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White House seeks delay on Huawei ban for contractors
https://www.reuters.com/article/us-usa-trade-huawei/trump-acting-budget-chief-asks-for-delay-on-huawei-restrictions-idUSKCN1TA0T1
WASHINGTON (Reuters) - The White House Office of Management and Budget has asked the U.S. Congress for more time to phase in a ban on federal contracts with companies that do business with Chinese telecom giant Huawei, part of a defense law passed last year.
FILE PHOTO: Workers sit a the Huawei stand at the Mobile Expo in Bangkok, Thailand May 31, 2019. REUTERS/Jorge Silva/File photo
The ban is one part of a multifaceted U.S. push against Huawei Technologies Co Ltd, the world’s largest telecoms network gear maker, which Washington has accused of espionage and stealing intellectual property.
Huawei has repeatedly denied it is controlled by the Chinese government, military or intelligence services. It has filed a lawsuit against the U.S. government over the restrictions in the defense policy bill.
The defense law, called the National Defense Authorization Act (NDAA), placed a broad ban on the use of federal money to purchase products from Huawei, citing national security concerns.
It included a ban on direct federal purchases of Huawei equipment, which will take effect this year.
But the White House said the government needed two additional years to work out rules for another part of the law, which requires third-party suppliers and contractors to restrict their purchases and use of Huawei equipment.
“This is about ensuring that companies who do business with the U.S. government or receive federal grants and loans have time to extricate themselves from doing business with Huawei and other Chinese tech companies listed in the NDAA,” Jacob Wood, a spokesman for the White House OMB, said in a statement.
Acting OMB Director Russ Vought asked congressional leaders and Vice President Mike Pence for the delay in a letter earlier this week. The letter was first reported by the Wall Street Journal.
Vought said the delay would “ensure the effective implementation of the prohibition without compromising desired security objectives,” and said there would be a “dramatic reduction” in the number of contractors able to sell to the U.S. government without a delay.
Vought asked that restrictions against purchasing Huawei equipment imposed on government contractors begin in four years, rather than two years. The delay would allow “additional time to think through the associated potential impacts and possible solutions,” he said.
The requested delay would not stop or affect the timing of a separate Commerce Department rule that added Huawei to its “Entity List,” a blacklist that bans the company from buying parts and equipment from American firms without U.S. government approval.
President Donald Trump also signed an executive order last month that bars U.S. companies from using telecommunications equipment made by firms deemed to post a national security risk.
US-China trade war: the financial markets are focused on the wrong risk
US bond market investors have been acting in a terrifying fashion, assuming a deflationary shock is ahead.
Such logic ignores trends from the last 30 years of globalisation
Tom Holland Published: 7:00am, 10 Jun, 2019
The US political strategist James Carville once said that after his death, he would like to be reincarnated as the bond market. “You can intimidate everybody.”
Well, the US bond market is a lot bigger and scarier today than in Carville’s time. The US Treasury bond market alone is worth some US$22 trillion. Then there is another US$7 trillion outstanding in US corporate bonds And that’s without even considering all the US mortgage-backed securities out there.
And lately, as the US-China trade war escalated, threatening to reverse the globalisation trend of the last three decades, the bond market has been behaving in a fashion that is not just intimidating, but also downright terrifying.
Happily, however, there are some good reasons to believe the market may have got things wrong, and that the outlook may not be quite so frightening after all, or that at least it may be a different sort of scary.
While economists and politicians will be arguing about the impact of the trade war on the world’s economy for months, and probably years, to come, the bond market has already made up its mind.
The US bond market is unequivocally pricing in a deflationary bust: the combination of falling prices and contracting output that makes for the toughest economic environment of all in which to prosper. And that goes for Asian economies as well as the United States.
At first, the prospect of deflation might not sound so terrible. Who doesn’t like lower prices?
But there are two different sorts of deflation. First, there’s the good sort, when improvements in efficiency, enabled by globalisation or new technologies such as the internet, allow goods and services to be produced more competitively.
Developers slammed after China tightens access to bond market funding
Then there’s the bad sort. This often sets in after an economic or financial shock, when demand dries up as consumers and companies stop spending and instead hoard cash in an attempt to pay down debt and strengthen their balance sheets.
The trouble is that as prices begin to fall, companies have to sell ever more stuff to service their debts. But selling more stuff is tough in a demand drought, especially as potential buyers tend to postpone their purchases, expecting prices to be lower next week or next month.
As a result, the size of debt piles increases relative to output, companies go bust and workers lose their jobs, which further depresses demand in a self-reinforcing downward spiral.
This is the direction the bond market is now signposting. Investors’ inflation expectations for the next five years, as implied by the prices of US Treasury inflation-protected securities, have slumped from a rate of 1.9 per cent a year in the fourth quarter of last year to just 1.6 per cent last week.
At the same time, the yield on 10-year US Treasury bonds has fallen from 3.2 per cent to 2.1 per cent. At that rate, the return on 10-year Treasuries is 0.2 percentage point below the US three-month interest rate: a sure-fire signal in the past that a US recession is just around the corner.
But is the bond market right to be pricing in such a deflationary bust? Usually busts happen because central banks aggressively jack up interest rates to choke off a debt-driven boom, or because of an external shock, like an energy price spike.
This time around, the US Federal Reserve’s tightening has been modest, and has taken place off a very low base. As a result, borrowing costs remain comfortably below the returns US companies earn on their capital, which makes a central bank-triggered bust look unlikely.
In that case, the feared cause must lie elsewhere. It can’t be energy prices, which are at just half the level of a few years ago. So, clearly, bond market investors are worried that the reversal of globalisation threatened by the escalating US-China trade and technology conflict will deliver a deflationary shock severe enough to lead them to price in a recession.
On examination, these fears appear illogical. Tariffs themselves won’t be enough to push the US into recession. Even if the administration were to slap 25 per cent tariffs on all imports from China, the direct frictional cost would amount only to around 0.5 per cent of US GDP.
Nor is it clear that the dispute will be deflationary, as the bond market is assuming. Sure, heightened uncertainty would cause companies to delay their investment decisions, which at the margin would depress demand.
On the other hand, trade tariffs are an additional cost, which is inflationary.
If currency markets were freely floating, much of this cost would be absorbed by an offsetting depreciation of the Chinese yuan
.
But so far, the Chinese authorities have effectively blocked the yuan from weakening through the ¥7.00 to the US dollar threshold. As a result, at least some of the cost of the US tariffs is being passed on to US consumers in the form of higher sticker prices, as US retail giant Walmart has admitted. That’s clearly inflationary, not deflationary.
A trader works on the floor of the New York Stock Exchange. The US bond market has been pricing on the expectation that the US-China trade war may cause a deflationary bust.
And if multinational companies realign their supply chains to avoid producing in China, that too will involve additional costs, and will generate additional investment demand, both of which will be inflationary.
And if they relocate production to America, as President Donald Trump is demanding, the new demand for workers at a time when unemployment is close to 50-year lows will be highly inflationary.
In short, common sense dictates that if the globalisation trend of the last 30 years was deflationary, as we know it was, it stands to reason that the reversal of that trend will now be inflationary.
Of course, in the longer term this may throw up a whole different set of challenges. But it does suggest that, in the near term, the big bad bond market is focusing on the wrong risk, and that when it wakes up to the true picture, there could be a very sharp reversal in financial markets indeed. ¦
Trump’s method to the madness on trade
Lost in the tweets and partisan fights is a belief that a bet on freer trade has proved to be a loser.
https://www.politico.com/story/2019/06/06/donald-trump-trade-policy-global-translations-1355868
Donald Trump is not winging it.
Or at least he’s not totally winging it.
However improvisational his daily machinations on trade — presenting publicly as motivated by a random mix of mood and twitches of the news cycle, including the latest threat of tariffs against Mexico — Trump and his team are acting on a well-developed theory of the case, one that has been decades in the making.
In Trump’s case, that strategy is intuitive. He’s been saying since the 1980s — and by all evidence genuinely believes — that the United States is letting itself be played for the fool by foreign adversaries, on trade specifically and global competition generally. Strong nations robustly protect domestic industries and keep foreign competitors at heel. Back in the ’80s his focus was more typically Japan; in recent years, but long before 2016, he’s been focused on China.
In the case of his advisers, the theory of the case is more intellectual. They believe that the big bet free trade advocates made in the 1990s — that welcoming China into the WTO would encourage it to integrate into a rules-based global economy — has proved to be a loser. China, by these lights, is happy to take advantage of the U.S. and other players’ commitment to free trade and rules but will continue to steal and subsidize to advance its own interests.
This method to the apparent madness has emerged in interviews for the new Global Translations podcast — which launched Thursday — with people who have worked for Presidents Richard Nixon, George H.W. Bush, Bill Clinton, George W. Bush, Barack Obama, and Donald Trump. And it helps explain why the Trump administration has made such a break from the strategy of previous administrations.
“I and many others had deceived ourselves that China wanted to be just like us,” said Michael Pillsbury, an influential adviser to the Trump administration on China and author of the book, “The Hundred Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower.”
“I finally woke up,” he said. “But I would not say everybody's awakened even at this point.”
The Trump doctrine marks a repudiation of decades of U.S. trade orthodoxy — that reached its high point in the 1990s, after the Soviet Union collapsed, and capitalism and liberalism appeared on the march. This “End of History” euphoria culminated in Clinton pushing past his party’s populist instincts on trade and embracing the elite view that the world was becoming more integrated, more rules-based, and more prosperous, and that this meant good things both for American and the rest of humanity.
In 1993, he signed into law NAFTA, which had been negotiated by the Bush administration, and enabled China’s accession into the WTO, stating in a 2000 speech: “By joining the WTO, China is not simply agreeing to import more of our products. It is agreeing to import one of democracy's most cherished values, economic freedom. The more China liberalizes its economy, the more fully it will liberate the potential of its people -- their initiative, their imagination, their remarkable spirit of enterprise. And when individuals have the power, not just to dream, but to realize their dreams, they will demand a greater say.”
That democratic dream now appears dead — and with it American patience to wait for China to reform itself.
The China hawks in the White House believe now is the best — and perhaps last — moment for the U.S. to take dramatic economic action against China, even at the cost of roiling markets and upending a strong U.S. economy.
