Obama Heats Up Asia Trade War

The real purpose of President Obama’s four-nation trip to Asia was to fortify an economic and military alliance to counterbalance China's growing influence in the region. In the preceding weeks, China has shown its displeasure by backing Russia in the Ukraine and meeting with Russian Foreign Minister Sergei Lavrov to negotiate a deal to redirect natural gas from Europe to China.  But when President Obama made comments in support Japan’s control over of the oil-rich Senkaku Islands that China claims as the Diaoyu Islands, Beijing retaliated by devaluing their currency. The U.S. is militarily stronger, but China’s devaluation is a trade war weapon to take American jobs.

President Obama said on April 24 the U.S. believes Japan's administration of a contested island chain should not change “unilaterally,” to assure Tokyo a U.S. security treaty “covers all territories administered by Japan.”  Although the New York Times naïvely called the president’s comments a “carefully calibrated statement” that “stopped short of siding with Japan in the dispute over who has sovereignty over the islands,” China sees the public comments of the United States as threat of military interference.   

China’s communist economy was threatened by the implosion of the Soviet Union in 1993. The U.S., EU and Japan negotiated the diplomatic coup of the century by agreeing to allow China to devalue their renminbi (RMB) currency from 2.65 to the dollar to 8.28 to the dollar, a 68% devaluation, and gain tariff-free access to their markets; in exchange for China demilitarizing and adopting a form of state-sponsored capitalism. 

Over the next decade, trade boomed in both directions as China’ fixed exchange rate to the dollar bought Western equipment to modernize industry and offered outsourced labor at less than 1/3 of Asian costs. But by July 2005, political pressure over job losses from all three trading partners forced China to start “revaluing” the RMB exchange rate upward. The 46% appreciation by February of this year explains why China’s economy has slowed and outsourced jobs are leaving. 

With China’s economy cooling off in late 2012, Shinzo Abe campaigned for the Prime Minister of Japan on a nationalistic platform of “unlimited” money printing to devalue the Japanese currency (yen) and a militaristic hard line to “resolutely defend” the contested Senkaku islands from Chinese challenges.”  Both actions were meant to antagonize the Peoples’ Republic of China and proved wildly popular to most Japanese voters. 

With China suffering expecting a major economic slowdown as they continued to revalue upward the exchange rate of the RMB to the dollar, devaluation by Japan was seen as predatory and Chinese media began blaming Japan for China job losses.

The Chinese claim the discovery and control of the Diaoyu Islands from the 14th Century, but Japan took control of the islands from 1895 until its surrender to the U.S. at the end of World War II. During the United States Civil Administration of the Ryukyu Islands after 1945, it was discovered that huge oil reserves might be found under the sea near the islands. In anticipation of the turnover of the Senkaku Islands, Japan declared a 100-mile Air Defense Identification Zone (ADIZ) around the islands in 1969.  Since returning to Japanese control in the 1971 Okinawa Reversion Agreement, island ownership has been disputed by China, Taiwan, and South Korea.

As retaliation for Prime Minister Abe's provocative statements, China’s Ministry of Defense on November 30th, 2013 began enforcing their own expanded Air Defense Identification Zone covering a huge offshore expanse that includes the disputed oil-rich Diaoyu/Senkaku Islands. The Chinese ADIZ rules require all aircraft must ask for permission to fly in the ADIZ and must “follow the instructions of the administrative organ of the East China Sea Air Defense Identification Zone”.  ADIZ rules warn that “China’s armed forces will adopt defensive emergency measures to respond to aircraft that do not cooperate in the identification or refuse to follow the instructions.” 

Since November, the U.S. has been flying unarmed B-52 bombers from Guam across the ADIZ without notification. The People's Liberation Army Air Force has regularly been scrambling Su-30 and J-11 warplanes in response to numerous flights of Japanese F-15s, E-767s and P-3s; U.S. P-3s and EP-3s; and South Korean F-15s.

No country is exposed to more risk from high energy prices than China, which passed the U.S. in 2010 as the world’s largest manufacturer. China also passed Russia to grab the number two spot behind the U.S. in defense spending. Fearing the Peoples’ Liberation Army would become the dominant military power in East Asia, Japan has launched a crash rearmament drive that by next year will have ballooned defense outlays passed France and U.K. to the number four spot, just behind Russia. 

President Obama may have meant for his pivot to Asia to be a unifying strategy. But with the Japanese and the Chinese already facing off in a trade war and potentially a hot war, the president’s comments about the Senkaku/Diaoyu Islands appear to have seriously antagonized the Chinese.  With the United States military far superior, China seems to be retaliating with devaluation as the trade war weapon that can inflict the greatest pain on America’s competitiveness and jobs.

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