By Perry Diaz
Planet Earth has shrunk so much that more than seven billion people’s lives are intertwined and their countries’ economies are inter-dependent with one another. If one country goes down, it pulls down many others, too. It did not then come as a surprise that when China’s stock market crashed, it was like a huge meteor falling in the middle of the Pacific Ocean causing a giant tsunami that reached the shores of more than 100 countries around the Pacific Rim. But the extent of the damage goes far beyond the Pacific Rim. The tremor was also felt in Europe, Central Asia, Middle East, Africa, and countries around the Atlantic Ocean. In other words, the whole world was shaken.
But compounding the economic fallout of China’s stock market, China deliberately devalued her yuan; thus, igniting an economic war that could hurt the U.S. dollar, the Euro, and other financial instruments. By devaluing the yuan, China’s export products became more competitive and attractive. On the other hand, it made the U.S. dollar stronger; thus, her export prices go up, making them more expensive and less competitive.
Last August 24, as the Americans were sleeping soundly in the middle of the night, China’s stock market crashed. It was called “Black Monday” because the market lost more than 40% since it peaked last June. It was reminiscent of the U.S. stock market’s crash in 1929, which ushered in the Great Depression. Needless to say, the U.S. would retaliate to China’s devaluation of the yuan. And who knows what China is going to do next?
One of the most effective weapons of an economic war is sanction. The U.S. used it against Cuba, North Korea, Iran, and lately, Russia. When Russia invaded and annexed Crimea, the U.S. and her European Union (EU) allies imposed a series of debilitating sanctions against Russia. As a result the country fell into recession.
Politics of oil
With the plummeting price of crude oil and the ruble in freefall – economists said that the ruble could plunge to 80 to the dollar — Russia has to tap her “sovereign reserve funds” to make up for the budget deficit. With 70% of her budget coming from oil exports, the price of crude oil falling — from $110/bbl (per barrel) to around $40/bbl — is battering the economy. Some experts in the industry believe that the oil’s fall was due to a “conspiracy” between the U.S. and Saudi Arabia – the first and second top oil producers — to glut the oil market and bring down the price of oil; thus, hurting the world’s third top oil producer, Russia, who just a year ago was the first top oil producer.
But Russia’s bane is China’s boon. As the world’s biggest consumer of oil and gas, the plummeting prices of crude oil had an unintended consequence – it helped China economically in a big way. It didn’t take long before China and Russia agreed on a huge gas deal. In May 2014, they signed a $400-billion preliminary agreement to supply China with Siberian gas in the next 30 years. But at what price? Although it was never disclosed what the price was going to be, it must be a good deal for China because she had been negotiating with Russia for many years but couldn’t agree on the price. With Russia hurting for export revenue, China must have gotten a “sweetheart deal.”
But recently, the deal turned sour; the final signing of the contract was delayed indefinitely because of China’s declining demand for gas, which stems from China’s economic downturn.
Now, the cat is out of the bag – China’s economy is cooling off. Her growth rate is down to 7%, way below the two-digit GDP only a few years back. And with the sudden devaluation of the yuan and a mysterious – and ominous — explosion of a warehouse full of toxic chemicals, the future doesn’t bode well for the superstitious Chinese. Is China in panic? The signs are there. For President Xi Jinping, this scenario would shatter his “Chinese Dream” of economic prosperity and strong military.
And for all these to happen just a few weeks prior to his first state visit to the U.S. in mid-September, it would certainly weaken his image as a strong world leader. Indeed, Xi’s visit couldn’t have come at a worse time, which begs the question: Can he afford to leave Beijing at a time of uncertainty at home? It makes one wonder if Xi’s political rivals would take advantage of his absence and do something stupid?
It was reported in the news that the Obama administration is preparing to issue sanctions in retaliation to the wave of cyber-economic espionage by Chinese hackers, who are believed to “have stolen everything from nuclear power plant designs to search engine source code to confidential negotiating positions of energy companies.” [Source: Washington Post]
It was also reported that officials from national security agencies and the Treasury Department are eager to push ahead with sanctions against China. These sanctions would be the first use of Obama’s executive order last April, which established the “authority to freeze financial and property assets of, and bar commercial transactions with, individuals and entities overseas who engage in destructive attacks or commercial espionage in cyberspace.”
If the sanctions were issued prior to Xi’s state visit, that would put the U.S. in a strong negotiating position to force China to curb her hacking activities. With a 53% surge in economic espionage cases in the past year, there is urgency to bring this issue up for discussion at the highest level of authority. And what would be a better time to do it than when Xi and Obama are meeting face to face on U.S. territory?
One minute to midnight
With the U.S. waging an economic war against China and Russia at the same time, there is a great deal of anticipation what the outcome would be. In my opinion, the U.S. is ahead but Russia and China are getting bolder and more aggressive. And this can be attributed to America’s ability to deal with any situation in a manner that serves the greater good. Russia and China on the other hand have authoritarian regimes and ruled by dictators. And as history tells us, dictators stay in power by repressing the free will of the people. Their survival is guaranteed only if their economy is robust. And to keep them entrenched in power, they rely on a corrupt bureaucracy and, more importantly, a corrupt military. But when their economy begins to falter, watch out because they won’t be around too long. Unlike America, they don’t have rule of law. They have rule of the jungle; it’s survival of the meanest.
It did not then come as a surprise when rumors started to circulate that Russian President Vladimir Putin and Chinese President Xi Jinping’s days might be numbered. Well, it may be too soon to predict their departure from power, but unless they can turn their country’s economy around, the sword of Damocles would always be hanging over their heads… ready to strike them down.
With so many conflicts happening in the world right now, there are talks that the Doomsday Clock is just a minute away to midnight; that is, World War III. Wrong! We’re now in the middle of World War III — an economic war — and it’s rocking the world.