by Thomas Wash | PDF

Following President Donald Trump’s withdrawal from the Transpacific Partnership (TPP) in January 2017, it was believed that the agreement would die a quiet death. However, with the leadership of Japan and Australia, the agreement found new life and the remaining members decided to move forward with the deal. Although the new agreement removed 22 clauses from the original pact, it remains largely intact. Now rebranded as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the deal has been in place since December 2018. Following its signing, it has been able to attract new applicants from the United Kingdom, Taiwan, and China. There is also growing interest from South Korea and Thailand. 

Serving as the current chair of the pact, Japan has openly advocated for the inclusion of Taiwan. If admitted, this would be the first time Taiwan has joined a multilateral trade agreement independent of China. Such a move would be a direct rebuke of the One China Principle, which states that Taiwan is an inalienable part of the People’s Republic of China that will eventually be reunified. In response, China has come out against Taiwan’s inclusion in CPTPP. In this report, we argue that Taiwan may have influenced China’s decision to formally apply to CPTPP, and we discuss what Chinese membership in the group could mean for the global economy. We begin with a discussion on the history of Taiwan and the One China Policy, which holds that there is only one Chinese government, and its capital is Beijing.  Next, we will discuss the motivations for CPTPP and why it is important. Finally, we will discuss Taiwan’s and China’s chances of being admitted into the group. As usual, we will conclude with market ramifications.

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by Bill O’Grady | PDF

The Thucydides Trap is an idea that comes from the ancient Greek historian of the same name who described a situation where the incumbent superpower of the time, Sparta, was faced with an insurgent power, Athens.  The two powers ended up in a ruinous war.  Thucydides postulated that when an established superpower is being threatened by a rising one, the likelihood of war increases.

Graham Allison did a study of the trap[1] in 2017, examining earlier examples but focusing on the situation between China and the United States, which appears to have at least some of the same characteristics that Thucydides outlined in his History of the Peloponnesian War that led to the conflict between Athens and Sparta.  Allison, as noted above, was primarily concerned about the potential for war between China and the U.S., but he also analyzed 16 other historical rivalries and concluded that 12 resulted in war while four did not.  Obviously, this ratio is not comforting.  Allison did conduct an examination of the trap conditions that didn’t result in war and tried to draw conclusions, but the concept of the Thucydides Trap has become a model for examining the U.S./China situation.

However, Hal Brands and Michael Beckley are proposing something of a twist to the trap.  They don’t dispute that the odds of conflict rise when there are rising powers that threaten the existing power arrangement.  But their position is that it isn’t exactly true that a rising nation is the problem.  Instead, what leads to war is if the rising power perceives that its rise is slowing.  They call it the “peaking power trap.” They argue that the real problem arises when an insurgent power begins to fear that its acceleration is slowing and thus the perception that a window of opportunity is closing is what produces war.

In this report, we will examine the idea that China may be reaching such a deceleration and therefore perceives that time is no longer on its side.  If that is the case, there may be no better time than the present to move quickly to secure its geopolitical goals while it has the power to achieve them.  The analysis starts with a review of the concept of the “high growth/low cost” (HG/LC) producer and the risks that emerge when that phase comes to a close.  We will also include a discussion of population issues.  From there, we will examine China’s geopolitical constraints and its capacity to overcome them.  Finally, in the section on market ramifications, we will look at how these two issues combine to potentially raise the problem that Brands and Beckley have introduced.

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[1] Allison, G. (2017). Destined for War: Can America and China Escape Thucydides’s Trap? New York, NY: Houghton Mifflin Harcourt Publishing Company.

by Patrick Fearon-Hernandez, CFA | PDF

Looking forward to the coming years and decades, today’s long-term investors face a stark question: will they be investing in a China-dominated world molded by authoritarian leaders in Beijing?  Or, will they be investing in a more familiar, Western-dominated environment reflecting the historic leadership of the U.S. and incorporating the values of freedom, private property, and justice, as handed down from British common law?  Here at Confluence, we have long discussed the global public goods of security and a reserve currency that the U.S. has provided in its traditional role as global hegemon, and we’ve shown that U.S. citizens have become tired of providing those goods.  We’ve argued that the most likely future is one in which the U.S. relinquishes its global dominance, producing an unstable and dangerous transition period from which some new hegemon—perhaps China—will eventually arise.

But the end of U.S. hegemony and its replacement by China are not yet set in stone.  High-level “China hawks” in the Trump administration have launched an audacious effort to convince the American people and America’s foreign allies that they must push back against China and its effort to assume the throne of global leadership.  At the dawn of the Cold War, the architects of U.S. “containment policy” faced a similar challenge as they built the case for thwarting Soviet expansionism.  The question now is whether the new tough-on-China argument will resonate to the same extent.

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