And they have tethered the rest of U.S. trade policy — demands of Canada, Mexico, Europe and Japan — to an aggressive agenda of increasingly squeezing China out of global supply chains while pressing for structural change in Beijing. When U.S. business leaders have warned, cajoled, and pleaded about the economic risks of a trade war, they have been rebuffed with the argument that it is precisely the strong economy that has wedged open a historic window of opportunity to make the move.
Global Translations
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U.S. Trade Representative Robert Lighthizer, who has described China as an “existential problem,” wants to use U.S. economic leverage to demand serious structural changes in China — while the U.S. still has that leverage.
The urgency behind the strategy concerns technology: China’s attempts to supercharge the growth of nascent tech industries by subsidizing them and forcing the handover of U.S. intellectual property. The goal is to leapfrog from its past status as a developing nation exporting cheap plastic wares to a leader in strategic emerging technologies that will define the next technological age — such as 5G and the next-generation internet, artificial intelligence and renewable energy.
China has copied U.S. technology, sometimes by requiring joint ventures and the sharing of intellectual property and other times by outright theft. The end of these forced technological transfers is Lighthizer’s central aim — even if they mean that soybean farmers will pay the price. If America fails to do so and becomes “number two in technology,” he told a congressional hearing in February, “then the world is going to look very different for our children.”
Pillsbury, the Trump adviser, said the administration fears not only losing a commercial rivalry — but enabling an Orwellian future in which an authoritarian Beijing controls global surveillance, directs online speech and embeds government control into the very plumbing of the internet.
“Their idea is the whole world will have this combination of [surveillance] cameras, your shopping patterns, what magazines you subscribe to, who your friends are, where you go based on your cell phone being geolocated,” with the aim of creating a social credit score, he said. “To what degree do you support the Communist Party of China? Have you ever criticized anything? And then when you apply to get a loan or to go to college or to do anything, your social credit score will tell how the government’s going to treat you.”
“Everybody in the world will be under this kind of system,” Pillsbury said of the authoritarian vision of the future.
Increasingly, the U.S. military is concerned, too. The 2018 national security strategy, signed by former Secretary of Defense James N. Mattis, asserts that China seeks “regional hegemony in the near-term and displacement of the United States to achieve global preeminence in the future.”
poster="http://v.politico.com/images/1155968404/201906/2322/1155968404_6044582814001_6044586070001-vs.jpg?pubId=1155968404"
Mitch McConnell: ‘Not much’ GOP support for Trump’s Mexico tariffs
true
This big picture explains in part why the Trump administration has been willing to wrest open trade relations with allies in order to remake the terms of global trade — it’s not just about a better bilateral deal for the U.S., but about a particular approach to China. Take the steel tariffs against Canada and Mexico that were aimed at “closing the back door” to subsidized steel from China, among other places; and the insertion of language in the new North American agreement that would expel a country from the agreement if it entered into a free trade agreement with a “non-market economy,” or new requirements aimed at reducing the share of Chinese parts in North America car production. Likewise, the administration will have China in mind as it opens talks with Japan and Europe.
In Trumpland, the long-term goals apparently outweigh the short-term chaos and pain.
Dan Ujczo, an Ohio-based trade lawyer with Dickinson Wright, recalled a meeting with senior Trump administration officials and groups representing industries affected by tariffs, who argued that the economic effects of Trump’s economic policies would be undone by a trade war. “It was really one of the most brilliant presentations I’ve ever seen — PowerPoint graphics, the whole thing — that said, ‘If you do this, administration, if you do what you're talking about doing on trade,” he recalled, “you’re going to take back all the economic gains you’ve made from tax reform.”
“And everybody thought it was a mic drop moment, right? Aha! And everybody in the administration kind of looked at each other and said, ‘We know. You think we don't know that?’”
Over two decades, 9/11, the wars in the Middle East and the financial crisis and recovery, made action too difficult, according to Ujczo — and the possibility of a next recession could close the window. “If we don’t do this now, when will we ever do this? It’s really, I think, in the eyes of this administration, a now-or-never moment — and they may be right.”
While Democrats don’t agree with all of Trump’s tactics, long-standing concerns about China have been bipartisan. House Speaker Nancy Pelosi was an early opponent of China’s entry into the WTO. Senate minority leader Chuck Schumer has long decried Chinese currency manipulation. Schumer recently tweeted, “Hang tough on China, President @realDonaldTrump. Don’t back down. Strength is the only way to win with China.”
The Obama administration shared concerns about Chinese subsidies and technological theft but attempted to address them by negotiating the Trans-Pacific Partnership — a new agreement with 11 other nations. The idea was to encircle China by creating a free-trade zone with its neighbors and set high standards that China would eventually have to accept in order to join. In trying to sell the deal to a skeptical public in 2015, Obama said China had been “putting out feelers” about eventually joining the pact.
Sen. Thom Tillis
congress
GOP fractures over Trump’s tariffs
By BURGESS EVERETT, MELANIE ZANONA and MARIANNE LEVINE
But the agreement lacked public and Congressional support amid a backlash against globalization. Trump withdrew the U.S. from the agreement after he was elected and has opted instead for an increasingly bilateral approach to confronting China — using threats, tariffs and negotiations with other nations as a way to influence China. In many ways, it was the administration’s firmest rebuke of the international coalition-building approach of Republican and Democratic administrations that preceded it.
While critics of the TPP said it wasn’t enough to force structural changes in China, supporters say Trump gave up a powerful tool.
“I think [it] is perhaps the most significant strategic blunder in recent American history,” said Michael Froman, the U.S. Trade Representative under Obama. “We’ve lost that position for the United States at least for now, and we have created a void, a vacuum that China is quite effectively filling at the moment.”
Trump’s agenda doesn’t necessarily mean an end to trade. But it does mean surrendering faith in gauzy principles and far-reaching trade protocols. Instead, go toe-to-toe with trade competitors at times and in sectors of one’s own choosing — and know that adversaries won’t respect you unless you prove on occasion that you are willing to inflict pain on others (and accept it yourself) to win a conflict.
And it leaves open the possibility that the confrontation with China could embolden hawks on both sides.
“Over the next year or two we're going to find out — can we have a trade deal? Can we have some kind of reconciliation with China?” said Pillsbury. “Or… are we moving toward a new Cold War relationship?”
War With the World: Trump Puts Tariffs on India, Considers Australia
https://moneymaven.io/mishtalk/economics/war-with-the-world-trump-puts-tariffs-on-india-considers-australia-7Wn7iqEGf063DCqqTQG5YQ/
Add India to the list of countries the US is n a trade war with. For now, Australia barely avoided Trump's wrath.
“I have determined that India has not assured the United States that India will provide equitable and reasonable access to its markets,” Mr. Trump said on Friday.
Tariffs start June 5 as Trump Pressures India Over Open Markets.
Mr. Trump on Friday said India would be removed from the U.S.’s privileged-trading program called the Generalized System of Preferences on Wednesday. Under the decadeslong program meant for some developing economies, the U.S. had allowed India to avoid tariffs on certain exports to the U.S. in the interest of promoting tighter trade ties and development.
India, the U.S.’s ninth-largest trading partner, is a top beneficiary of the GSP program. Mr. Trump’s move will add tariffs of as much as 7% on Indian exports of goods like chemicals, auto parts and tableware to the U.S., which in 2018 accounted for more than 11%, or $6.3 billion, of India’s total exports of goods valued at $54.4 billion, according to the Congressional Research Service, a research agency for the U.S. Congress.
Spotlight Australia
Please consider Trump Administration Considered Tariffs on Australia.
Some of President Trump’s top trade advisers had urged the tariffs as a response to a surge of Australian aluminum flowing onto the American market over the past year. But officials at the Defense and State Departments told Mr. Trump the move would alienate a top ally and could come at significant cost to the United States.
The administration ultimately agreed not to take any action, at least temporarily.
The measure would open yet another front in a global trade war that has pitted the United States against allies like Canada, Mexico, Europe and Japan, and deepened divisions with countries like China. It would also be the end of a reprieve for the only country to be fully exempted from the start from steel and aluminum tariffs that Mr. Trump imposed last year.
The tariffs on Australia would have hit imports of aluminum, although measures that would have applied to other products had been discussed as well. Shipments of Australian aluminum to the United States have surged since last year, when Australia became one of the few countries not to face metal tariffs.
Unfair Competition
Trump wants to protect US steel and aluminum manufacturers from "unfair competition".
How come the rest of the world, including Canada and Australia can produce steel and aluminum cheaper than the US?
Even if there was a nefarious answer to that question (there isn't), the fact remains that far more US industries benefit from cheaper metals than are harmed by them.
Logically, no matter the reason, the US should welcome cheap steel and aluminum.
Chain Reaction
Trump put tariffs on steel and aluminum from Mexico, Canada, and China, so importers turned to Australia.
Aluminum imports from Australia rose by 45 percent from 2017 to 2018. They are up even more, by 350 percent, for the first three months of 2019, compared with the same period in 2018.
The same thing is happening across the board.
Tariffs on China drove imports from Vietnam, India, and other places.
For now, Australia is still a small supplier. Yet Trump is hopping mad.
Understanding Trade
I saw an interesting Tweet yesterday in which someone claimed "trade is a zero sum game".
That is seriously wrong. Unfortunately, that is how Trump views things. Trump believes there is a winner and loser to every deal. The fact is both sides have to believe they gain, or there is no deal.
Here's a simple example I gave someone other night in a discussion at karaoke.
Imagine an island with 8 people. Four are net makers and four are fishermen. The net makers make and mend nets, and perhaps gather coconuts in their spare time.
The net makers trade nets and coconuts for fish.
In the absence of trading nets for fish, the net makers would have to learn how to fish. The fisherman would have to learn now to make nets and plant and gather coconuts.
It's much easier to become skilled at one or two things than dozens of things. In essence, this is what trade is all about: Everyone wins.
Better Deal
By insisting on getting a better deal than the other side, Trump risks a slowdown in trade.
Trump thinks this will bring jobs back to the US.
It won't.
Steel and aluminum are particularly misguided tariffs because very few are employed in industries that produce steel. By a factor of 10 or more there are more US manufacturers who use steel and aluminum.
The US has some legitimate gripes, but tariffs never have, nor ever will, produce the results Trump hoes for.
