Photo: Reuters / Stringer

The US is once again escalating the “China threat” rhetoric. The latest incidents include blocking Ant Financial, a subsidiary of Chinese e-commerce giant Alibaba, from acquiring US-based MoneyGram International; pressuring AT&T to cancel a deal with China’s Huawei to distribute its smartphones; and resuming “freedom of navigation and overflight operations” (FNOPs) in the South China Sea.

Blocking Ant Financial 

The Congressional Committee on Foreign Investment in the US (CFIUS) blocking of Ant Financial from acquiring MoneyGram for “national security” reasons is one of the latest blows to the already uneasy US-China relationship.

Ant Financial’s motive for acquiring MoneyGram, the second-largest money-transfer firm in the US, was said to have been driven by increasing competition from Tencent’s WeChat facial-recognition payment system in China. Ant offered the highest bid, estimated at US$1.2 billion, to acquire MoneyGram.

The deal was to be a “win-win” for both companies, as MoneyGram would have been sold at a higher price and Ant Financial would have gained access to foreign markets. The highest offer from a US firm was US$1 billion. The CFIUS decision also caused MoneyGram to lose more than 8% of its stock value.

However, the CFIUS appears to be more concerned with “national security” than MoneyGram’s interests. The issue was that the Chinese government might have been able to access American consumer information through the US company’s data bank. How that might further compromise national security is unclear, particularly when that information can be easily obtained through credit-rating agencies.

AT&T/Huawei partnership

Another blow to the US-China relationship was AT&T’s sudden cancellation of an agreement to market Huawei’s latest smartphone, the Mate 10 Pro, in the US. More than 90% of Apple iPhones are sold through telecommunications carriers in the US, and AT&T is the country’s second-largest provider of wireless services. Huawei is China’s biggest manufacturer of telecommunications equipment.

Again, the AT&T decision is said to have resulted from pressured by the US Senate and congressional intelligence committees fearing a risk to “national security”. Huawei’s founder was said to be a former army officer who may still have ties to the Chinese military.

However, Huawei provides telecom equipment and has set up telecommunication architecture in some 170 countries and regions, including staunch US allies such as the UK, New Zealand and Germany. The Chinese company in fact has partnered with Germany’s Deutsche Telekom in the launch of fifth-generation (5G) connections in Europe. What’s more, Huawei has agreements with 45 of the world’s leading wireless carriers.

The Mate 10 Pro is said to be more advanced but less expensive than the most advanced smartphones produced by Apple and Samsung. Barring or restricting its entry to the US market would limit consumer choices in violation of the the spirit of competition. With Apple and Samsung controlling almost 60% of the US smartphone market, it has become an oligopoly that could result in inefficiency and price gouging.

Reviving FNOPs

Early this month, US State Department policy director Brian Hook accused China of reneging on the promise not to “militarize” the South China Sea further, vowing to resume FNOPs. There  are also news reports (mainly from the US media) that the Philippines is concerned with China installing more weapons in the disputed region.

It is true that China is installing more weaponry on the islands it has built within the “Nine Dash Line” in the South China Sea. But it is unclear whether China is reneging on a promise or merely responding to recent US policies in Asia. President Donald Trump’s preference for the term “Indo-Pacific” has fueled speculation that he is reviving the quadrilateral security agreement between the US, Australia, Japan and India to “contain” China’s “aggression” and increase his own country’s arms sales.

Indeed, Trump and his senior officials, including Secretary of State Rex Tillerson, Defense Secretary James Mattis and Chairman of the Joint Chiefs Joseph Dunford, were acting like arms salesmen during their visits in Asia in late 2017, pledging to sell India, Japan, South Korea, Australia and other “friendly nations” hundreds of billions of dollars’ worth of advanced US weapons, “helping” them to defend themselves against Chinese “bullying”.

