US secretary of state nominee Rex Tillerson's astounding remarks about the United States threatening to block China accessing contested islands in the South China Sea is an example of how domestic politics in Washington or Beijing could "trump" cooler heads prevailing and lead to a clash between the world's two biggest powers.
Tillerson is facing considerable resistance among voting senators to be Donald Trump's secretary of state due to his business ties as the former chief executive of ExxonMobil to Russian president Vladimir Putin.
When Tillerson shocked China – and undoubtedly Australia – last week with his provocative warning about the islands, was he trying to throw a bone to hawkish Republican senators by showing he would be tough on China?
Some private observers in Washington (and China's Global Times) believe it is plausible he was engaging in domestic politics and inadvertently overreached.
Republican Senators Marco Rubio, John McCain and Lindsey Graham have voiced serious concern about Tillerson's ties to Putin, who bestowed Moscow's Order of Friendship on Tillerson three years ago after ExxonMobil signed a multibillion-dollar deal with Russia's state-owned oil company, Rosneft.
They have reserved the right to vote against Tillerson's confirmation in the 100-seat Senate. Republicans hold 52 seats.
If all three declined to endorse Tillerson, Trump would require Democratic support to approve his pick for America's top diplomat.
As a retired oil businessman, Tillerson is not steeped in nuanced diplomatic talk.
Increased risk of war
Defence secretary pick James Mattis, a highly experience military general, did not repeat Tillerson's brazen remarks on denying access to the islands, though he did criticise China's "vast territorial claims with no basis in international law".
Yet on the other hand, as a 41-year ExxonMobil employee who has worked around the world, Tillerson is experienced in dealing with foreign governments. He would have meticulously prepared his lines for the Senate confirmation hearing.
Denying China access to the islands it has constructed and militarised would increase the risk of a US-China war. As Paul Keating warned, Australia could be collateral damage. The mining sector would be particularly hard hit.
China's media mouthpiece, the Global Times, on the weekend assailed Tillerson's remarks as "the most radical statement from the US side so far" – a considerable feat given Trump has questioned the One China policy on Taiwan and threatened 45 per cent tariffs.
Trump has appointed several other China critics to his administration, including trade and industry adviser Peter Navarro, author of the book, Death by China. Navarro blames China's trade and currency practices for the loss of thousands of American manufacturing jobs.
A growing risk is that domestic politics in the US and China lead to an escalation in tensions between Trump and President Xi Jinping. Both will have local audiences to please in 2017.
Xi, a strongman, will want to appear tough in the lead up to the 19th National Congress of the Communist Party of China in autumn, to ensure he is re-elected leader and his supporters are appointed to key posts.
If there are any wobbles in China's economy, Xi may ratchet up China's assertiveness in the South China Sea as a nationalist distraction.
Severe consequences
Trump, with his white working class voters in the rustbelt hoping for a return of manufacturing jobs, wants China to appreciate its currency and give US firms better market access to China.
With the US dollar likely to strengthen further in 2017 as the US Federal Reserve raises interest rates and Trump outlays his pro-growth plans, the yuan may naturally weaken further and anger Trump.
In that scenario, a trade war – or actual military conflict – over currency or the South China Sea becomes more likely.
For a small open economy like Australia exporting commodities around the South China Sea to Asia, the consequences would be severe.
China is Australia's biggest export market and Beijing effectively governs global commodity prices on the demand side.
One can only assume and hope BHP Billiton's leaders, who met the President-elect last week and are highly connected to Xi's team, reinforced this crucial point at Trump Tower in New York.
Coincidentally, the recently retired Tillerson's former employer, Exxon, is a joint venture partner in Chevron's $US54 billion Gorgon liquefied natural gas project off the northwest coast of Western Australia.
So Tillerson, who has visited the site, would be well aware Australian gas, iron ore and coal is shipped to Asia around the South China Sea, a $US5 trillion trade corridor.
Perhaps BHP, which has a joint venture with Exxon in the Bass Strait off southeastern Victoria, should pick up the phone to Tillerson too, even if he might have been just playing poker with US senators and China.
John Kehoe is US Correspondent for The Australian Financial Review in Washington.
