This comes from Andy Lees at UBS:
The Australian think tank, The Lowy Institute has warned that risks are growing that the incidents at sea involving China could lead to a war in Asia. The risk-taking behaviour of the Chinese military, its resource needs and greater assertiveness has raised the possibility of armed conflict that could draw in the United States and other powers. “The sea lanes of Indo Pacific Asia are becoming more crowded, contested and vulnerable to armed strife. Naval and air forces are being strengthened amid shifting balances of economic strategic weight. China’s frictions with the United States, Japan and India are likely to persist and intensify. As the number and tempo of incidents increases, so does the likelihood that an episode will escalate to armed confrontation, diplomatic crisis or possibly even conflict”. Yesterday the U.S. Senate unanimously approved a resolution that deplored China’s use of force against Vietnamese and Philippine ships in the South China Sea. The think tank report reminds us of the dispute between China and Japan last year following the Japanese arrest of a fisherman and the Chinese naval exercise near Japan’s southern Okinawa islands that provoked a diplomatic crisis and the reduction in rare earth exports. Whilst I hope they are wrong, I’m not sure what good hoping does in a resource constrained world.
As I wrote On Food Riots, Peak Oil and Military Force in March, “a world in which basic natural resources are neither cheap nor abundant and in which the debt levels in leading economies are very high is one prone to geopolitical instability”.
The real issue here is that emerging markets in Asia are now increasing their wealth and this has meant an increased need for natural resources – not just oil and gas but water, coal, steel and land for agricultural production.China is now the world’s largest energy consumer, having just passed the United States. As China grows its need for energy will come into conflict with the west in a competition for dwindling sources. However, these two examples demonstrate that the problem of natural resources will be even more conflict-ridden within Asia as countries compete over the benefits of shared resources.
These issues are certainly less problematic during downturns like 2008-2009 when demand for natural resources is subdued. However, during recovery the resource conflicts in Asia become more acute.
Thinking about this from a US domestic perspective, with China showing greater willingness to use a muscular approach, the US will want to see some sort of counterweight emerge in that region in concert, given the overstretched US military. Japan would be the natural fallback, but the Japanese have their own domestic concerns at present. Therefore, if the US cares about Asia’s balance of power, it will reluctantly become involved in these disputes, lessening the chance of a US military drawdown. This will increase strains on the US government budget. With military cuts off the table, the likelihood of budget cuts to entitlements therefore increases.
This post originally appeared at Credit Writedowns and is reproduced here with permission.