Trump declares (trade) war…for now
Donald Trump’s inauguration marked a change in the world order, the free market liberal order that continued from 1945 in the West, and spread across the world around 1989. Here’s the transcript of the entire speech. But here are my quick three takeaways. The speech means, firstly, Trump is planning a 1930s-type national nation building project. Secondly, and inevitably, there’s now all possibility of a devastating trade war. And thirdly, Islamists are now the prime target of the administration.
The speech highlighted the new American credo of manufacturing in US, with American workers, and American infrastructure getting priority. It is unclear how he can do it, however, as if he imposes legal procedures on manufacturing outside US, his own company which outsources to China, will also suffer. The world is not stuck in the 1930s, and one cannot change the direction of capital flow or alter the comparative advantages. The center of gravity of economy moved to the East, and one can only adapt so far.
Trump’s inauguration statement was straightforward and refreshingly neutral in tone. In a certain way, it was without all the ridiculous and optimistic and hopeful balderdash we seem to have expect from American inaugurations. This was like a whistle for a firing squad. The world is now without leadership, and every power for its own. If you’re a strong power, then be stronger, if you’re weak, choose a side. Simple as that.
Researchers who deal with grand strategy often tries to find historical patterns in foreign policy.
Nothing could be as fascinating as a pattern which has been repeated for centuries, especially post-Westphalia, Trump railed against Germany from trade to migration policies to NATO in a couple of interviews before his inauguration. In a curious turn of event, US, UK and Russia again finds themselves aligned against Econ/Military powers from continental Europe.
In those long ranging interview, Trump raised some pertinent, and at times contradictory points, as usual. But overall, there’s a pattern emerging. Trump was vehement in his trade ideas and pondered in putting tariffs on German carmakers. The shock sent the stocks down. Trump said, he might consider putting around 35 percent tariff on German cars, and wanted to do a deal with Germany so that American cars are sold in Europe as well. The mercantilist instinct of Trump came out, as he wanted to promote US companies, even if it means starting a trade war and upending the global economic order.
In a move that would be beneficial to Britain, Trump squarely puts himself in UK’s corner against EU with regards to Brexit. He called Merkel’s decision to open the “floodgates” of migrants a complete catastrophe, in what could be the biggest ever tilt against Merkel in Europe and might influence the the German elections. He is an old fashioned nationalist, and is serious about borders, evidently. He also said he is willing to do a free and fair and fast trade deal with UK, as soon as possible.
The most striking attacks came for NATO, which he called obsolete. He said, that NATO repeatedly failed to stop terrorism, bizarrely, as it is not NATO’s job to deal with terrorism, and he also said that NATO interventions in Middle east have been recipes for catastrophe. He also said, he is willing to do a deal with Russia, taking away sanctions as opposed to nuclear weapons reduction.
Now, what’s striking is none of these ideas are revolutionary or new to Trump. Mass migration to Europe is the prime cause for this anti-globalisation backlash that’s happening across the world. People are not as opposed to free trade as they are opposed to free movement of random strangers from faraway land en masse. That’s the prime concern of the nativist backlash against the free movement borderless orthodoxy of the last 25 years.
Secondly, Obama was the first one to do a deal with Russia, or attempt to at least, when it comes to Reset. Obama was the one who took away missile defense from Poland, and tried and failed to get away from Middle east. It was under Obama, that Bob Gates warned NATO that the current alliance is unsustainable, in its current form. If NATO doesn’t urgently reform, Gates said, then the future US leaders will find it hard to justify American commitment, to American taxpayers.
It is truth. As we see NATO expand to mindless missions like intervention in Libya, it is increasingly failing to provide security within Europe. Only five countries consistently spend over the minimal 2 percent required. It not only is a burden on US taxpayers, but it is difficult to justify that countries like Lithuania and Latvia wants US security and sees Russia as a threat when they are not even willing to pay 2 percent of their GDP. These are not new ideas, and has been persistent in security debates since the mid 1990s.
Unfortunately, it is a common mistake that alliances are build and solidified on ideological similarity, and they are meant to last. It is historically false. No alliances last forever, unless there’s a common shared interest and sharing of responsibility proportional to the threat quotient of each alliance partners. It is understandable that value based order is coming to an end. Every country, would be better off searching for new alliances based on interest as well as preparing for the inevitable return of great power rivalries.
Finally, in his speech, Trump mentioned that the Islamist days are numbered. It reflects a broad shift from bipartisan idea in US FP of aligning or differentiating between good and bad muslims. Trump, will align with anyone against Islamists. This is a hint to other great powers, and a potential space for alignment. Policymakers are hopefully taking note.
But China focuses on reforms
The fifth session of the Chinese People’s Political Consultative Conference (CPPCC) is gathering in Beijing for a ten day meeting to discuss on political and social issues in China, with President Xi Jinping, Premier Li Keqiang, and other senior leaders ideating on how Chinese policies are supposed to be setting the agenda. This of course comes at a precarious time, with global confusion over free trade, restart of global arms race, and tectonic shifts in alliance structures across the world. It also comes amidst renewed global economic glut, stagnated growth in most of the world, and uncertainty over European elections. But primarily, the focus of the world is on how China will increase its defense budget, and will continue on reforms and growth on economy. An added focus would be on Chinese plans on climate change.
Growth is one of the main agendas, and anti corruption drive is going to increase. Anti-graft measures have been a significant agenda under President Xi and will continue in the near foreseeable future. According to Pew Research half of the Chinese public consider corruption to be a major issue. The growth forecast was reduced to 6.5 percent. Premier Li Keqiang, mentioned that the growth forecast is targeted towards stability and it is important to ensure employment. Despite the reduction, however, it stays among the topmost growing economies in the world. The potential job growth is targeted around around 11 million.
The important part of the announcement came with a note on protectionism, which is a concern. Alongside potential trade controls, there is high probability of deterorting situation for free trade in both the continents, and destabilisation of geopolitical situation in Asia. “Both the de-globalization trend and protectionism are growing,” Li was quoted to say, adding that “there are many uncertainties about the direction of the major economies’ policies and their spillover effects, and the factors that could cause instability and uncertainty are visibly increasing.”
The protectionism threat is however, unlikely to be fulfilled, as there is economic consensus that there is essentially no other place for consumers to go and buy other than Chinese made products. I have repeatedly written about this, and other economists agree as well, that protectionism will bump against a wall, the moment prices start increasing and biting consumers in Europe and US, which are heavily market dependant economy. Recently, it was estimated, that even if there’s full protectionism against China, the estimated GDP damage would be 3%, which is heavy, but survivable for China, considering trade with other major economies continue. 70 percent of the global technological production chain is based in China, including laptops, mobiles and tablets. Also important to remember that a milestone was reached when China overtook the entire Eurozone as the biggest banking system. In one of the growing symbols of mainstreaming of economy, the value of China’s banking system was estimated by Financial Times as more than 3.1 times the size of the country’s annual economic output, compared with 2.8 times for Eurozone.
Another round aspect keeping with the global norms, was Chinese plan on climate change, as evident from the focus of smog free Chinese cities. Added focus on cutting coal use, upgrading coal-fired power plants, to controlling car and other vehicle emissions were put forward, as well as, the use of clean energy economy was encouraged. 24 hour online monitoring of industrial pollution was proposed as well.
Cutting coal will therefore possibly go down as the biggest reform undertaken in recent history. As China moves and shifts its economy from a high growth to a middle growth advanced middle income power, coal energy needs to be replaced with clean energy, which will add to the pedigree of China as a responsible stakeholder when it comes to key climate reforms and pledges.