Not Easy to Win
Instead of trade wars being easy to win, we see Trump is in a trade war with the world, with precisely zero victories.
Meanwhile, China Puts U.S. Soybean Buying on Hold as Tariff War Escalates.
No one wins trade wars. Upping the ante just makes for bigger losses all around.
This means war: furious Canada and Mexico launch retaliation after Trump imposes tariffs
Canada responded to the US tariffs on steel and aluminium by imposing billions worth of countermeasures, while Mexico put duties on food and steel and the EU vowed its own retaliation
Tribune News Service
http://themillenniumreport.com/2018/06/this-means-war-furious-canada-and-mexico-launch-retaliation-after-trump-imposes-tariffs/
US President Donald Trump’s decision Thursday to slap tariffs on steel and aluminium from Canada, Mexico and the European Union sharply escalated global trade tensions and widened a rift with America’s closest allies.
The Trump administration’s announcement that its once-delayed tariffs would take effect starting Friday was met swift condemnation and retaliation as well as a multilateral challenge at the World Trade Organisation.
Canadian leaders reacted particularly angrily to the tariffs, 25 per cent on steel and 10 per cent on aluminium. Trump had justified the import levies on the grounds of national security – a line of reasoning Canadian officials called absurd, illogical and illegal.
Bourbon, blue jeans and steel: here’s how the EU will fight US trade war
Canada, the largest exporter of steel and aluminium to the United States, said it would apply countertariffs of 25 per cent and 10 per cent on US$16.6 billion worth of American metals, farm goods and other products, to take effect July 1.
“That Canada could be a national security threat to the US is inconceivable,” said Canadian Prime Minister Justin Trudeau, noting the many Canadians who have died alongside US soldiers in joint military operations over the years. “These tariffs are an affront to the long-standing security partnership between Canada and the United States.”
Mexico responded to the news by announcing immediate retaliatory tariffs on US products including pork bellies, apples, grapes, blueberries and flat steel.
EU leaders already had drawn up a list of American imports worth several billions of dollars that would be subject to tariffs, including jeans, Kentucky bourbon and Harley-Davidson motorcycles – goods aimed at applying maximum political pressure as they are produced in home states of top lawmakers.
French President Emmanuel Macron said in a speech that the US tariffs would mean “war”.
“This decision is not only unlawful but it is a mistake in many respects,” Macron said in a speech after the US announcement. “Economic nationalism leads to war.”
These tariffs are an affront to the long-standing security partnership between Canada and the United States Canadian Prime Minister Justin Trudeau
International Monetary Fund chief Christine Lagarde meanwhile warned the G7 officials of an erosion of trust amid the trade frictions, saying that the action will “distort and damage and disrupt supply chains which have been established now for decades”.
“This is protectionism, pure and simple,” said Jean-Claude Juncker, president of the EU Commission, which represents the 28-member states in the union. He said the US “now leaves us with no choice” but to impose duties on American imports, although he did not specify the exact amount or timing of the retaliation.
Canada warns it will ‘respond appropriately’ if US steel tariffs take effect
European officials on Thursday met US Commerce Secretary Wilbur Ross in Paris in a last-ditch effort to dissuade the US from going through with the tariffs, arguing among other things that the administration was directing its aim at the wrong target. They said the source of the problem of excess global steel production is China, not Europe.
Trump first announced plans to tax imported steel and aluminium from all countries in March, but delayed applying the tariffs on the EU, Canada, Mexico and a handful of other countries as the administration sought voluntary quotas or other trade concessions from them. Ross indicated that negotiations could continue even after the tariffs are imposed, but EU officials insisted that the threat of metal tariffs be removed before broader trade discussions could take place.
The EU as a bloc is the United States’ largest trading partner, with exchange of goods and services exceeding US$1 trillion. Steel and aluminium make up a tiny fraction of the overall trade: US steel imports from all countries totalled about US$29 billion in 2016 – a fifth of that from the EU.
As such, if the US and its trading partners confine the tariffs and countertariffs to steel and aluminium, trade experts say, the threat of the global trade war expanding could pass, even as transatlantic relations have been strained by Trump’s pull-out of the Paris climate accord and nuclear deal with Iran.
Economic nationalism leads to war French President Emmanuel Macron
But what worries analysts now is how Trump might react to the trade retaliation. In a separate trade battle with China, Trump initially threatened tariffs on US$50 billion of Chinese goods for intellectual property theft, but after Beijing vowed it would match the tariffs, the president proposed tripling the duties on US$150 billion of Chinese imports.
“If the US ups the ante and this doesn’t remain just a steel issue, particularly with Canada, Mexico and the EU, then that would be a signal to me that we are spinning out of control,” said Douglas Irwin, an economics professor and trade historian at Dartmouth College. He added: “I can understand, in some sense, the administration starting a trade war with China, but it is enormously damaging and counterproductive to start a trade war with Canada, the EU and Mexico.”
That sentiment was shared by US lawmakers from both parties, many businesses and to some degree even by the United Steelworkers union. Congressional Republicans blasted Trump’s move to levy steel and aluminium imports, predicting it would hurt domestic companies and lead to higher prices for American consumers.
“This is dumb,” said Nebraska Senator Ben Sasse, adding that similar protectionist measures contributed to the Great Depression in 1929.
House Speaker Paul Ryan said flatly that he disagreed with the decision. “Instead of addressing the real problems in the international trade of these products, today’s action targets America’s allies when we should be working with them,” he said.
Some US aluminium producers and groups supporting domestic steel manufacturers and Trump’s “America first” agenda applauded the action.
But the steel and aluminium tariffs are likely to complicate, if not hamper, ongoing negotiations with Canada and Mexico to revamp the North American Free Trade Agreement, a major economic goal for the administration. Trump has made it no secret that the threat of steel and aluminium tariffs was intended as a lever to win concessions from Canada and Mexico.
US trade adviser denies that US-China trade war is ‘on hold’
“The most likely impact is the stalling of the negotiations,” said Christopher Wilson, deputy director of the Mexico Institute at the Wilson Centre in Washington.
The new tariffs come one month before Mexico’s July 1 presidential elections, and on Thursday, the country’s presidential candidates bristled at the news. “Don’t play with Mexico,” tweeted Jose Antonio Meade, of the ruling Institutional Revolutionary Party. “We will defend our jobs, our markets and our workers.”
Front-runner Andres Manuel Lopez Obrador, of the National Regeneration Movement, warned the Mexican government not to “fall into the trap of a trade war” because Mexico’s economy “is very weak. … Therefore we have to act firmly, but at the same time maintain trade relations with the United States, and so dialogue is very important.”
This is why we had a Great Depression. ‘Make America Great Again’ shouldn’t mean ‘Make America 1929 Again’ Republican US Senator Ben Sasse
Trudeau said he had spoken with Trump last Friday about meeting with the president to finalise a deal on a revised Nafta, as the parties appeared to have the makings of an agreement. But Trudeau said that vice-president Mike Pence contacted him Tuesday and said that Canada would have to accept a five-year sunset clause as a precondition to a Nafta deal. A sunset provision would automatically dissolve Nafta after five years unless the partners all agreed to extend it. Trudeau said that was unacceptable to Canada.
Last week Ross said his agency would consider whether imported cars and car parts are harming US national security and as such should be subject to new tariffs. The department initiated the investigation by tapping the same rarely invoked provision of US trade law, called Section 232, that was the basis for levying taxes on imported steel and aluminium.
Lawmaker delighted as US restricts Chinese hi-tech students’ visas
In the metals case, the administration concluded that the rise of foreign steel and aluminium over the years had hurt domestic producers and presented an economic and national security risk to the country because it had resulted in fewer American sources for military armour and infrastructure, such as the electric power grid.
Bad news that @POTUS
has decided to impose taxes on American consumers buying steel and aluminum from our closest allies--Canada, the EU, and Mexico (with whom we run a trade surplus on steel). In addition to higher prices, these tariffs invite retaliation.
— Senator Pat Toomey (@SenToomey) May 31, 2018
That announcement threatened to scuttle continuing talks with China, but Ross said Thursday that he planned to go to Beijing this weekend, as scheduled, for another round of negotiations.
If Trump starts trade war, EU will fight back with peanut butter
Earlier South Korea won a permanent tariff exemption on steel after it agreed to a quota, and similar deals have been cut with Brazil, Australia and Argentina. Japan, another major steel supplier to the US, earlier was slapped with steel duties as it has steadfastly declined the Trump administration’s overtures to sit down and negotiate a trade deal.
China or the US? Europe’s ‘impossible choice’ in the trade war
(May 29): Growing tensions between China and the United States over the escalating trade dispute – and the resulting global uncertainty – are forcing other countries to choose between the two economic superpowers.
The European Union, which is the world’s largest trading bloc and a top trading partner of both China and the US, is in a difficult spot since US President Donald Trump’s decision to ratchet up pressure on Beijing early this month – a move that included signing an executive order which effectively banned Chinese telecoms giant Huawei from accessing US supply chains.
“Europe is finding itself today in an extremely inconvenient position in which countries that seek to coexist with both China and the US are called to make an impossible choice and prove their allegiance to one of the parties over the other,” said Gal Luft, co-director of the Institute for the Analysis of Global Security, a Washington-based think tank.
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As nationalist rhetoric heats up in the wake of an early-May breakdown in US-China trade talks, top officials from both countries have engaged in intense shuttle diplomacy aimed at securing support and shoring up alliances across Europe.
Chinese Vice-President Wang Qishan, a close ally of President Xi Jinping who formerly led trade talks with the US, is visiting Germany and the Netherlands this week, just days after another top Xi aide, Li Zhanshu, the Communist Party’s third-most powerful cadre, wrapped up a trip to Hungary, Austria and Norway.
Wang’s trip will coincide with US Secretary of State Mike Pompeo’s arrival in Berlin for talks with Chancellor Angela Merkel on Friday. The US State Department said Pompeo would also visit the Netherlands, Switzerland and Britain.
Pompeo’s four-nation trip is expected to pave the way for further travel by Trump himself, who is set to visit Britain and France early next month.
The EU is in a delicate balancing act, as deteriorating US-China relations coincide with its own widening rift with the US over trade. European ties with Beijing stand at a crossroads, amid signs of a gathering storm and growing rivalry.
In a landmark shift in its policy on China, the European Commission – the executive arm of the EU – for the first time labelled it an “economic competitor” and “a systemic rival” in a policy paper in March.
