This long read in the FT gives you an in-depth perspective of America and its allies are preparing for war with China. Whilst the Americans’ public rhetoric might be one of a country which is willing to go the extra mile to avoid armed conflict with China, the military prep detailed in this piece points to a different reality. The FT’s journalists begin their reporting from “Mimosa Plus Golf Course in Clark, an area about 92km north of the Philippines’ capital Manila” where the Americans have a large air base:

“They’re back,” says onlooker Denmark Blances, a tourism student. “I’ve never seen so many US uniforms.” The troops were participating in Balikatan, or “shoulder to shoulder”, a large military exercise the US conducts annually with its oldest ally in Asia. This year it involved more than 17,600 members of the forces, the most since the US lost permanent access to Clark in 1991.

The stepped-up drills are just one element of an expansive, multi-pronged strategy that the Biden administration has introduced across the Indo-Pacific to counter what it sees as the growing military threat from China in the region.”

The FT details the various pillars of Joe Biden’s unexpectedly muscular stance vis a vis China. The first pillar is to cut off China’s access to advanced semiconductor tech by blocking ASML (a company in which Marcellus’ Global Compounders Portfolio has invested) from exporting lithography machines to China.

The second pillar to sell to its allies in the Pacific far more weaponry than America has ever done: “…the US signed the Aukus deal with the UK and Australia to enable Canberra to obtain a fleet of nuclear-powered submarines. To cover the two decades before the new submarines are built, the US will deploy four nuclear-powered submarines in Australia from 2027, and later sell at least three Virginia-class submarines to Canberra.

The US also agreed to deploy more fighter jets, bombers and other assets to Australia on a rotational basis to respond to the growing Chinese presence in the western Pacific….

But the biggest milestone in the Indo-Pacific region has been the seismic shift in Japan’s defence policy in response to China, which it has called its “greatest strategic challenge”. In December 2022, Tokyo unveiled its landmark national security strategy, which pledged to significantly boost defence spending and acquire counterstrike weapons. In the short term, Tokyo plans to buy 400 American Tomahawk cruise missiles, giving it the ability to strike China.”

The third pillar of the American plan is to cement a series of military alliances across the Indo-Pacific so as to encircle China. This is perhaps where Joe Biden has been far shrewder than anybody gives him credit for: “In early 2021, he resurrected the Quad, a security grouping formed in 2007 consisting of the US, Japan, Australia and India that had fallen dormant after Canberra and New Delhi grew concerned about provoking Beijing…

Biden’s next step was to strengthen Washington’s relationship with Tokyo. His administration has increased co-operation over everything from military exercises and table-top war games to joint operational planning for any potential conflict.
More recently, in January, the two countries announced that the US Marine Corps would deploy mobile units with intelligence and surveillance capabilities and anti-ship weapons, known as the Marine Littoral Regiment, in Okinawa, the Japanese island where the US has long had a military presence. They also agreed to increase training and exercises on the Nansei chain of islands, a critical region for defending Taiwan.

“The most important development in the Indo-Pacific since the turn of the century, beyond China’s trajectory, was Japan’s new national security announcements and the alliance announcements in January,” says Phil Davidson, the former head of US Indo-Pacific command. “Those were really powerful.”

But the US is not only focused on its biggest allies. It has also been forced to step up co-operation with smaller Pacific Island nations after Beijing shocked Washington last year by signing a security pact with the Solomon Islands.

In response, the US last week signed a security pact with Papua New Guinea and extended so-called Compact of Free Association agreements with Palau and the Federated States of Micronesia — deals that will give the US military exclusive access to facilities for two decades.

“The Biden team has made remarkable progress in expanding access to facilities in east Asia over the past six months,” says Zack Cooper, a former Pentagon official. “Deals with Japan, the Philippines, Australia, Papua New Guinea and the Freely Associated States are all critical to dispersing US forces and assets.”…

….one of the “most novel” parts of Washington’s approach is the extent to which its allies are increasingly networking together. This is one element of a wider strategy to create “a more resilient, distributed, mobile and lethal presence in the Indo-Pacific region”, he says.

Japan, for instance, has signed Reciprocal Access Agreements with Australia and the UK, which will allow its military to exercise with British and Australian forces in their countries and vice versa. Tokyo and Manila are negotiating similar terms.”

As we head into Cold War II, America’s attempts to encircle China will create new trade flows around arms & defence equipment, around pharmaceuticals and the stuff that goes into it, around electronic equipment and the hundreds of ancillary industries which feed this colossal industry. It’s time to re-read those John Le Carre and Frederick Forsyth novels from the 1970s and 1980s to understand what the world will feel like in the decade ahead. Back then we could kid ourselves that we were far from Europe’s battlefronts. This time around, we are at the battlefront.

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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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