U.S. – China Trade War, Part Two: The Thucydides Trap by Chet Nagle
https://creativedestructionmedia.com/analysis/2019/06/22/u-s
“We have met the enemy, and they are us.”
Pogo
Intellectual elites and mainstream media have been captivated by Dr. Graham Allison and his prediction that China and the United States are inexorably heading toward war. Like Francis Fukuyama’s 1992 book, “The End of History and the Last Man,” Dr. Allison’s book is fatally flawed.
Fukuyama’s analysis of the fall of the Soviet Union created a storm of controversy in learned circles. He postulated that the victory of democracy and capitalism over communism meant that there were no more challenges to freedom and global security, and therefore history was ended. His book is based on philosophers like Plato, Hegel and Marx. Like Fukuyama’s work, the best-selling book by Dr. Graham Allison “Destined for War: Can America and China Escape Thucydides’s Trap?” is also based on an ancient Greek philosopher.
The Greek philosopher Allison used was also a general in the wars in which Sparta, an ascending power, ultimately defeated Athens, the most powerful city-state in the Greek multi-state ‘polis.’ Based on a comment by general-philosopher Thucydides, “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable,” Allison and his team in Harvard’s ‘Thucydides Trap Project’ cited 16 instances in the last five hundred years in which an established power was challenged by an ascending power. In 12 of those 16 examples, the rivalry resulted in war.
Allison considers the United States and China to be the 17th case, with the Harvard Belfer Center describing it as “irresistible rising China is on course to collide with an immovable America.” Among the reasons the work of Allison and his team is flawed, besides describing China as “irresistible,” is that they ignored important details in their 16 examples. One such detail is that in 11 of the 12 cases that resulted in war, the cause was a rising power (like Imperial Japan or Nazi Germany) that was violently and aggressively expanding its territory.
In the instance of China versus America, Allison ignores a much more important detail. That is, in none of the 16 cases did the established power financethe rise of the ascending power — as the United States is still doing for China. Damage to China’s economy caused by the current trade war illuminates the significance of that “detail.” The actions of the Trump administration and congress to constrict China’s access to American commercial and capital markets will likely pause or even stop the Chinese Communist Party’s publicly stated plan to dominate America. The consequences of financial details in the 17thcase, China versus the United States, should not have ben ignored by Allison’s book or, more importantly, by the Securities and Exchange Commission (SEC).
America’s stock markets, banks, and financial institutions are almost as large as the rest of the world’s capital markets combined. Knowing that, the Communist Chinese Party instructed its industries to tap that giant capital market. Now, four decades later, the combined value of the shares of hundreds of the of Chinese companies in the U.S. capital markets represents more than one trillion dollars!
All American corporations listed on major U.S. stock exchanges are required by the SEC to provide complete and accurate information about the exact nature of the company’s business, including such things as detailed balance sheets, ownership, partners, subsidiaries products, and risks an investor may face. For some reason, companies managed by the Chinese Communist Party get a pass on those requirements for transparency.
What kind of Chinese industries have slithered under SEC monitoring and are now in investment portfolios, 401Ks, and developing country index funds? The list includes hundreds of companies involved in manufacture of parts for missiles, warships, and military aircraft. Others are participating in the construction and arming of the illegal South China Sea islands that are international waters, or providing communications equipment for North Korea, or building surveillance CCTV cameras for Uighur concentration camps. Do such activities by a Chinese company pose a risk to an investor? You won’t find it in their SEC-approved prospectus.
At the current rate, Chinese companies will soon become a significant part of the investment portfolio of millions of Americans. What will happen when those businesses are exposed as contributors to China’s suppression of human rights, or are attacked by a nation threatened by their activities, or are blacklisted by the U.S. government? The value of those shares will drop or disappear and many Americans will suffer serious losses. Meantime, American retirement funds are helping build Communist China’s military forces. As the cartoon character Pogo famously said, “We have met the enemy and he is us.”
Fortunately, Senators Rubio and Menendez understand that the danger of Chinese companies inside the U.S. capital market is immediate and greater than America falling into some Thucydides Trap. They have proposed a bi-partisan bill named the Equitable Act. When it becomes law, foreign companies that do not make their audits available for review will be subject to increased disclosure requirements. If they don’t comply within three years they will be delisted from American stock exchanges. It is a great first step, but the masters of Wall Street and American investors must suspend their primal urge for profit and act voluntarily. They should quickly identify and sell shares in any company that is fulfilling the Chinese Communist Party’s stated objective of dominating America.
To paraphrase Lenin, we are not selling China the rope to hang us, we are giving them money to makethe rope.
Chet Nagle is a former senior Pentagon official, and a founding member of the Committee on the Present Danger: China
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