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If you’re going to occupy the moral high ground, you’d better make sure your boots are clean. (Macro Macchiato 03/06/19)

June 3, 2019

If you’re going to occupy the moral high ground, you’d better make sure your boots are clean. 

 

My Sunday evening reading included this humdinger as reported by Reuters:

Speaking on Sunday at the Shangri-La Dialogue in Singapore, Asia’s premier defence summit, China’s Defence Minister Wei Fenghe warned the United States not to meddle in security disputes over Taiwan and the South China Sea. On Saturday, acting U.S. Defence Secretary Patrick Shanahan told the meeting that the United States would no longer “tiptoe” around Chinese behaviour in Asia. “Perhaps the greatest long-term threat to the vital interests of states across this region comes from actors who seek to undermine, rather than uphold, the rules-based international order,” Shanahan said.

 

If the Rules-Based International Order is another way of describing the “Washington Consensus” by which western liberal democracies rule the world, them Mr Shanahan needs to realise two things:

 

1. Nobody listens any more when the US preaches about the rules based international order. The US has done as much as any other significant international actor to undermine it in the 21st Century. Apart from its policies in the Middle East, the US has repudiated the WTO, the UN, and the Paris Accord. The current administration openly pursues mercantilist policies which the International Rules Based Order evolved to overcome. 

 

2. Mr Shanahan’s comments are about a half-decade out of date. Since the Belt and Road Initiative, the Asian Infrastructure Development Bank, the Shanghai Cooperation Agreement and numerous other bodies and treaties were created, an interlocking series of “friendships” rather than “alliances” has emanated out of a Chinese focal point. A new international order based on these friendships, but always putting national interest first, has already superseded the old Washington Consensus which the US itself has done so much to undermine. 

 

Current US policy – America First – is simply a recognition of and a reflection of the reality on the ground across Asia and increasingly Eurasia, Europe, Africa and Latin America. The use of tariffs as punishments to force the renegotiation of bilateral relationships is a blunt way of undermining the rules-based order. The difference for the current US administration is that, if we do it, it’s ok. If you do it, it isn’t. Fom the US perspective, it’s a case of, if you can’t beat them, join them. From the perspective of those countries threatened by trade tariffs and sanctions, why would any other country putting its own national interest first submit to such behaviour?

 

As Donald Trump lands in the UK for his state visit, he is getting a generally bad press including from the state broadcaster, so our view here in the UK may be distorted by the media, even if it is not ‘fake’ reporting. We have to remember that the US economy remains mostly free and open and that it is growing faster than any of its OECD rivals. China meanwhile continues to tighten its authoritarian grip on its citizenry with the social credit system, re-education camps and censorship. This week the Chinese Communist Party blocked Wikipedia in China (though as much of what is in Wikipedia is at best apocryphal and dances lightly with the actualité, perhaps it is a debatable loss). OK, its internal affairs are its internal affairs, but China’s industries and media have a constitutional duty to support the Party and its policies, which is the Americans’ beef with Huawei. 

 

Hang on though. This is a shipping newsletter isn’t it. So far, so what? Does any of this matter to shipping? Well, yes it does. Here are some ways it does.  Last week I was in discussion with an international commodity trading company, an international ship broker and a Chinese ship operator. Doing my best not to identify any of those present, here are some of the things we talked about.

 

1. Trade wars are here to stay. The US is using trade tariffs as an economic weapon in its own interests. Whether those are short-term interests or long-term depends on their success. Mainstream economists would say that tariffs are not in its short or long-term interests, but then again, elements of mainstream economics have been debunked in recent years. What value for instance does monetarism still have in the light of China’s state-sponsored rise? It seems, as I have written before, to be as up to date as a telephone table.  But as the global economy devolves into a patchwork of bilateral and club deals, trade will be disrupted, which will directly affect shipping demand. US soyabean exports are only the start. 

 

2. In the coming years, China is going to start floating the RMB and it will become a rival reserve currency to the dollar, the yen and (don’t laugh) the euro. By then, China will be demanding freight payment in RMB. China already pays for resources in its own currency. As its ownership – both direct and as financier- of the global fleet increases, why should it not?

 

3. The open global spot market in commodity shipping is shrinking as a percentage of total seaborne trade. This one is harder to quantify in terms of tonnage, because there is still nothing like complete transparency on who is shipping what on which terms. But the feeling is aboard that China is leading the way in moving raw materials especially in what traditionally would be called ‘off-market’ ways. For instance, there has been a recent spike in iron ore shipments from Iran to China. These would appear to be backhaul shipments on geared vessels moving timber and steel products out of China to the Middle East and Africa. It’s a neat backhaul trade. It’s not conducted in USD, and it pays no attention to the US repudiation of the Iran nuclear deal. It’s not cabotage but it’s hard for non Chinese operators to get a look-in due to the US sanctions.

 

 

The Take Away

 

In their 2016 book War by Other Means, RD Blackwell and JM Harris updated von Clausewitz’s aphorism that war is politics by other means. They opined that trade, investment and energy politics are now the ‘other means’ chosen by nation states to conduct war. At the time they regretted that the US too often “reaches for the gun over the purse in its international conduct.” The Trump administration has changed that. In doing so, the US has adopted the practices of its differently principled competitors. It has added this ‘geoeconomic’ practice to its unipolar role as global policeman. It’s hard to occupy the moral high ground when your boots are covered with the mud of such practices. But that’s the new realpolitik and we have to get used to it, because the shipping industry is right in the middle.

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