Observers say that, with the return of trade war tensions, Europe – already caught in the middle of the unfolding US-China rivalry – will become an important battlefield for the two giant nations’ geostrategic political machinations.
“The common view in Europe is that the EU basically agrees with the substance of American criticism of China, but does not agree with the methods and manners of confrontation,” said Tamas Matura, a China specialist who is an assistant professor at Corvinus University of Budapest and president of the Central and Eastern European Centre for Asian Studies.
“The EU and its member states are deeply interested in the stability of a free and global economy, and disruption from any side is undesirable,” he said.
US and Europe’s shared cynicism over China masks different approaches
John Seaman, a research fellow at the French Institute of International Relations, said European countries in general shared most of the US’ concerns about China.
Those concerns include market openness and reciprocity, fair competition and the outsize role of the Chinese state and the Communist Party in China’s economy, security risks to critical infrastructure, authoritarian politics, human rights, Beijing’s political influence abroad and, in particular, China’s growing technological prowess.
Seaman called Washington’s latest moves against Huawei “a clear turning point in the US approach to China”.
“It seems that we’re still at the beginning of a much more structurally confrontational approach on the part of the US, wherein the Trump administration is looking to leverage all dimensions of American power,” he said.
The EU’s China strategy puts European unity to the test
Philippe Le Corre, a senior fellow in the Europe and Asia programmes at the Carnegie Endowment for International Peace, also saw Trump’s actions on Huawei as the moment that the world’s largest telecoms equipment maker became “a symbol of Chinese brands going abroad”.
US officials have accused Beijing of reneging on commitments to end its allegedly improper trade policies – prompting the Trump administration to raise tariffs on US$200 billion worth of Chinese imports from 10% to 25% after the sides wrapped up an 11th round of talks earlier this month in Washington without reaching a deal.
Beijing, which has countered that any deal needs to be balanced, answered the US side by imposing punitive tariffs on US$60 billion of American products.
Trump had already turned up the pressure on Beijing two weeks earlier with his executive order that effectively banned US companies from supplying Huawei and its affiliates with critical components, on the grounds that national security was at risk.
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Washington has for months tried to forge an international alliance against Huawei, which has risen to become a pillar of Beijing’s bid to expand its global influence on trade and technology.
While Australia and Japan have taken their own action against Huawei, closing ranks behind the US, many American allies in Europe remain undecided about whether to adopt sweeping bans against the Chinese company.
This is despite having similar security concerns over Huawei’s leadership in the development of fifth-generation, or 5G, mobile telecommunications technology that enables data to be transferred at a speed 20 times faster than existing standards.
During their trip to Europe, Trump and Pompeo are expected to further press traditional US allies to side with Washington on China and Huawei in particular, citing concerns that the company’s products may support spying by Beijing and disrupt the allies’ communications networks.
But leaders in France, Germany, Britain and the Netherlands have so far vowed to stay the course and break with Washington over its effort to keep a ban on Huawei equipment.
China deal gives Italy edge over ‘jealous’ rivals: Italian minister
Despite concerns about the potential pitfalls of using the Chinese company to supply vital digital infrastructure, many European leaders insist they have set tough rules and security standards for the supplier.
Merkel and French President Emmanuel Macron have said they will not block Huawei or any other company because Europeans are “pragmatic and realistic”.
Seaman said the issue came down to what the Trump administration saw as the end goal of its confrontational approach and whether its hardline tactics would reflect a long-term strategy that could outlast Trump’s controversial, unconventional presidency.
For instance, on 5G, Seaman said, many governments had started from a network security approach. Their focus has been on measures that could be taken to make 5G networks safer and more resilient – and light on geopolitics.
European politics is in flux, but the news is not all bad for investors
“There is a sense that the two cannot be separated, but focusing only on geopolitical risk and failing to develop the principles, procedures and practices that will ensure that the backbone of tomorrow’s ultra-connected society is secure, is just as dangerous,” the researcher said.
Duncan Freeman, a research fellow at the EU-China Research Centre of the College of Europe in Brussels, said that although trade and technology were separate issues, Washington’s ongoing disputes with Beijing on those topics underlined the changing balance in bilateral ties.
“The recent conflict over trade and technology is occurring in the wider context of the rise of China and the decline of the US that has been taking place in recent decades,” he said.
“The US’ dominant global position is based on its economic and technological power which underlies its military strength, but it has become clear that the US is losing that position in key areas.”
How Italy’s deal with China shows up the cracks in the EU
While Freeman did not see Trump’s China policy as creating a tipping point in the long-term global balance of power, he agreed that the US approach to dealing with China marked a significant policy shift.
“The policy will not achieve its apparent aim of rebalancing the relative decline of the US and rise of China, and we can expect further friction as this process continues,” he said.
“A key factor will be how the US manages its long-term decline as a global power, and whether China manages its increasingly important position in the global system to avoid confrontation with the incumbent leading power.”
Freeman said it should also be remembered that, like Japan and many other US allies, the EU itself is a target of Washington on trade, as the Trump administration regards the EU as being almost as bad as China in its embrace of protectionism.
Will the EU go the way of the Soviet Union?
“It is difficult for the EU to adopt a completely independent position as it is dependent on both the US and China in key areas of its security and economy,” he said.
Freeman said that although the Trump administration’s policies had raised Europe’s concerns over security and economic relations with the US, and put transatlantic relations under question, EU-US ties remained central to EU policy.
Therefore, “there is unlikely to be any major shift away from this in the short term”, Freeman said.
What is more, China had had little success in its attempt to create common ground with the EU since Trump’s election in November 2016, Freeman said.
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“In fact, the rhetoric on China in much of the EU has got tougher in recent years, although this is not uniform, especially in some member states which seek closer ties with China,” he said.
Matura of Corvinus University also said Trump and his top officials would be making a grave mistake if they were to alienate their European allies, when Trump clearly wanted to score a major success in his conflict with China ahead of next year’s presidential contest.
“The policies of the Trump administration have been very mixed so far, as it confronted China and degraded US global leadership at the very same time,” he said.
“If Washington really wants to contain China, the economic-political-social decoupling will continue. But the US cannot be successful without rebuilding global trust in its leadership.
“Bullying everyone, including its very own allies, is not a viable way to preserve US dominance in the world.”
Pompeo ‘saddened’ as Italy signs up for Chinese project
Matura and other observers agree the US’ allies in Europe and Asia eventually might be dragged into the looming economic cold war between Washington and Beijing.
“Although many say that it is due time for the EU to get more independent from the US, it would take many years to develop the necessary technological or military capabilities to act as an independent major player,” Matura said.
“Despite its theoretical ambitions, the EU has never been able or never been pushed to grow up to its potential.
Italy’s move to join New Silk Road may see EU tighten stance on China
“The most optimistic scenario is that in case of a US-China confrontation, Europe would try to gain just enough time to develop its own capacities.
“In reality, however, I expect the EU to play the role of a mediator between the two sides.”
Luft noted that although some European countries, such as Italy, had chosen to side with China on flashpoint issues – such as Xi’s aggressive trade and infrastructure push, the Belt and Road Initiative – “few in Europe are courageous enough to openly confront Trump for fear of his wrath”.
Seaman said Trump’s unilateral, “America first” crusade might have caused agitation in Europe and even fuelled some deep resentment of the US president, his policies and his country, but it had not led to an embrace of China.
“Broadly speaking, Europe is looking to hedge in the best way it can and avoid getting dragged into a US-China confrontation in which it has to make stark choices,” Seaman said.
Switzerland to sign belt and road deal during Maurer’s China trip
“The risk for the US comes in over-leveraging their economic power in such a way that it generates a rift [in Europe] that won’t play out in the short term, due to the state of dependency, but [leads to] a longer-term strategy to become more resilient to the various levers of American power,” he said.
And what will become of European political leadership and cohesiveness after the recent European parliamentary elections, which saw modest wins for the anti-EU populist right-wing movement?
“There is a risk that Europe itself will become even more fragmented than it is today, at a time when the geopolitical context demands that Europeans band together,” Seaman said.
“We’re already seeing Washington and Beijing trying to push their influence on the continent, with the Huawei/5G case as a clear example.
“But a further fragmentation of the EU will only increase the need for China and the US to pay closer attention to Europe as a field of competition.”
https://www.theedgemarkets.com/article/china-or-us-europes-impossible-choice-trade-war
US Threatens Europe With "Loss Of Access To US Financial System" Over SWIFT-Evading Iran SPV
https://www.zerohedge.com/news/2019-05-29/us-threatens-europe-loss-access-us-financial-system-over-its-iran-funding-spv?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29
It's going from bad to worse for Europe, whose currency had just hit session lows after Brussels confirmed that Italy faces a massive fine over its debt, when the Euro was hit with a double whammy after Bloomberg reported that the Trump administration is escalating its battle with "European allies" over the fate of the Iran nuclear accord, and is "threatening penalties against the financial body created by Germany, the U.K. and France to shield trade with the Islamic Republic from U.S. sanctions."
According to Bloomberg, the Treasury Department’s undersecretary for terrorism and financial intelligence, Sigal Mandelker, sent a letter on May 7 warning that Instex, the European SPV to sustain trade with Tehran, and anyone associated with it could be barred from the U.S. financial system if it goes into effect.
As a reminder, last September, in order to maintain a financial relationship with Iran that can not be vetoed by the US, Europe unveiled a "Special Purpose Vehicle" to bypass SWIFT. Back then we predicted that Washington would not be too delighted with this development seeking to undermine the dollar's reserve status. We were right.
“I urge you to carefully consider the potential sanctions exposure of Instex,” Mandelker wrote in the letter to Instex President Per Fischer. "Engaging in activities that run afoul of U.S. sanctions can result in severe consequences, including a loss of access to the U.S. financial system."
Germany, France and the U.K. finalized the Instex system in January, allowing companies to trade with Iran without the use of U.S. dollars or American banks, allowing them to get around wide-ranging U.S. sanctions that were imposed after the Trump administration abandoned the 2015 Iran nuclear deal last year.
Not surprisingly, a senior admin official behind the eltter said the U.S. decided to issue the threat "after concluding that European officials, who had earlier downplayed the significance of Instex in conversations with the Trump administration, were far more serious about it than they had initially let on."
