This may be the Asian Century, but it’s looking more like the era of Raytheon, Northrop Grumman, General Dynamics and the rest of the U.S. military-industrial complex.
I don’t even mean U.S. President Donald Trump’s Cold War era-like defense spending surge. I’m referring to the notable spike in geopolitical flare-ups in Asia: the about-face in China-North Korea relations; South Korea’s THAAD missile defense system; Beijing building military installations on disputed South China Sea islands and atolls; distrust between Indonesia and Australia; President Vladimir Putin’s Russia encroaching eastward; a drug war in the Philippines making neighbors uncomfortable; a Taiwanese skirmish with Uber that could troll a thin-skinned White House; the steady bombardment from Trump’s Twitter feed.
Wary of Trump’s unpredictability, Beijing is boosting its naval budget anew (no one knows the exact figure). But an even more precarious flashpoint could be North Korea, where Kim Jong Un is mocking China’s President Xi Jinping as “dancing to the tune of the U.S.” That’s a bit like condemning your banker publicly and hoping the cash continues flowing. As Pyongyang and Beijing rumble, markets will surely get caught in the crossfire. Question is, how much?
The Trump factor makes that even harder to answer than usual. So does the brazenness with which Kim is suddenly operating in Pyongyang. Kim’s first shot across the Trump White House’s bow came on Feb. 11 as Trump dined with Prime Minister Shinzo Abe in Florida. That missile test came a bit over a month after Trump tweeted his disapproval at Pyongyang building intercontinental ballistic weapons, declaring “It won’t happen!” On Feb. 13, Kim’s half brother, the China-friendly Kim Jong Nam, met his end in a broad-daylight assassination in Malaysia.
All indications point to fratricide by a dictator-sibling out for blood, and Xi’s government is not happy. One reason Xi is livid, and Tokyo and Seoul are quaking, is that the deadly VX nerve agent was used at Kuala Lumpur International Airport. Kim may have been doing more than taking out a potential successor. He may have been demonstrating Pyongyang’s chemical weapons capabilities to Beijing, Seoul, Tokyo and Washington. They add to concerns the Kim regime might make a major geopolitical miscalculation that shakes markets.
All this complicates the calculus for a China clearly fed up with Kim’s antics. So fed up, in fact, that Beijing seems more willing than ever to work with Washington. Will Trump’s national security team meet Xi’s government halfway? There’s a good argument that hopes to denuclearize North Korea via economic incentives present Beijing and Washington with a common-ground opportunity. Another holds that things just got a whole lot more complicated.
Trump has long claimed Xi’s Communist Party could bring Kim to heel immediately if it wanted. That world view is now even more fanciful with the death of Kim Jong Nam, whom Beijing saw as a viable replacement for Kim Jong Un. That implicit point of leverage is now kaput.
As Kim tests Xi’s patience, he’s also testing a blustery new U.S. leader desperate for a foreign policy win, preferably one that buttresses his strongman street cred. Trump may see filling the Asian seas with warships as a low-hanging fruit option. Trouble is, that puts more American military hardware in close proximity with China’s. Japan’s, too, as Abe tries to win Trump’s affection, putting his naval vessels where his ambitions are.
That gets us back to the U.S. military-industrial complex. From $435 billion last year, IHS Jane’s sees the Asia-Pacific region’s military outlays reaching $533 billion by 2020. That estimate may prove conservative considering the view of Ian Bremmer of Eurasia Group and other geopolitical strategists that an outright war in Asia, never mind the odd market-moving episode, is no longer unthinkable.
The traditional economic goalposts that once dictated security expenditures also are falling away. Even though growth is falling, six of the top 10 defense-equipment importers for five years running have been Asia-Pacific nations. India and China top Asia’s own list. So, slowing growth isn’t impeding an Asian arms race that has China, Indonesia, Japan, South Korea and, presumably, North Korea binging on bombs. Beijing’s massive land grab in the South China Sea also has the Philippines and Vietnam raising their defenses. Around Asia, expect budget deficits to worsen as a result, for governments to prioritize defense over economic inclusion and for neighbors to cooperate less.
In recent years, economists famed for warning of Black Swan shocks like Nouriel Roubini listed South China Sea tensions higher than North Korea’s provocations. Well, 2017 is proving to be a year in which both trouble spots threaten markets, with a hefty dose of “Trump trauma” risks tossed in for good measure. That may not be a recipe for a buoyant Nikkei, Kospi or Shanghai Composite Index, but it sure is a bonanza for the world’s weapons merchants.
William Pesek is executive editor of Barron’s Asia and writes on Asian economics, markets and politics. www.barronsasia.com
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