incident, such as the launch of missiles either at aircraft or at military bases in Taiwan or China. Would an accidental incident spiral out of control and result in a massive military conflict?

DE-RISKING THE SUPPLY CHAIN THROUGH NEAR SHORING

After years of escalating labor costs in China, imposition of up to 25% tariffs, major disruptions to the supply chain from Asia due to the COVID pandemic and now the Russian invasion of Ukraine, many US companies are determined to move to Mexico and reduce the significant risk of sourcing from Asia.

Others are comfortable remaining with their current sources in China. How many container ships will sail for those companies if active hostilities start between China and Taiwan?  How will the United States react if China is successful in conquering Taiwan? Minimally, a blockade of ocean transport from China and oil imports via tanker ships to China would be imposed very quickly.

If hostilities break out, the supply chain that exists on that day will be ruptured to the point that it will take years to repair.  To start a Near Shoring strategy then will be too late, making it imperative that the process begins sooner rather than later.

If you are considering a Near Shoring strategy to move your manufacturing from China to Mexico, please contact us.