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Alpha-States

Written by Brian Hicks
Posted November 10, 2005

I received a number of e-mail responses to Monday's Waking Dragon ("Fast Times at Pacific Rim High"), including ones from Canadians happy with the way I addressed the trade situation between our two NHL-brother countries.

I greatly appreciate criticism, both favorable and otherwise, and I encourage all readers to respond when they feel the urge, to sam@wealthdaily.net.

Most of all, I am proud that the Waking Dragon is called "fair and reasonable." That is what analysis should be. It is our job here at Wealth Daily to provide you with information that shows both sides of every story, and your job to use that knowledge to make sound investments. However, some details are bound to fall by the wayside in the course of distilling information, no matter how earnest the effort.

Here, we revisit the Canada-USA-China trade triangle with another metaphor for international economics and statecraft...

Dogs.

Marking Territory

My first family dog was Buck, a big mutt with a face like a German Shepherd and a temperament like a Labrador. I remember times when Buck did his business inside, and he was punished. But when my parents and I took Buck for walks around our quiet Kansas City suburb, we encouraged him to unload on any bush or tree he felt needed watering.

Buck obliged.

President Hu Jintao of China has visited 29 countries and 2 major international assemblies since taking office in March of 2003.

 


 

 

Now, out of both fear and respect I will not compare the Chinese leader to my childhood pet, but both have made the same statement through their actions: "I was here, and now you know it."

A Barking Dog Doesn't Always Want a Fight

The marking of territory is not necessarily an overture to combat. Buck was a tame dog, and if another dog sniffed around an area he marked, he wouldn't fight right away. Rather, dogs sniff each other out to get a sense of each other's intentions, and usually avoid full-blown fights. Just so, not every foreign visit by a statesman means all the others should put their dukes up. Alliances are built with the goal of avoiding war, and in modern times those partnerships are founded on economic bases. That is what China is doing, with the knowledge that the more heavily linked China is to Country X, the less likely Country X is to act hastily against China.

The most obvious example of this effect is the United States' continuing One-China policy. Reiterated the other day by President Bush, the One-China policy is the mechanism by which China tests the international political waters regarding its relationship to Taiwan.

Just last week, Senegal officially closed its embassy in Taipei, in favor of strengthening relations with Beijing. Beijing refuses to establish full diplomatic relations with any country that has an embassy in Taiwan, as foreign acknowledgement of Taiwan as a sovereign entity is contrary to the official Chinese assertion that Taiwan is part of the People's Republic of China.

But even though we do not recognize Taiwan's independence officially, we facilitate their maintenance of security infrastructure in the name of "balance of power" across the Taiwan Straits.

Despite its assertive One-China policy, China has not started a war with Taiwan. It is my opinion that precisely because it has securely asserted itself, it will not wage all-out war over the former Formosa.

Just because the dog is big and loud doesn't mean it wants to rumble. The situation might actually be opposite.

Labrador Homeland

As I alluded to above, the Labrador is a large, imposing dog. But Labradors are also known for their mild disposition. Named after the area of Newfoundland, Canada where they were originally bred, Labradors are like most Canadians: they're well-suited to cold, good with children, and they drink lots of Molson. Well, maybe not the last part.

Labradors will bark if they need to, and bite only as a last resort.

Canada is not going to stop selling oil to the United States. It's barking loud because we're playing rough and Canada wants to regain some control over the situation.

Indeed, Alberta's Energy Minister told Canada's Embassy magazine that he objects to the Ottawa government's use of Alberta oil as a pawn in the softwood lumber dispute. According to Minister Greg Melchin, "the federal government receives 43 percent of revenue from the oil sands; Alberta receives 36 percent."

That revenue includes one million barrels per day of exports to the U.S., and Canada won't be giving that trade up anytime soon.

For Canadian producers for whom costs far outweigh the benefits of shipping oil to China, California is a more local and immediate option.

BUT, the seaborne route from Canada to China is also short, in Chinese terms.

The Middle East is farther away and, as we well know, security concerns are factored into shipping costs from the turbulent Gulf petrocracies. So it is quite possible that Chinese buyers will make it worthwhile for producers who would otherwise ship to California to turn to the Pacific first.

False Teeth?

It remains to be seen whether the United States will assume a more conciliatory attitude towards Canada in the lumber dispute. It is very possible that Prime Minister Paul Martin's strong stance on the issue is just that-a stance, with no forthcoming action.

However, the U.S. government should consider this a lesson in the game we invented. Throughout the entire Cold War, then in the 90s with NAFTA, and countless other trade alliances we have established over the years, we have insisted that free markets would be the rails on which the train to the future would ride. "Come on board," we said.

But then two of our partners get a little chutzpah and start working around us, and we wonder why. We are now reaping the seed of international trade that we ourselves have sown.

We should thank our lucky stars that Canada is unleashing a black-gold bounty just up the road. It behooves neither Canada nor us for the relationship to break off entirely, but preferential treatment may become a thing of the past if grievances are not addressed properly.

- Sam Hopkins


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