The Art of Economic War

In 1999, two colonels in the People's Liberation Army of China, Qiao Liang and Wang Xiangsui, released a book on military strategy called Unrestricted Warfare (超限战, literally "warfare beyond bounds").
 
Its focus — how does a developing nation like China defeat a militarily and economically superior opponent (e.g. the United States)?
 
How do nations inflict serious damage to economies of their opponents, not by direct military action, but by 'other means'?

Excerpt from Chapter 5:
 
"The great masters of warfare techniques during the 21st century will be those who employ innovative methods to recombine various capabilities so as to attain tactical, campaign and strategic goals."

 Nearly twenty years later, these 'innovative methods' examined in Unrestricted Warfare are more relevant than ever.
 
With the new trade war looming, I thought it would be an opportune time to discuss how the developing nations of Asia may react to aggressive trade measures taken by the U.S., inspired by Unrestricted Warfare.
 
I put the key 'tactics' in the categories of 'Offense' and 'Defense'.
 
Defense: Red tape
 
In order to insulate their local economies, weaker countries can increase the ‘red tape’ for foreign companies that want to manufacture products overseas. This can hurt their local labor market, but can also shield local manufacturers from foreign competition.
 
Further, local licenses can be made more expensive, inspections more stringent, and companies given ‘preferential treatment’. Point in case — U.S. chip maker Qualcomm Inc. waited months for Chinese regulators to accept its proposed $44 billion acquisition of NXP Semiconductors.
 
Offense: Attack your opponent’s currency
 
The U.S. dollar is the top global reserve currency, dominating foreign exchange reserves via the sheer clout of the U.S. economy for the last 70 years.
 
In order for a currency to reach this status, it needs:

  • Backing of a strong national economy with relatively free capital flows
  • A banking system big enough to handle the demands of being a creditor
  • Export clout to keep capital flowing inwards

These requirements make reserve currency status an elite club dominated by the U.S. and to a slightly lesser extent the UK and EU. This, and the benefits it accords, doesn’t make developing nations very happy.

economic_war_1.png
 

China (the world's second largest economy), Brazil (sixth), Russia (ninth) and India (10th) — also known as the BRIC countries — are some of the biggest proponents for the creation of a neutral global reserve currency that can’t be dominated by one country alone.
 
One of the means they envision is using gold as the basis - or 'peg' - of value for whatever this theoretical currency may be.
 
And China has been on a gold buying-spree for the last 10 years, increasing its reserves to levels that have some analysts speculating they're trying to shift the balance of global reserve power from the dollar to gold.
 
I'm uncertain that is the ultimate goal, but it's clear what higher demand for gold means — China benefits and the U.S. dollar's reserve status diminishes.
 
How to Keep Score
 
'Keep score' by watching the relationship between gold and long-term U.S. bond yields. Every time gold goes up, China is winning... and every time the U.S. long-term bonds are up, the U.S. is winning.

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Peter Pham