East China Sea spat: the ultimate Black Swan threat? - The Share Centre Blog

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Michael Baxter

East China Sea spat: the ultimate Black Swan threat?

Written by: Michael Baxter on December 4th 2013

Category: Thought for the day

US Vice President Joe Biden is in China. The backdrop to his visit is scary. War in the region, one involving China, Japan and the US, is unthinkable, and would clearly be the single biggest catastrophe to descend upon the world since Germany invaded Poland. Because the consequences of such a dispute would be simply awful, and no one worth considering would benefit, many assume it just won’t happen. But, as we all know, unthinkable things happen these days. I have been reading up about the dispute, and have been getting a distinct feeling of déjà vu. But I actually think a bigger risk of conflict lies elsewhere, and in a corner of Europe.

Mr Biden’s visit follows David Cameron’s jaunt to the other side of the Great Wall. But the purpose of the trips appears to be quite different. Mr Cameron was, at least on paper, there to talk about trade. Mr Biden, on the other hand, is there to talk about the latest dispute in the East China Sea – at least that is how it is being interpreted. Trade comes into the equation too.

Before I look at the Biden trip and the risk of war in the region, let me drawn your attention to how one Chinese newspaper responded to DC’s visit. The state owned Chinese newspaper, ‘The Global Times’, slammed Mr Cameron. Its headline stated: “China won’t fall for Cameron sincerity.” And then proceeded to describe Britain in terms that were… well, let’s call them not very flattering. It suggested that the UK was not a big world power and said it was just an “old European country apt for travel and study.” It then slated Cameron for his policy towards Tibet and the Dalai Lama saying: “Beijing needs to speed up the pace of strength in diplomatic resources and make London pay the price for when it intrudes into the interests of China.”

Some of the comments in the article remind me of the letter sent by the Chinese Manchurian Emperor, Qianlong to King George III back in 1793. A British trade mission in China, had been a failure, the only result it appeared was to offend the Chinese Emperor. We don’t need anything from you, was the gist of the letter: “Our Celestial Empire possesses all things in prolific abundance and lacks no product within its own borders.” The letter continued that China certainty did not require any products from Barbarian nations, but magnanimously agreed to overlook the English King’s impertinence. The letter concluded: “Nevertheless, I do not forget the lonely remoteness of your island, cut off from the world by intervening wastes of sea, nor do I overlook your excusable ignorance of the usages of Our Celestial Empire. I have consequently commanded my ministers to enlighten your ambassador on the subject, and have ordered the departure of the mission.”

The UK did finally find something it could sell to China – opium from India. The Chinese authorities, tried to ban the import of this product – how very anti laissez faire of them – with the impasse eventually leading to the Opium wars. This was a sad saga in Anglo/Sino relations, and one that few Brits have heard of. Most Chinese however, are well aware of this conflict.

I tell this story, in part to show similarities between today and then, but to also illustrate how both parties were to blame. China was to blame for its initial arrogance, and refusals to countenance that Britain had anything to offer. Britain was to blame, among other things, for shamelessly trying to enforce the export of such a pernicious product as Opium. Besides, in the century or so that followed the sending of the infamous letter, Britain showed an arrogance that made Emperor Qianlong’s letter seem like humbleness personified in comparison.

As for the US Vice President’s trip, trade does form part of the debate; in particular accusations by the US that China has been dumping certain products. But we all know that this visit is really about the Senkaku/Diaoyu islands, and the creation by China of an Air Defence Identification Zone (ADIZ) in the region.

I do wish people could be honest. China insists that the formation of this ADIZ is not about territorial disputes, but rather relates primarily to safety. China is not banning foreign aircraft from the ADIZ, merely wants non-Chinese aircraft to identify themselves to Chinese authorities as they enter the zone. They fool no one.

Yet, from what I read, China does appear to have genuine claims over what it calls the Diaoyu islands. This is not analogous to Britain and Argentina over the Falklands. China’s claim to the islands in the East China Sea goes back centuries, and was once undisputed, unlike the case of the Falklands, where the claims to the island have been disputed from day one.

Besides, while Japan’s Prime Minister Abe Shinzo may be an economic dove, from a military point of view he is a hawk. The conflict with China was escalated when his government nationalised the islands.

But history tells us wars often occur (though they are not inevitable) with the rise of new super powers. I remember being told that when I studied Ancient History: the rise of Rome made war with Carthage unavoidable. I think my teacher was guilty of hindsight bias. All wars seem inevitable after the event.

There is nothing inevitable about a war involving China. But it is a risk.

Given this, why are equities as high as they are? The markets do not seem to be factoring in the risk of conflict. I think the reason for this is that we are in an all or nothing scenario. There is no point in pricing in a conflict with China because such an occurrence would be too dreadful to contemplate.

PS. For what it is worth, I think the biggest risk of major conflict in the world right now relates to the Ukraine. The Russian people and their President hate the way previous leaders allowed the Soviet Union to fall apart. I am not sure an ultra-confident (and perhaps detached, not to mention unpredictable) Mr Putin would be willing to allow a popular uprising in any country to derail the plans of a pro-Russian government.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Abe Shinzo military hawk, David Cameron in China, letter from Qianlong to King George III, Opium wars, senkaku/diaoyu islands dispute

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