The official, who asked not to be identified discussing internal deliberations, said the letter was intended to serve as a warning that the U.S. would punish anyone associated with Instex -- including businesses, government officials and staff -- if they were working to set up a program to help Iran evade U.S. sanctions.
“This is a shot across the bow of a European political establishment committed to using Instex and its sanctions-connected Iranian counterpart to circumvent U.S. measures,” said Mark Dubowitz, the chief executive officer of the Foundation for Defense of Democracies in Washington.
When asked to comment on the letter, the Treasury Department issued a statement saying “entities that transact in trade with the Iranian regime through any means may expose themselves to considerable sanctions risk, and Treasury intends to aggressively enforce our authorities.”
At the heart of the latest US move is the argument that Iran and its central bank use deceptive financial practices and haven’t implemented minimum global safeguards against money laundering and terrorism financing, according to Bloomberg.
While it is obvious that the US ire was sparked by the realization - and alarm - that cracks are appearing in the dollar's reserve status, opponents of Instex argue - at least for public consumption purposes - that the mechanism is flawed because the Iranian institution designated to work with Instex, the Special Trade and Finance Instrument, has shareholders with links to entities already facing sanctions from the U.S.
Meanwhile, during a visit to London on May 8, Mike Pompeo also warned that there was no need for Instex because the U.S. allows for humanitarian and medical products to get into Iran without sanction.
“When transactions move beyond that, it doesn’t matter what vehicle’s out there, if the transaction is sanctionable, we will evaluate it, review it, and if appropriate, levy sanctions against those that were involved in that transaction,” Pompeo said. “It’s very straightforward.”
In 2018, Europe made a huge stink about not being bound by Trump's unilateral breach of the Iranian deal, and said it would continue regardless of US threats. But now that the threats have clearly escalated, and Washington has made it clear it won't take no for an answer, it will be interesting to see if Europe's resolve to take on Trump - especially in light of the trade war with China - has fizzled.
Japan Then, China Now
https://www.project-syndicate.org/commentary/for-america-china-is-the-new-japan-by-stephen-s-roach-2019-05
May 27, 2019 Stephen S. Roach
Back in the 1980s, Japan was portrayed as the greatest economic threat to the United States, and allegations of intellectual property theft were only part of Americans' vilification. Thirty years later, Americans have made China the villain, when, just like three decades ago, they should be looking squarely in the mirror.
NEW HAVEN – “When governments permit counterfeiting or copying of American products, it is stealing our future, and it is no longer free trade.” So said US President Ronald Reagan, commenting on Japan after the Plaza Accord was concluded in September 1985. Today resembles, in many respects, a remake of this 1980s movie, but with a reality-television star replacing a Hollywood film star in the presidential leading role – and with a new villain in place of Japan.
Back in the 1980s, Japan was portrayed as America’s greatest economic threat – not only because of allegations of intellectual property theft, but also because of concerns about currency manipulation, state-sponsored industrial policy, a hollowing out of US manufacturing, and an outsize bilateral trade deficit. In its standoff with the US, Japan ultimately blinked, but it paid a steep price for doing so – nearly three “lost” decades of economic stagnation and deflation. Today, the same plot features China.Notwithstanding both countries’ objectionable mercantilism, Japan and China had something else in common: They became victims of America’s unfortunate habit of making others the scapegoat for its own economic problems. Like Japan bashing in the 1980s, China bashing today is an outgrowth of America’s increasingly insidious macroeconomic imbalances. In both cases, a dramatic shortfall in US domestic saving spawned large current-account and trade deficits, setting the stage for battles, 30 years apart, with Asia’s two economic giants.When Reagan took office in January 1981, the net domestic saving rate stood at 7.8% of national income, and the current account was basically balanced. Within two and a half years, courtesy of Reagan’s wildly popular tax cuts, the domestic saving rate had plunged to 3.7%, and the current account and the merchandise trade balances swung into perpetual deficit. In this important respect, America’s so-called trade problem was very much of its own making.Yet the Reagan administration was in denial. There was little or no appreciation of the link between saving and trade imbalances. Instead, the blame was pinned on Japan, which accounted for 42% of US goods trade deficits in the first half of the 1980s. Japan bashing then took on a life of its own with a wide range of grievances over unfair and illegal trade practices. Leading the charge back then was a young Deputy US Trade Representative named Robert Lighthizer. Fast-forward some 30 years and the similarities are painfully evident. Unlike Reagan, President Donald Trump did not inherit a US economy with an ample reservoir of saving. When Trump took office in January 2017, the net domestic saving rate was just 3%, well below half the rate at the onset of the Reagan era. But, like his predecessor, who waxed eloquently of a new “morning in America,” Trump also opted for large tax cuts – this time to “make America great again.”
The result was a predictable widening of the federal budget deficit, which more than offset the cyclical surge in private saving that normally accompanies a maturing economic expansion. As a result, the net domestic saving rate actually edged down to 2.8% of national income by late 2018, keeping America’s international balances deep in the red – with the current-account deficit at 2.6% of GDP and the merchandise trade gap at 4.5% in late 2018.And that’s where China assumes the role that Japan played in the 1980s. On the surface, the threat seems more dire. After all, China accounted for 48% of the US merchandise trade deficit in 2018, compared to Japan’s 42% share in the first half of the 1980s. But the comparison is distorted by global supply chains, which basically didn’t exist in the 1980s. Data from the OECD and the World Trade Organization suggest that about 35-40% of the bilateral US-China trade deficit reflects inputs made outside of China but assembled and shipped to the US from China. That means the made-in-China portion of today’s US trade deficit is actually smaller than Japan’s share of the 1980s. Like the Japan bashing of the 1980s, today’s outbreak of China bashing has been conveniently excised from America’s broader macroeconomic context. That is a serious mistake. Without raising national saving – highly unlikely under the current US budget trajectory – trade will simply be shifted away from China to America’s other trading partners. With this trade diversion likely to migrate to higher-cost platforms around the world, American consumers will be hit with the functional equivalent of a tax hike. Ironically, Trump has summoned the same Robert Lighthizer, veteran of the Japan trade battles of the 1980s, to lead the charge against China. Unfortunately, Lighthizer seems as clueless about the macro argument today as he was back then.In both episodes, the US was in denial, bordering on delusion. Basking in the warm glow of untested supply-side economics – especially the theory that tax cuts would be self-financing – the Reagan administration failed to appreciate the links between mounting budget and trade deficits. Today, the seductive power of low interest rates, coupled with the latest strain of voodoo economics – Modern Monetary Theory – is equally alluring for the Trump administration and a bipartisan consensus of China bashers in the US Congress.The tough macroeconomic constraints facing a saving-short US economy are ignored for good reason: there is no US political constituency for reducing trade deficits by cutting budget deficits and thereby boosting domestic saving. America wants to have its cake and eat it, with a health-care system that swallows 18% of its GDP, defense spending that exceeds the combined sum of the world’s next seven largest military budgets, and tax cuts that have reduced federal government revenue to 16.5% of GDP, well below the 17.4% average of the past 50 years. This remake of an old movie is disconcerting, to say the least. Once again, the US has found it far easier to bash others – Japan then, China now – than to live within its means. This time, however, the movie might have a very different ending.
Destined for War
Can America and China Escape Thucydides’s Trap?
By Graham Allison
https://pdfs.semanticscholar.org/b9ad/5c29be85e8e95a3a3a344c945394e5998faf.pdf
Professor Graham Allison gazes into the future of US-China
relations in Destined for War: Can America and China Escape
Thucydides’s Trap? only to find the best guide to the future is the
past. Specifically based on Thucydides’s well-known observation that “It
was the rise of Athens and the fear that this inspired in Sparta that made war inevitable,” Allison has popularized the phrase “Thucydides’s Trap” to describe the dangerous historical dynamic that develops when a rising power threatens to displace an established ruling power.
This dynamic was summarized aptly in an earlier article: “The rise of a new power has been attended by uncertainty and anxieties. Often, though not always, violent conflict has followed. The rise in the economic and military power of China, the world’s most populous country, will be a central question for Asia and for American foreign policy at the beginning of a new century. ”
In researching cases of rising powers challenging ruling powers over
the last 500 years, Allison and the Thucydides Trap Project at Harvard
University found 12 of 16 cases resulted in war. Avoiding Thucydides’s
Trap thus equates to avoiding war. Based on this analysis, Allison
concludes that “as far ahead as the eye can see, the defining question
about global order is whether China and the United States can escape
Thucydides’s Trap.”
The high percentage of cases that resulted in war provide persuasive
support to the overall argument that war between the United States and
China may be more likely than generally considered. Yet a few cautionary
notes on the data set and methodology are warranted.
First, while the principal result of the study (12 of 16 cases led to
war) seems objective, decisions on what cases to include necessarily
involve some subjective analysis. As such, the overall data supporting
the general argument have evolved since the initial Thucydides’s Trap
argument was presented. In 2012–14 the argument cited 11 of 15 cases
leading to war.
Why does Trump want to destroy the European Union?
https://www.quora.com/Why-does-Trump-want-to-destroy-the-European-Union
The Man Who Wants to Unmake the West
Europeans are starting to worry that Steve Bannon has the EU in his cross hairs. Here’s how the White House could genuinely help pull it apart.
It was the day after Britain voted to leave the European Union in June, and the Western world was still absorbing the shock. With no clear plan for what would come next, the globe’s fifth-biggest economy had abruptly announced a divorce from the neighbors it had been trading with for nearly 45 years. Markets plunged. “A calamity,” declared the New York Times. “Global panic,” proclaimed one London headline.
Steve Bannon had a different reaction. He booked the calamity’s chief architect as a guest on his radio show to celebrate.
This was then still weeks before Bannon emerged into the national spotlight as CEO of Donald Trump’s struggling presidential campaign. Bannon was an executive at Breitbart News, an activist-editor-gadfly known mostly on the far right, and the “Brexit” campaign was something of a pet project. He hitched onto the Tea Party movement early in Barack Obama’s presidency and noticed a similar right-populist wave rising across the Atlantic, where fed-up rural, white Britons were anxious about immigration and resentful of EU bureaucrats. The cause touched on some of Bannon’s deepest beliefs, including nationalism, Judeo-Christian identity and the evils of Big Government. In early 2014, Bannon launched a London outpost of Breitbart, opening what he called a new front “in our current cultural and political war.” The site promptly began pointing its knives at the EU, with headlines like “The EU Is Dead, It Just Refuses to Lie Down”; “The European Union’s Response to Terrorism Is a Massive Privacy Power Grab”; “Pressure on Member States to Embrace Trans Ideology.” One 2014 article invited readers to vote in a poll among “the most annoying European Union rules.”
