by Jim Rickards, DailyReckoning:
In the world of geopolitics, broadly defined to include defense, military, intelligence, diplomacy and various the aspects of statecraft in the international arena often intersect with the world of global capital markets. The sphere of global capital markets include stock, bonds, derivatives, gold, commodities, foreign exchange, etc. These those two worlds are not completely independent, and often converge.
The point of intersection is getting larger, as are the flashpoints. Think of it as two circles that start out apart. They get closer and closer. Well, suddenly they come together and there’s an intersection. They keep converging and the intersection gets larger. It’s actually difficult to think of an international economic issue that doesn’t have a geopolitical aspect and vice versa.
It is difficult to think of a major geopolitical issue that doesn’t have some economic or financial aspect to it. It’s important recognize that these are not completely separated worlds. These are two worlds that are converging where you cannot understand one without the other.
The first thing is the number of hot spots in the world is growing. That means the potential for conflict and war, where a situation is sufficiently dangerous enough that you could not rule out a war. These threats include a shooting war with China, a military theatre with multiple dimensions from the battle space, a possible cyber war, or even a financial war.
As I have written about prior, geopolitics and China have these regional convergences that continue to grow (CLICK HERE for prior further geopolitical analysis on China).
The South China Sea is an area of great importance. When just looking at the geographical area you’ll see two things. First, it’s a huge space. Second, it’s surrounded by 6 countries, all of which have some claim on it, except for one. China claims, “We own the whole thing.” They maintain a claim to the entire South China Sea. That means they’ve got potential confrontations with all the other states around it.
There are two states in the region have the most potential for war with China. One is the Philippines and the other is Vietnam. The Philippines is an ally of the United States and holds a treaty between governments, meaning it’s not just a regional power but an area where the U.S has long strategic interests in.
The United States has a Mutual Defense Treaty with the Republic of the Philippines standing since 1951 that dictates that if either of our countries are at war, or attacked by an external force, we’ll be in alliance. Newly appointed Secretary of State, Rex Tillerson has re-emphasized that commitment. With all of that in mind, we are not seeing China back down.
The Chinese continue to build artificial islands, but they’re not just creating islands they’re constructing air strips on them and landing aircraft on them. While China only has one aircraft carrier, which is fairly primitive by our standards, they also have submarines and use these forces to patrol that region.
The U.S. has now sent the USS Carl Vinson (CVN-70) is the third United States Navy Nimitz-class supercarrier, and its strike group to the region. Aircraft carriers don’t travel alone. That battle group is now in the South China Sea ready to confront China and maintain U.S interests and international obligations. There’s a real potential for war with China there.
The second hot spot takes is further north to the East China Sea, located between the Sea of Japan and the South China Sea. Where a flashpoint in the region is over a dispute regarding the Senkaku Islands. Those select islands are uninhabited but are currently claimed by both Japan and China. They consist mostly of major rock formations but hold a significant amount of territory that is strategically located along major sea lanes.
As of last year, the Chinese Navy has 303 naval combatant vessels that includes over 70 large combatants. To compare that, the Japanese Navy has an estimated 67 vessels. While the Japanese may have better technology, they have serious ground to make up.
As the U.S. seems to be backing away in certain aspects, sentiment in Japan could push them toward a greater buildup of forces. The days of relying on the U.S. defense umbrella and not taking care of their own defense may be over. As China continues to be aggressive and expand, the expectation is for greater Japanese military growth.
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