For all the talk of the escalating confrontation between the US and China, Bank of America’s Mike Hartnett writes that the “trade war” of 2018 should be recognized for what it really is: the first stage of a new arms race between the US & China to reach national superiority in technology over the longer-term via Quantum Computing, Artificial  Intelligence, Hypersonic Warplanes, Electronic Vehicles, Robotics, and Cyber-Security.

This is hardly a secret, as the China strategy is laid out in its “Made in China 2025” blueprint: It aims to transform “China’s industrial base” into a “smart manufacturing” powerhouse via increase competitiveness and eroding of tech leadership of industrial trading  rivals, e.g. Germany, USA, South Korea; this is precisely what Peter Navarro has been raging against and hoping to intercept China’s ascent early on when it’s still feasible.

At the forefront of China ambitious growth plan, Beijing’s investments in “advanced internet and communication technologies, embedded systems and intelligent machines” aim to ensure that 40% of China’s mobile phone chips, 70% of industrial robots, 75% of basic core components and 80% of renewable energy equipment are “Made in China” by 2025.

Meanwhile, the China First strategy will be met head-on by an America First strategy.  Hence the “arms race” in tech spending which in both countries is intimately linked with defense spending. Note military spending by the US and China is forecast by the IMF to rise substantially in coming decades, but the stunner is that by 2050, China is set to overtake the US, spending $4tn on its military while the US is $1 trillion less, or $3tn.

This means that some time around 2038, roughly two decades from now, China will surpass the US in military spending, and become the world’s dominant superpower not only in population and economic growth – China is set to overtake the US economy by no later than 2032  – but in military strength and global influence as well.

And, as Thucydides Trap clearly lays out, that kind of unprecedented superpower transition – one in which the world’s reserve currency moves from state A to state B – always takes place in the context of a war.

Which explains BofA’s long-term strategic recommendation: “We believe investors should thus own global defense, tech & cybersecurity stocks, particularly companies seen as “national security champions” over the next 10-years.”

And here’s the reason why:

Because one might as well make some money before the next world war breaks out…

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