Bannon’s site quickly became tightly entangled with the United Kingdom Independence Party, a fringe movement with the then-outlandish goal of Britain’s exit from the EU. In October 2014, UKIP’s leader, Nigel Farage, poached a Breitbart London editor to work for him. That September, Bannon hosted a dinner for Farage at his Capitol Hill townhouse. Standing under a large oil painting by the fireplace, Farage delivered a speech that left the dozens of conservative leaders in attendance “blown away,” as Bannon later recalled.
On June 23 of last year, Britons defied the pleas of Europe’s political elites and narrowly voted for Brexit. Many observers called it the most traumatic event in the history of a union whose origins date to the 1950s. Suddenly the future of all Europe, whose unity America had spent the decades since World War II cultivating, lay in doubt. It was the next day that Bannon hosted Farage for a triumphal edition of his daily radio show.
“The European Union project has failed,” Farage declared. “It is doomed, I’m pleased to say.”
“It’s a great accomplishment,” Bannon said. “Congratulations.”
Bannon now works in the West Wing as President Donald Trump’s top political adviser. He is, by all accounts, the brains of Trump’s operation—a history-obsessed global thinker whose vision extends far beyond Trump’s domestic agenda and Rust Belt base. Bannon co-wrote Trump’s “America First” inauguration speech, which hinted at a new world order, and will join the president’s National Security Council—apparently the first political adviser to get a permanent seat in the president’s Situation Room. And while commentators are focusing on Bannon’s views about nationalism here in the United States, his public comments and interviews with several people who know him make clear that, even as he helps Trump “make America great again,” he has his sights set on a bigger target across the Atlantic Ocean.
Bannon’s Favorite Europeans
Crowley-Sidebar1-MarineLePen.jpg
Donald Trump’s transition team denied scheduling the French nationalist Marine Le Pen’s visit to the Trump Tower café in January. But she met Guido Lombardi, an informal liaison between Trump and the European far-right, who claims Bannon gave his blessing.
Crowley-Sidebar1-FraukePetry.jpg
Breitbart often sets Frauke Petry, the leader of the anti-immigrant Alternative for Germany party, as a foil to Angela Merkel. “The achievements of the Reformation and Enlightenment are endangered,” Petry told Breitbart, arguing that defending immigrants has become a new religion in Europe—and echoing Bannon’s own defense of the Judeo-Christian West.
Crowley-Sidebar1-GeertWilders.jpg
Geert Wilders—the leader of the Dutch far-right Party for Freedom, which is on track to win the most seats in the Netherlands’ upcoming election, has contributed articles to Breitbart—such as “Britain Is The Brexit Pioneer and Others Will Follow” and “Muslims, Leave Islam, Opt for Freedom!” He was also the keynote speaker at Breitbart’s “Gays for Trump” party at the Republican National Convention in July.
Crowley-Sidebar1-BeppeGrillo.jpg
Breitbart has covered Italy’s Beppe Grillo and his nationalist movement with articles like “After Brexit and Trump, Italy’s Five-Star-Movement May Be The Next Surprise.” Grillo called Trump’s victory an “extraordinary turning point” for global populism, and he expects Italy will follow.
Crowley-Sidebar1-NigelFarage.jpg
In 2012, Nigel Farage accepted Bannon’s invitation to meet in Washington, where Bannon introduced the U.K. Independence Party leader to like-minded individuals. Farage became a regular on Bannon’s radio show, and defended critics who called Bannon anti-Semitic, telling Breitbart that the attacks amounted to “demonization.”
Credits: AP Images; Getty
“Bannon hates the EU,” says Ben Shapiro, a former Breitbart writer who split with Bannon last year but who shares the sentiment. “He figures it’s mainly an instrument for globalism—as opposed to an instrument for the bettering of Western civilization.”
“What we understand from Bannon is that the EU is abhorrent,” one Western European government official told me.
The idea that one man could threaten the European project might sound extreme. And it would be an exaggeration to say that even the full-throated support of Breitbart London was what tipped the scales toward Brexit. But having the ear of the president of the United States is different—and the question of just what Bannon plans to do with his influence has become a huge preoccupation of diplomats, European government officials and experts on the venerable trans-Atlantic relationship. In more than a dozen interviews, they recounted a creeping sense of dread about the very specific ways Bannon could use American power like a crowbar to pull the EU apart.
“The European Union is under serious threat,” Guy Verhofstadt, a former Belgian prime minister and now a senior EU official, told a London audience in late January. Its enemies, he said, now include Trump—thanks in large part to “the enormous influence of his chief political adviser, Mr. Bannon.”
Since the election, European officials have been combing the internet, including Breitbart’s archives, for clues to Bannon’s worldview and how he might counsel Trump. And what they’re finding is stoking their deepest anxieties. “They have a deep well of psychological reliance on the American-led order,” says Jeremy Shapiro, a Hillary Clinton State Department official now at the European Council on Foreign Relations in London. Now they’re bracing for an American assault on that order.
Europe as we know it has never been more vulnerable to such an assault. Economic malaise and high debt are testing the EU’s financial structures and pitting its members against one another. So is the historic influx of refugees from the Middle East and North Africa. Nationalist parties and candidates hostile to the Union are ascendant in France, Germany, Italy and the Netherlands—all of which are set to hold elections this year. Russia, which may stand to gain the most from a disunited Europe, is gleefully aiding the process by disrupting Europe’s domestic politics with propaganda and hacking meant to discredit the pro-EU establishment.
In an ordinary time, the White House would be the crucial counterweight to such nationalist passions. In what he billed as an address “to the people of Europe” from Hanover, Germany, last spring, President Barack Obama issued a plea for for European unity. “This is a defining moment,” he said, warning that “a unified, peaceful, liberal, pluralistic, free-market Europe” had begun to fray. America and the world, Obama said, “needs a strong and prosperous and democratic and united Europe.”
But as one European diplomat puts it: “With Obama gone, there’s no benign father figure anymore.” Instead, there is a threatening stepfather in Bannon, for whom unity is not the solution but the problem. Bannon’s vision, as laid out in public remarks and private conversations, opposes international organizations in favor of empowering nation-states. He has complimented the National Front, the party of the French right-wing presidential candidate Marine Le Pen, who pledges to extract France from the EU (and who was spotted in Trump Tower soon after the election). And he brokered a post-election meeting between Trump and Farage, who recently told Fox News that European leaders are “terrified” about what Trump means for their political union.
The EU, of course, can’t be pried apart overnight. The union—a borderless political and economic compact of 28 countries with a collective GDP of $16 trillion—is too large, its governments and economies too entangled. But if momentum toward dissolution continues after Brexit, possibly urged on by the United States, that too would be hard to reverse. The shakeup of the postwar European project could be one of Trump’s biggest legacies. Which is why European officials, former Obama officials and trans-Atlantic experts are starting to consider how it could really happen—and what the consequences for the world order might be if its most stable and prosperous political alliance comes undone.
***
Is that what Trump wants? It is Trump and not Bannon who is, at least notionally, in charge of U.S. foreign policy. But while vague, Trump’s own views about Europe also clearly fall outside American norms. Trump’s “America First” mantra implies a reduced U.S. commitment overseas. He has suggested that NATO is both obsolete and a bad deal for the American taxpayer, and in February, Defense Secretary James Mattis issued an unprecedented warning that the United States would “moderate its commitment” to the alliance if other members don’t contribute more to its budget. Nor does Trump like complex trade deals with multiple entities like the EU’s jumble of member states. (Trump did unexpectedly tell an interviewer in late February that he was “totally in favor of” the EU. But his rote language—“I think it’s wonderful, if they’re happy”—left many observers unconvinced.)
And then there is Trump’s unhappy personal experience with the EU, in a place called Doonbeg. In early 2014, Trump paid $15 million for an 18-hole golf course in the seaside town on Ireland’s western coast. The course and hotel, which Trump spent millions more to expand and upgrade, sits on eroding sand dunes that he wanted to protect with a 15-foot rock wall on the beach below. Locals fought the barrier, forcing Trump to back down.
When Trump talks about the barrier now, he frames it as a bitter parable about the EU’s growth-killing bureaucracy. “I learned a lot because I got the approvals very quickly from Ireland. … [But] to get the approvals from the EU would have taken years,” Trump told the Times of London in January. “I said forget it. I’m not gonna build it. … I found it to be a very unpleasant experience.”
In fact, Trump’s tale has little to do with the EU. It is true that one of several objections involved the beach’s EU-approved status as a sanctuary for a tiny endangered whorl snail. But the project never required Brussels’ approval. As for Ireland’s government, it rejected a petition to consider the dispute, leaving the matter to county officials, who are now evaluating a proposal for a smaller barrier.
So while Trump might lack clear policy goals, his visceral nationalism and disdain for rule-making in Brussels make him a ready vessel for Bannon’s world-historical ideas about the EU’s invidiousness. Bannon is a wide reader with a deep interest in history; a Breitbart editor recalled to the Los Angeles Times the “staggering collection of books” on Bannon’s desk. Bannon takes a special interest in Europe. In a 2014 speech to a European audience, he noted that the next day was the 100th anniversary of the assassination of the Archduke Franz Ferdinand in Sarajevo, the trigger for World War I and what Bannon casually called “the end of the Victorian era.”
Bannon’s public remarks, and accounts from people who have spoken with him, make clear that he believes Brexit and Trump’s election are part of something bigger, a global political revolt that could restore what he calls lost “sovereignty” on the continent. “I think strong countries and strong nationalist movements in countries make strong neighbors,” Bannon told an audience of religious conservative activists at the Vatican in 2014. “That is really the building blocks that built Western Europe and the United States, and I think it’s what can see us forward.”
