Always very difficult, political and economic relations among China, Japan and South Korea — a quarter of the world economy — have entered a new phase with an alarming military standoff on the Korean Peninsula. That can seriously damage $1.3 trillion of American foreign trade and set back Washington's efforts to reduce its $432 billion trade deficit with those three East Asian nations.
Since there is no military solution to the Korean political problem, extremely tense relations are bound to continue because the key players — the U.S. and China (you can add the neighboring Russia, too) — have diametrically opposed interests and objectives.
To make this simple, you can think of the Korean crisis as a key part of the U.S.-China battle for Asia.
China clearly wants the U.S. out of Asia, as often intimated by statements that "Asia should be for Asians," and that "outside powers should not meddle in Asian affairs." Beijing believes that time is on its side as its economy continues to forge ahead. Meanwhile, it keeps recycling its annual current account surpluses of $270 billion in huge infrastructure investments to improve what China calls "Asian connectivity."
Washington, of course, has different ideas about all that and maintains a large military presence throughout the Asia-Pacific.
This is a deadly serious confrontation. A top U.S. general was grimly reporting that the only "deliverable" after a meeting with his Chinese counterparts last Thursday in Beijing was "a framework agreement for a joint staff dialogue mechanism" — a 24/7 hotline to prevent catastrophic accidental mistakes and miscalculations as China and the U.S. keep chasing each other's air and naval military assets around China's maritime borders.
Does all that make U.S. stocks, bonds and direct investments look like good bets?
The Chinese think so. They just reclaimed the top spot on the list of Treasuries foreign holdings. Remember, they are recycling the dollars they got as the U.S. settled its trade deficit (and China's trade surplus) of $170.7 billion in the first six months of the year.
Commentary by Michael Ivanovitch.
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