Moreover, the US is deploying more military assets in the Asia-Pacific region, sending in three aircraft-carrier battle groups (more to come), the most advanced jet fighters and bombers, missile defense systems and other weaponry. The official reason is reining in North Korea’s nuclear ambitions. But Beijing appears to think differently: that the massive firepower is not meant to “wipe North Korea off the map,” but to targeting China (and Russia).

In any event, the US and China seem to be in an arms race and accusing each other of “militarizing” the Asia-Pacific region. To counter the potential US “threat,” China and Russia are holding increasingly frequent military exercises in the East China Sea. Taiwan and Japan are reporting that the Chinese air force and navy are flying over and sailing nearer their territories more frequently. China is also building more aircraft carriers, jet fighters, missiles, destroyers and submarines.

Effects on US economy and security

The irony is that the effects of recent US policies on China may not produce the results Washington wants or expects.

First, earlier US congressional policies have reduced Chinese investments from almost $50 billion in 2016 to less than half that in 2017. An investment loss of $25 billion is bound to undermine economic and employment growth in the US, particularly in the high-technology and financial sectors.

The latest policies could further reduce Chinese investment and put the already complicated and uneasy China-US relationship at risk. More than $250 billion in business deals that US firms have acquired might not materialize.

The US has gained nothing  from FNOPs except damaging five destroyers and wasting money on fuel. These operations have not stopped China from ‘militarizing’ the South China Sea. If anything, they have had the opposite effect

It is also ironic that barring Chinese investment in the US high-tech sector has accelerated technology innovation in China. In response to US policies it sees as hostile, the Chinese government has increased spending on research and development activities, from around 1% of gross domestic product in the early 2000s to more than 2% today.

In addition, China has invested hugely in STEM (science, information technology, engineering and management) education, producing between 6 million and 7 million gradates in these areas each year. These investments will enable the country to narrow the technology gap sooner rather than later and surpass the US in artificial intelligence, supercomputing, self-driving cars, high-speed rail, and financial technologies.

Second, the US has gained nothing from FNOPs except damaging five destroyers and wasting money on fuel. These operations have not stopped China from “militarizing” the South China Sea. If anything, they have had the opposite effect, prompting China to deploy more military assets and personnel within its claimed “Nine Dash Line.” Indeed, resumed FNOPs will not only prove unable to deter Chinese  “militarization” but could in fact heighten tensions in the disputed sea.

Few Asian nations if any want war in their back yards. It might be for this reason that Japan and India want better relations with China, even though both are embroiled in border or territorial disputes with the Communist giant. The Association of Southeast Asian Nations (several of whose members are disputants) is working with China to agree on a code of conduct to resolve the issues.

Taking the debate to its logical conclusion, blocking Ant Financial’s acquisition of MoneyGram International, pressuring AT&T to cancel its partnership with Huawei and resuming FNOPs will harm the economic and security interests of both the US and China.

To “contain” China (and other countries it did not like), the former US administration under Barack Obama earmarked $1.3 trillion to upgrade its nuclear arsenal over a 30-year period, prompting China to increase and strengthen its own nuclear arsenal. Trump’s National Security Strategy, which calls for spending $1 trillion to produce smaller and low-yield nuclear bombs, will only push China to beef up its own deterrence capabilities.

That money could only be coming out of other US government departments’ budgets and/or increases in the already high public-debt-to-GDP ratio. Either way, the US economy and society could suffer.

Meanwhile, China’s companies may not be able to access the lucrative US market. Their business ambitions could be further curtailed.

With both China and the US pointing intercontinental ballistic missiles armed with multiple nuclear warheads at each other, not too many if any in the US, China and the world can feel that they are sleeping safely at night. These two countries possess enough nuclear weapons to blow up the world and kill its more than 7 billion people many times over.

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Ken Moak

Ken Moak taught economic theory, public policy and globalization at university level for 33 years. He co-authored a book titled China's Economic Rise and Its Global Impact in 2015. His second book, Developed Nations and the Economic Impact of Globalization, was published by Palgrave McMillan Springer.

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