The notion that this could happen—and that it might be a good thing—is a whiplash-inducing reversal from decades of American foreign policy. It has long been an article of faith in the West that a unified Europe represents a historic triumph of diplomacy, in which America itself has invested hundreds of billions of dollars and thousands of lives. The EU has real flaws, to be sure: Its bureaucracy is cumbersome; its common currency limits fiscal policy at times of economic crisis; and its now virtually borderless interior left it unable to control the huge influx of refugees from Syria and elsewhere. But consider those flaws in the context of what the EU has achieved: not just economic prosperity, but an end to the centuries of horrific armed conflict.
To Bannon, however, a strengthened EU is nothing less than a risk to civilization: a body that dilutes national identity and whose border policies allow Islam to invade the West, one refugee at a time. Bannon, who did not respond to interview requests, has repeatedly made clear his views about Europe. Most revealing is the widely read transcript of his Vatican talk, in which Bannon declared that “the world, and particularly the Judeo-Christian West, is in a crisis.” Europe’s citizens, he said, are restless for “sovereignty for their country, they want to see nationalism.” And, Bannon added: “They don’t believe in this kind of pan-European Union.”
To Bannon, a strengthened EU is nothing less than a risk to civilization: a body that dilutes national identity and whose border policies allow Islam to invade the West, one refugee at a time.
Bannon has also expressed admiration for the reactionary French philosopher Charles Maurras, according to French media reports confirmed by Politico. Maurras, like Bannon, was a Catholic nationalist, and he argued in the early 1900s that the Enlightenment had elevated the individual over the nation. (One person who knows Bannon said he has spoken of the coming end of the Enlightenment.) To Maurras, a hero of the modern French right wing, the French Revolution ideals of “liberty, equality and fraternity” were a liberal cosmopolitan corruption of France’s authentic identity. Bannon has approvingly cited Maurras’ distinction between the “legal country,” led by elected officials, and the “real country” of ordinary people, as a frame for the populist revolt underway. Maurras even warned about the nefarious influence of Islam in Europe.
As does Bannon. In February, a Danish newspaper editor named Flemming Rose recounted in the Huffington Post a conversation he had had with Bannon at a private gathering in New York last spring. In what Rose described as profane and “passionate” terms, Bannon “made it clear he had lost faith in Europe as secularism and arriving Muslim immigrants had eroded traditional Christian values as the founding pillar of our civilization,” Rose wrote. “Losing the Christian faith, in his view, has weakened Europe—it’s neither willing nor able to confront Islam’s rising power and some European Muslims’ insistence on privileged treatment of their religion.”
Bannon’s solution? Rebuilding the firm borders between European states—to keep the Muslim immigrants out, and to keep in the religious and national identity. “I have admired nationalist movements throughout the world,” Bannon told the Wall Street Journal shortly after the U.S. election. “I have said repeatedly, strong nations make great neighbors.”
But do they? Many a European leader, not to mention historian, disagrees. Runaway nationalism led to, among many other horribles, Franz Ferdinand’s assassination and World War I, and gave us Hitler, Mussolini and Milosevic. Those things, in turn, drew America’s military across the Atlantic.
“I don’t get it. Americans have spent a lot of their history either fighting against Europeans or fighting on behalf of Europeans against other Europeans,” says Charles Kupchan, who served until January as the top official for European affairs at the Obama White House. “Anybody who wants to bring Europe down risks putting us back in the 19th century or the early 20th century.”
European officials note that this happens to be a goal of Russia’s president, Putin, who is busily undermining the post-Cold War internationalist order in favor of a nationalistic, geography-based power politics. A U.S. effort to dismantle the EU, one Western European government official says with distaste, “would put America on the same side as Putin.”
The thought is rattling Europe at the highest levels. In January, Donald Tusk, president of the EU’s European Council—who calls himself “an incurably pro-American European who is fanatically devoted to trans-Atlantic cooperation”—sent a letter to member states characterizing the Trump administration as a menace to the Union, alongside the likes of Russia and radical Islam. “[W]ith the new administration seeming to put into question the last 70 years of American foreign policy,” Tusk wrote, America now had to be considered not a stalwart friend of the EU but a “threat.”
Wolfgang Ischinger, former German ambassador to the United States, put it in starker terms in remarks at a February security conference in Munich attended by top Trump officials. “Is President Trump going to continue a tradition of half a century of being supportive of the project of European integration, or is he going to continue to advocate EU member countries to follow the Brexit example?” Ischinger asked. “If he did that, it would amount to a kind of nonmilitary declaration of war. It would mean conflict between Europe and the United States. Is that what the U.S. wants?”
***
Seeking to allay such anxieties, Vice President Mike Pence flew a few days later to Brussels, the EU’s center of government, with a reassuring message. “The United States is committed to continuing its partnership with the European Union, and I wanted to make that very clear,” Pence said.
But whatever solace his words might have given to EU leaders was short-lived. The very next day, Reuters reported that, shortly before Pence’s olive branch to Brussels, Bannon had met with Germany’s ambassador to Washington and sent a very different message by repeating his idiosyncratic views about Europe. The White House downplayed the conversation, confirmed by a source to Politico, as a quick hello. But the encounter with Bannon affirmed fears in Germany’s government that Europe must prepare for a policy of what an unnamed source quoted by Reuters called “hostility towards the EU.”
A United States hostile to the EU would be terrifying for Europe at any moment, but never more so than right now. Economic weakness, a flood of refugees and a drumbeat of Islamic State terrorism have combined to create what EU official Verhofstadt calls “an existential crisis.” Making things worse, the EU-bashing Marine Le Pen has a chance in France’s spring presidential elections, while anti-EU candidates have gained traction in the Netherlands, which votes in March, and Italy, which may call elections this summer. In September, voters in the EU’s anchor state, Germany, will deliver a verdict on Chancellor Angela Merkel, a staunch defender of European unity whose popularity has severely eroded in recent months.
Some European leaders worry that Trump and Bannon could issue a de facto endorsement of Le Pen, turbocharging her supporters and her media coverage. In a post-election tweet, Le Pen’s niece Marion, who is also a prominent member of her party, wrote cryptically that she accepted Bannon’s alleged “invitation … to work together.” A few weeks later, French officials were startled to learn that Le Pen had been seen in the lobby of Trump Tower, though a Trump spokesman denied that she had been in any meetings there.
But tweets and photo ops might not be where Trump could inflict the most damage. The White House commands the awesome economic and political might of the United States, and can employ that power as a sledgehammer against the weakened, post-Brexit EU. “I think Brexit is going to be a wonderful thing for your country,” Trump told Britain’s prime minister, Theresa May, during her January visit to Washington. Last year, Obama had tried to discourage Brexit by promising it would put Britain “at the back of the queue” for American trade deals. Now Trump was making clear that it had a place safely at the front. “You’re going to be able to make your own trade deals without having someone watching you,” Trump added.
Many European leaders heard that as game theory. Signaling that he will reward countries that turn away from a united Europe creates an incentive for them to do so early. No one wants to be at the back of the queue. Trump’s pick for commerce secretary, Wilbur Ross, sees things the same way: As one member of Congress who recently spoke with the billionaire investor recounted his attitude, “Bilateral is where we’re going. Why would we trade with seven countries at once?”
EU rules bar member countries from striking up formal bilateral trade talks, but nothing stops the kind of informal discussions May has begun with Trump. And experts say there are plenty of other arrangements and loopholes that Trump and Bannon could exploit to pit EU members against one another.
Trump could even provoke a powerful backlash against Bannon’s anti-EU project. The new American president is deeply unpopular in Europe.
“For an American administration, breaking up the EU is like falling off a log. The majority of EU countries value their relationship with the U.S. more than they do with the EU, and are readily open to American requests that would even run counter to the letter of their European obligations,” Jeremy Shapiro says. That might apply to issues beyond trade, he says, speculating that Trump could roil EU members by rewarding some and punishing others with tax and immigration policies. “It’s trivially easy,” Shapiro says. “If you differentiated between countries, you could create a lot of damaging tension within the EU.”
The Trump team is already pressing on a purple bruise within the EU—the resentment of its lesser members toward mighty Germany, whose economy dominates the continent. “You look at the European Union, and it’s Germany. Basically a vehicle for Germany,” Trump told the Times of London. “That’s why I thought the U.K. was so smart in getting out.” A few days later, Trump’s trade adviser, Peter Navarro, piled on, arguing in the Financial Times that Germany’s use of the common EU currency, the euro, translates to an unfair trading edge. That Trump and Navarro have keyed in on anti-German resentment reflects a savvy understanding of the EU’s fault lines. Shapiro recalls meetings between Obama officials and European counterparts, who initially boasted about their unity. “Two or three meetings later, they’d be talking about keeping Germany off the [United Nations] Security Council,” he says.
***
Pressured by U.S. trade deals, harassed by Russian hackers, sniped at by local Breitbarts—does the EU stand a chance? Well, for now, yes. Although this year’s elections could greatly empower anti-EU nationalists, none are likely to trigger sudden Brexit clones. Even if Le Pen were to win, she would be unlikely to gain the needed parliamentary power for such a radical move. And while it will stun Europe if Merkel loses her own parliamentary majority in September, her right-wing rivals will be similarly limited. The same goes for the Netherlands and Italy. Polls show that clear majorities across Europe still support the EU. Modern Europe was built over 70 years and won’t be easy to tear down in a presidential term.
Trump’s unpopularity in Europe could even provoke a powerful backlash against Bannon’s anti-EU project. In Germany, for instance, the surging Social Democratic candidate for chancellor, Martin Schulz, has positioned himself against Trump and invoked the memory of Germany’s Nazi past. Trump’s “attacks on Europe are also attacks on Germany,” Schulz said at a February rally. “In a time when the world is drifting apart, in a time of Trumpism, we need values-based cooperation of the democracies in Europe now more than ever.”
Several European officials argued that attempts by Trump to meddle directly in their electoral politics—by, say, tweeting support for a specific candidate, like Le Pen or the Dutch right-winger Geert Wilders—would likely backfire given the new president’s toxicity on the continent. One person who has spoken at length to Trump and Bannon about Europe told me Trump understands the risk of backlash from openly backing populist European insurgents. “As far as Bannon,” the person began, before trailing off and adding in a knowing tone, “You’ll have to ask him.” Bannon could also get some help from his old colleagues at Breitbart, which recently announced plans to expand to Berlin and Paris. “The aim is to help elect right-wing politicians in the two European countries,” Reuters reported, citing sources “close to Bannon.”
