The World Waits To See What Changes the Trump Ascendancy Will Bring
In recent years, the annual World Economic Forum meeting in Davos, a regular January fixture, has not enjoyed quite the same cachet as it did before the global financial crisis. Back then, this gathering of world political and business leaders was widely seen as setting the agenda for governments and multinational companies the world over. Following the crisis, it was patently clear that the participants in the Davos conferences were no closer than anyone else to having answers to the questions posed by ongoing trends in the global economy.
This year, however, President Xi Jinping gave a boost to the Davos organisers in deciding to address the meeting. His presence ensured that those business leaders who were seeking to increase their presence in China would see an opportunity to curry favour at the highest level. Nevertheless, of the European political elite, Chancellor Merkel and President Hollande both stayed away from this year’s jamboree on the ski-slopes.
It is not difficult to understand why, for some European leaders, Davos is now a no-no. To be seen by their voters junketing with business chiefs in a luxury resort would merely serve to heighten the populist rage that has been shaking the foundations of the political order in Europe. Admittedly, Mrs May addressed the meeting but she was in the special position of having a job to do to persuade corporate managers that Brexit would not render the UK a less friendly environment for business. President Xi’s attendance was perhaps the most significant of these political comings and goings, though. Beijing surely recognises that Mr Trump’s approach to international trade could well result in the reversal of the globalisation process that has so favoured China’s economic development. By presenting himself as the champion of free markets, he was probably hoping to win good will towards China among the multinational globalisers.
The world at large is still waiting to see what differences to US foreign policy Mr Trump’s move into the White House will make. It already seems clear that the incoming president will not countenance multilateral trade agreements. He evidently prefers bilateral deals in which mutual trading advantages can be more readily negotiated. Mr Tillerson, who is Mr Trump’s nominee to serve as secretary of state, had said during congressional hearings last week that he was not opposed to President Obama’s Pacific trade agreement (TPP). But his view was quickly slapped down by the Trump team. It was indicated that Mr Tillerson had been merely expressing a personal view on free trade theory, as if that were an excusable eccentricity, and that there was no chance of TPP surviving.
We must presume that what goes for TPP also applies to TTIP, the proposed US-EU trade agreement. It would be inaccurate, though, to characterize Mr Trump on these grounds as a protectionist. His willingness to do bilateral deals militates against that description. He is, rather, a ‘mercantilist’, a devotee of the theory of trade that held sway before the days of Adam Smith. He believes that in any trade deal there should be clear benefits for both sides and that we cannot rely on an ‘invisible hand’ to maximise prosperity for all in a free trading environment.
To be sure, Adam Smith recognised, as some of his latter-day disciples have failed to do, that his economic theories rested on certain moral principles, namely, those relating to the reciprocal obligations of commutative justice. These are principles that might or might not apply in practice. Mr Trump’s view seems to be that these moral pre-conditions are not being fulfilled in present global conditions and that reversion to a more basic approach to trade relations is the only rational response. For so long has the tide been running in favour of free trade, at least since the inception of GATT in 1947, that international policymakers and investors alike risk being wrong-footed by the shift in Washington’s attitude to trade.
The Trump ascendancy is likely to bring change well beyond the range of International trade issues. Dr Kissinger has apparently sensed what might be afoot. Since Mr Trump’s election, he has released a series of comments to the media that have been supportive of the new regime. While the focus has been on Mr Trump’s relations with Mr Putin and how US policy towards Russia might change, the shift in US orientation is likely to be more fundamental.
European leaders may also be perplexed by Mr Trump’s attitude to the EU
That is, presumably, why the reaction to the Trump election victory within the US policymaking establishment has been so shrilly negative. It marks the collapse of the ideological ‘neocon’ hegemony, based on belief in ‘the end of history’ and in regime-change across the world as a policy objective, and a return to the realpolitik associated with the Kissinger years.
In this regard, Mr Trump’s declaration that NATO is ‘obsolete’ is probably best understood as a signal to Mr Putin that US adventures of the recent past, in Georgia and Ukraine, will not be repeated. It also lets European allies know that the USA will be seeking an overhaul of the objectives and responsibilities of the strategic alliance. Hence, there is no necessary conflict with Mr Trump’s statements, on other occasions, that NATO was very important to him. Unfortunately, there appears to have been no serious consideration on the European side of what modernising NATO might require.
Following the fall of the Berlin Wall, there had been a sense among NATO member-states that the organisation had lost its original raison d’être. NATO could only exist as a response to a security threat to Europe and, given the geography, that threat could only realistically be seen as coming from Russia. Hence, the continuing existence of NATO depended on maintaining a defensive posture towards Russia, even when throughout the 1990s the latter nation looked incapable of mounting any serious challenge to Europe, on account of its internal disorganisation. NATO’s progressive eastward encroachment, as seen from Moscow’s point of view, persisted even after Mr Putin restored order within Russia and strengthened his country’s ability to retaliate. Consequently, NATO is, in truth, once again vital to Europe’s security and the organisation has to find a modus vivendi with Russia if hostilities are to be avoided.
