11/27/13 – Asia Heats Up Again

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Nov 27, 2013 5:52:23 AM

and tagged Politics and the Economy

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One more reason to be grateful we live in the U.S. is the peaceful nature of our geopolitical neighborhood. With Canada and Mexico as our major neighbors, we really don’t have to worry about facing a local war—something Americans don’t appreciate enough. The fact that the Cuban missile crisis continues to resonate suggests what an exception it was. Other countries aren’t nearly so fortunate.

In several posts last year, I wrote about the increasingly serious face-off between China and Japan—with Taiwan and Korea also in the mix—over territorial claims in the local seas. Although the problem hasn’t gone away, it’s been subsumed in other, more urgent news since then. Recent events suggest it’s time to take another look.

Japan’s economic resurgence has led it to take a more active approach to its foreign policy, including its military and security environment. Along with that, the situation in the Senkaku/Diaoyu islands, to give the Japanese and Chinese names, has been slowly ratcheting up, as China has continued to apply pressure. This has been a low-level problem for several years, but it’s stayed out of the headlines with no serious developments for the past year or so.

The most recent development, and the one that prompts this post, is that China has unilaterally declared ownership of a large chunk of airspace around and over those islands, demanding notification if anyone flies there. The problem here is that the area overlaps an existing Japanese zone, as well as what has been considered international airspace. This is a dramatic raising of the stakes in the conflict—an explicit challenge to Japan and an implicit challenge to the U.S., which regularly operates military aircraft throughout the entire region. For China to say “hands off” to the U.S. in what, up until now, has been international airspace is a serious move—even though the challenge was, in theory, directed at Japan.

The U.S., of course, is having none of it. Washington immediately put a pair of B-52s through the airspace in question, saying that the flights were part of a “long planned” military exercise, and not an immediate response to the Chinese actions. The story made the front pages of both today’s Wall Street Journal and New York Times.

China now finds itself in a difficult position. After raising the stakes, followed by Washington’s prompt re-raise, it must decide whether to use military force to attempt to impose the zone of control, or effectively back off. Japan has a similar but less fraught decision to make: whether to follow the U.S. lead and immediately defy the zone, or temporize and, in that way, at least partially accept it. Either way, we will see more uncertainty in Asia. Taiwan, South Korea, and the Philippines also have some hard decisions to make.

The betting still has to be that the situation will once again die down to a low-level confrontation, with no real macro effects. The fact that it’s boiled up so quickly, though, to a level where the U.S. is sending strategic bombers to make a point, reminds us that Asia remains subject to significant noneconomic risks.

It also reminds us, as I started with today, how lucky we are in the U.S., in so many ways. Be aware of the risks, but be grateful for what we have.

Safe travels and a very happy Thanksgiving to all!

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