( Repeats from Tuesday. John Kemp is a Reuters market analyst. The views expressed are his own)
* Chart 1: tmsnrt.rs/ 2DdG1vb
* Chart 2: tmsnrt.rs/ 3jPcvwj
By John Kemp
LONDON, July 28 (Reuters) – Worsening diplomatic relations in between the United States and China are putting a spotlight on their economic inter-dependency in the context of global supply chains for both technology and energy.
Leading policymakers in the United States and some of its closest allies, including Australia and Britain, have just recently hardened the language in which they describe relations with China.
China has actually been labelled a “strategic rival” for a long time however the nation is significantly referred to as a “tactical enemy” implying a more confrontational relationship.
Problems about unreasonable trade practices, intellectual home theft, currency intervention, and employment losses have actually changed into far more serious concerns about espionage, innovation transfers and nationwide security.
Competition in between the United States and China is now represented in existential terms by Mike Pompeo, the leading U.S. diplomat, extensively also believed to harbour presidential ambitions.
” We need a method that safeguards the American economy, and certainly our method of life. The totally free world should triumph over this new tyranny,” Pompeo said in a high-profile speech on the China hazard last week.
The crucial question is how tactical adversaries, or even opponents, can structure their financial relationship to minimise security risks.
The economic relationship includes not just product trade however a variety of services including transportation and logistics, banking, legal services, professional services, education and tourism.
It likewise consists of financial investment, science and technology cooperation, information transfers, payments systems, currency and migration (” Communist China and the Free World’s Future”, U.S. Department of State, July 22).
Unpicking this web of interdependencies will not be simple or low-cost.
For numerous security specialists, the service is to decouple the economies of the two superpowers, sculpting the world into blocs led by United States and China respectively, restricting dependences in between the 2.
Decoupling remains intensely controversial, offered the implied upheaval in worldwide supply chains, which would be very costly, but many security experts have endorsed some degree of disengagement.
In the United States and some of its allies, much of the argument now revolves around the desirable degree of decoupling, rather than the concept of decoupling itself, and how to pursue engagement in the remaining locations.
For U.S. and allied security specialists, the top priority for decoupling focuses on high-technology products such as semiconductor production and telecoms as well as sophisticated science.
However there are likewise more comprehensive concerns about supply chains that depend upon manufacturers in China, consisting of for computers, telecoms equipment, medical equipment, steel and rare earth minerals.
Up until now, U.S. policymakers appear more crazy about decoupling than their counterparts in China, who stay publicly committed to a more integrated international economic system.
For security professionals in China, nevertheless, there are growing concerns about dependence on imported raw products, especially oil and gas, in addition to worldwide payments and currency systems dominated by the United States.
OIL AND GAS
In the four years from 1970 s to the 2000 s, the United States ended up being the world’s biggest importer of petroleum and the implied economic and security vulnerability ended up being a leading priority for U.S. policymakers.
Towards completion of the period, there were concerns that the country would also end up being based on imported natural gas, intensifying issues about the security threat of energy dependence.
The U.S. shale revolution eased those fears by massively expanding domestic production and turning the United States into a net exporter, initially in gas and more just recently in oil.
China’s rapid industrialisation and minimal domestic oil and gas resources have put the country on the opposite path; in impact the 2 countries have actually changed places on energy problems.
After becoming an oil exporter in the early 1970 s, China became a net importer again in the mid-1990 s and is now without a doubt the world’s biggest petroleum importer.
More just recently, China has actually emerged as a big net importer of gas as the country switches from utilizing coal to gas in heater and power generation.
China’s security specialists now have to grapple with the exact same concerns about import dependence that controlled argument in the United States for 40 years.
China has to stress over energy cost spikes, politically-motivated embargoes and long maritime supply chains through choke points that could be blockaded.
China also needs to stress some of its existing and projected oil and gas imports originate from the United States and its allies, consisting of Australia and nations in the Middle East.
Like the United States before it, China’s reaction is likely to concentrate on reducing its need to import through a mix of developing domestic resources, increased performance, and buying options.
China’s focus on domestic energy sources (nuclear, hydro, wind and solar) and electric lorries can mostly be described by the requirement to lessen its dependence on imported oil and gas, in addition to concerns about air contamination and to a lower level environment change.
Degrading relations with the United States are likely to encourage China’s policymakers to enhance their efforts to cut dependence on imported oil and gas, and develop sources far from the U.S. alliance.
China will also magnify its pursuit of renewable resource and electrification of the transport system, which have the collateral advantage of minimizing air pollution and emissions intensity.
But top policymakers may think twice to reduce the nation’s dependence on safe locally produced coal in favour of insecure imported gas.
Fight with the United States could lead to a future in which China has a big renewables sector supported by lots of coal.
If so, China would be following the United States, which also focused on coal, nuclear and renewables during the age of energy insecurity from the 1970 s to the 2000 s.
Domestic coal supplied a policy hedge versus the risk of rate rises, blockades and shortages postured by dependence on imported oil and feared dependence on imported gas.
Coal-fired power production has frequently been the fallback option for countries stressed about worldwide energy security.
There are significant concerns about the usefulness of considerable decoupling of supply chains in between the United States and China in either technology/communications or energy/payment systems.
For all its efforts, the United States never ever managed to decrease its dependence on imported oil between the mid-1970 s and the mid-2000 s, until new technology in the kind of shale ultimately enhanced domestic production.
Remaking and rerouting worldwide supply chains would include tremendous expenses for both superpowers, involving a multidecade effort, which even then might not prosper.
The scale of the disturbance could make policymakers stop briefly and reassess the decoupling strategy or a minimum of temper its grander ambitions, in an attempt to save a minimum of some trade, financial investment and policy cooperation.
However as the relationship between the superpowers degrades, all these interdependencies, not just technology, will go up the policy agenda, and energy circulations will be high among them.
– China and the world oil market: from producer to consumer and back once again (Reuters, February 2013)
– United States and China go into a new cold war (Reuters, July 22)
– With trade war, U.S. and China stumble into the Thucydides Trap (Reuters, April 4, 2018) (Modifying by Jane Merriman)