It is a realpolitik understanding of this point, it seems, that will govern US policy in the near term. The incoming Administration may well look for pretexts to justify scaling down economic sanctions against Russia, to the dismay of those European governments that have been most insistent on enforcing the sanctions regime. Such a shift in the US position will not bode well for those political factions in the Eurasian sphere that had been hoping to seize and maintain power under cover of an appeal to liberal democracy.
Some European leaders may also be perplexed by Mr Trump’s attitude to the EU. For decades past, it has been a key element in US global strategy to encourage the development of the EU as one of the twin pillars of the Western alliance. Mr Trump, however, has said that the EU does not matter much to the USA and could, in any case, be on the point of disintegration. Whereas EU leaders have, up to now, been able to rely on the USA to back their drive to greater cohesion, as when President Obama warned that the UK would go to the back of the queue in negotiating a trade deal with the USA if it left the EU, they evidently cannot count on US support any longer.
In a climate that has suddenly turned inimical to their objectives, EU policymakers have, at least momentarily, been thrown off balance. One response to the changed situation might be for them to commit themselves more determinedly to completing European union but that would require them to find a community of interests, a task that has defeated them so far.
Mr Cazeneuve, the French prime minister, has responded to the shift in the US attitude to Europe by reviving the idea of an EU army, independent of the NATO structure. The proposal is likely to gain support in some EU capitals where suspicions are growing that European principles and values are diverging from those of the USA, undermining the very basis on which NATO was constructed. However, the immediate German response to this French proposal has been guarded. Mr Heusgen, a CDU adviser on foreign policy, declared that an EU army is an illusion. He preferred to explore with Mr Trump the basis for a new relationship between the USA and Europe.
The chief international concern of the incoming US Administration will be its relations with China
It is not difficult to see why Germany might be reluctant to entrust its security to the EU. Institutions within the EU have never demonstrated an ability to take rapid decisions, which is essential to military effectiveness. How an EU army would be constituted and commanded in the face of a serious aggressor might only be finally settled after the sad event of defeat. Mr Heusgen indicated that the German government was willing to meet Mr Trump’s demand that European members of NATO commit 2% of their GDP to defence. Latest data, for 2015, show Germany was spending 1.2% of its GDP on defence. The additional spending required to meet Mr Trump’s target would, therefore, be significant. Italy, at 1.1%, together with Spain and Belgium, both at 0.9%, would have even larger adjustments to make, starting from budgetary positions much less strong than Germany’s. Luxembourg was lowest of all, at only 0.4%. For France, already spending 1.8% of GDP on defence, the shortfall was much less.
The European members of NATO already meeting the 2% target were the UK, Poland, Estonia and Greece. For these countries, the budgetary consequences of making an adequate defence contribution would be less serious. Even so, the level of defence spending is not necessarily an accurate indicator of military effectiveness, as Mr Trump has recognised in his determination to cut US government payments to producers of defence goods. A thoroughgoing overhaul of NATO would call for consideration of the quality of the outlays as well as their quantity.
The chief international concern of the incoming US Administration will be its relations with China, given that these will affect the fortunes of the world’s two largest economies. Indeed, the outlook for the third most substantial economy, Japan, also depends to a large extent on how the USA and China settle whatever differences they have. Though, on trade, Mr Trump has engaged in some tough talking, China’s Commerce Ministry has expressed a belief that problems can be solved through dialogue. Both parties appear to be staking out their positions before beginning negotiations over a new trading relationship. This might be a straightforward process, were it not for the rising threats to security in the Pacific region.
One potential flashpoint is Korea, where Pyongyang’s continued missile testing combined with the impeachment proceedings against President Park, creates a sense of instability. Korea is not the only point where conflict could erupt, however. The otherwise conciliatory Mr Tillerson stated in the congressional hearings that the USA would take measures to prevent China accessing the artificial islands it has constructed in the South China Sea. This went a lot further than the Obama Administration has been prepared to go; the USA, up to now, has been committed merely to keeping the sea-lanes open. Inevitably, Mr Tillerson’s remark prompted a sharp reaction in Beijing. The risks of an escalation of tensions around the South China Sea may well be especially high in the early weeks of the Trump Administration, before Beijing and Washington have had time to work out any kind of understanding.
A more serious long-term problem faces the USA in the Pacific region. Several of the alliances on which the USA has relied appear to be breaking down. Financial co-operation between South Korea and Japan is stymied over differences arising from events in WWII. The maverick President Duterte of the Philippines, while professing friendship for the USA, is ordering military hardware from Russia. Perhaps of most concern, in view of sensitivities surrounding the ‘one China’ policy, is the fast deteriorating demographics of Taiwan and the implications for public pension liabilities, now estimated at nine times annual GDP. Cuts in pension entitlements, including those of Taiwan’s military, look unavoidable, with negative effects on morale.
About the author
Stephen’s career spanning five decades has made him one of the most respected and unique voices in the City of London. Disclaimer regularly publishes a selection of his elegant and thoughtful essays on the global economy, which he has been writing regularly since he founded Fifth Horseman Publications in the late 1980s. As well as an economist, Stephen serves as Treasurer of the Forum for European Philosophy and was elected to the Royal Institute of Philosophy.
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