At the top levels, there are signs the EU’s once-complacent leadership has genuinely woken up to the realities of a Trump-and-Brexit world. In Washington, the EU has kicked off a lobbying campaign to save itself. In mid-January, dozens of foreign policy reporters gathered at an elegant townhouse in Washington’s Kalorama neighborhood, so close to Obama’s new home they had to walk through a police checkpoint. Their host was the EU ambassador to Washington, David O’Sullivan. As the influential guests enjoyed white wine and hors d’oeuvres, the Irish-born O’Sullivan, who has the harried manner of a man playing defense, delivered a short speech in defense of the embattled institution he represents. He and his colleagues also held events at both national party conventions this past summer, and at the EU offices on Washington’s K Street lobbying corridor, visitors can find a thick glossy brochure, “The European Union: A Guide For Americans,” which explains the EU’s structure and functions, and declares that the U.S.-EU partnership “is the single most important driver of global economic growth, trade, and prosperity.”
In an interview at his office, O’Sullivan dismissed the most alarmist talk of Trump’s intentions as speculative and overblown. And, as at his evening cocktail party, he addressed the idea of dismantling the EU in Trump’s language: raw economics. “On the basest level, just look at it from America’s self-interest,” he said, arguing that a giant single market for American goods is the most profitable and efficient arrangement. “Would it be in America’s interest to see that fragmented to 28 separate markets?”
O’Sullivan seems torn—between wanting to downplay the specter of imminent disaster in the EU (which, after all, wants to be seen as a safe investment) and reminding Euroskeptics that they are playing with matches in a very dry forest. Brexit, he insists, was “a special situation,” made possible by Britain’s long uncertain relationship with the European continent. And he predicts that the EU can calm populist anger with gradual reforms to its immigration and border policies.
When pressed, however, O’Sullivan admits that the alternatives can get dangerous fast. “Anyone who would support a more assertive national identity in Europe has not read their history,” he says. “It doesn’t take long for people to say, we’re better than you.” Nationalist leaders in Europe will likely be quick to take up the cause of ethnic kin who live on the other side of foreign borders, some of which were disputed for centuries before the EU diminished their importance. The notion raises the specter of nationalist conflicts around Europe similar to implosion of the former Yugoslavia in the 1990s—conflicts that ended only after major American interventions. A small crack opened by preferential American trade or tax policy, with the help of some Russian meddling, could widen to a chasm with alarming speed.
“Before you call for France and Germany to go their separate ways, you better think about the longer-term consequences,” says Kupchan, the former Obama official. “Otherwise, we may be sending some armored divisions back that way.”
The Great Power Game is On and China is Winning
If America wants to maintain any influence in Asia, it needs to wake up.
From across the pond come two geopolitical analyses in two top-quality British publications that lay out in stark terms the looming struggle between the United States and China. It isn’t just a trade war, says The Economist in a major cover package. “Trade is not the half of it,” declares the magazine. “The United States and China are contesting every domain, from semiconductors to submarines and from blockbuster films to lunar exploration.” The days when the two superpowers sought a win-win world are gone.
For its own cover, The Financial Times’ Philip Stephens produced a piece entitled, “Trade is just an opening shot in a wider US-China conflict.” The subhead: “The current standoff is part of a struggle for global pre-eminence.” Writes Stephens: “The trade narrative is now being subsumed into a much more alarming one. Economics has merged with geopolitics. China, you can hear on almost every corner in sight of the White House and Congress, is not just a dangerous economic competitor but a looming existential threat.”
Stephens quotes from the so-called National Defense Strategy, entitled “Sharpening the American Military’s Competitive Edge,” released last year by President Donald Trump’s Pentagon. In the South China Sea, for example, says the strategic paper, “China has mounted a rapid military modernization campaign designed to limit U.S. access to the region and provide China a freer hand there.” The broader Chinese goal, warns the Pentagon, is “Indo-Pacific regional hegemony in the near-term and displacement of the United States to achieve global pre-eminence in the future.”
The Economist and Stephens are correct. The trade dispute is merely a small part of a much larger and even more intense geopolitical rivalry that could ignite what Stephens describes as “an altogether hotter war.”
As the Pentagon’s strategic paper posits, China’s overriding foreign policy goal is to squeeze America out of East Asia and force it back to the Hawaiian islands as its forward position in the Pacific. Thus would Hawaii cease to be America’s strategic platform for projecting power into Asia and become merely a defensive position. If this strategic retreat were to happen, it would be one of the most significant developments in international relations since the end of World War II.
America has been projecting significant power into Asia since the 1890s, when President William McKinley acquired Hawaii through annexation, then seized Guam and the Philippines in the aftermath of the Spanish-American War. For good measure, he cleared the way for the construction of the Panama Canal and continued his predecessors’ robust buildup of the U.S. Navy. President Theodore Roosevelt then pushed the Canal project to actual construction, accelerated the naval buildup, and sent his Great White Fleet around the world as a signal that America had arrived on the global scene—as if anyone could have missed that obvious reality.
With the total victory over Japan in World War II, America emerged as the hegemon of Asia, with colonies, naval bases, carrier groups, and strategic alliances that made it foolhardy for any nation to even think of challenging our regional dominance. Not even the Vietnam defeat, as psychologically debilitating as that was, could undercut America’s Asian preeminence.
Now China is seeking to position itself to push America back into its own hemisphere. And judging from the language of the National Defense Strategy, America doesn’t intend to be pushed back. This is a clash of wills, with all the makings of an actual military conflict.
China Has Already Lost the Trade War
China Isn't an Enemy and Hawks Shouldn't Turn It Into One
But if China represents the greatest potential threat to America’s global position, making an eventual war likely (though not inevitable), why is Washington not acting like it knows this? Why is it engaging in so many silly military capers that undermine its ability to focus attention and resources on the China challenge? While the National Defense Strategy paper suggests that U.S. officials understand the threat, America’s actions reveal an incapacity to grapple with this reality in any concentrated fashion.
Here’s a general idea of what a U.S. foreign policy under Trump might look like if it was based on a clear recognition of the China threat:
Iran: Since the end of the Cold War, the sheer folly of Trump’s Iran policy has been exceeded only by George W. Bush’s Iraq invasion. Barack Obama bequeathed to his successor a rare gift in the Iran nuclear deal, which provided an opportunity to direct attention away from Tehran and toward America’s position in East Asia. In no way did it serve America’s national interest to stir up tensions with Iran while the far more ominous China threat loomed. A policy based on realism would have seized that opportunity and used the channels of communication forged through the nuclear deal to establish some kind of accommodation, however wary or tenuous. Instead, America under Trump has created a crisis where none need exist.
Personnel: While the Iran policy might be difficult to reverse, a reversal is imperative. And that means Trump must fire National Security Advisor John Bolton and Secretary of State Mike Pompeo. While their bully boy actions on the global stage seem to mesh with Trump’s own temperament, the president also appears increasingly uncomfortable with the results, particularly with regard to their maximum pressure on Iran, which has brought America closer than ever to actual hostilities. Whether Trump has the subtlety of mind to understand just how destructive these men have been to his broad foreign policy goals is an open question. And Trump certainly deserves plenty of blame for pushing America into a zone of open hostility with Iran. But he can’t extricate himself from his own folly so long as he has Bolton and Pompeo pushing him toward ever more bellicosity in ever more areas of the world. He needs men around him who appreciate just how wrongheaded American foreign policy has been in the post-Cold War era—men such as retired Army Colonel Douglas MacGregor and former Virginia senator Jim Webb. Bolton and Pompeo—out!
Russia: Of all the developments percolating in the world today, none is more ominous than the growing prospect of an anti-American alliance involving Russia, China, Turkey, and Iran. Yet such an alliance is in the works, largely as a result of America’s inability to forge a foreign policy that recognizes the legitimate geopolitical interests of other nations. If the United States is to maintain its position in Asia, this trend must be reversed.
The key is Russia, largely by dint of its geopolitical position in the Eurasian heartland. If China’s global rise is to be thwarted, it must be prevented from gaining dominance over Eurasia. Only Russia can do that. But Russia has no incentive to act because it feels threatened by the West. NATO has pushed eastward right up to its borders and threatened to incorporate regions that have been part of Russia’s sphere of influence—and its defense perimeter—for centuries.
Given the trends that are plainly discernible in the Far East, the West must normalize relations with Russia. That means providing assurances that NATO expansion is over for good. It means the West recognizing that Georgia, Belarus, and, yes, Ukraine are within Russia’s natural zone of influence. They will never be invited into NATO, and any solution to the Ukraine conundrum will have to accommodate Russian interests. Further, the West must get over Russia’s annexation of the Crimean peninsula. It is a fait accompli—and one that any other nation, including America, would have executed in similar circumstances.
Would Russian President Vladimir Putin spurn these overtures and maintain a posture of bellicosity toward the West? We can’t be sure, but that certainly wouldn’t be in his interest. And how will we ever know when it’s never been tried? We now understand that allegations of Trump’s campaign colluding with Russia were meritless, so it’s time to determine the true nature and extent of Putin’s strategic aims. That’s impossible so long as America maintains its sanctions and general bellicosity.
NATO: Trump was right during the 2016 presidential campaign when he said that NATO was obsolete. He later dialed back on that, but any neutral observer can see that the circumstances that spawned NATO as an imperative of Western survival no longer exist. The Soviet Union is gone, and the 1.3 million Russian and client state troops it placed on Western Europe’s doorstep are gone as well.
So what kind of threat could Russia pose to Europe and the West? The European Union’s GDP is more than 12 times that of Russia’s, while Russia’s per capita GDP is only a fourth of Europe’s. The Russian population is 144.5 million to Europe’s 512 million. Does anyone seriously think that Russia poses a serious threat to Europe or that Europe needs the American big brother for survival, as in the immediate postwar years? Of course not. This is just a ruse for the maintenance of the status quo—Europe as subservient to America, the Russian bear as menacing grizzly, America as protective slayer in the event of an attack.
This is all ridiculous. NATO shouldn’t be abolished. It should be reconfigured for the realities of today. It should be European-led, not American-led. It should pay for its own defense entirely, whatever that might be (and Europe’s calculation of that will inform us as to its true assessment of the Russian threat). America should be its primary ally, but not committed to intervene whenever a tiny European nation feels threatened. NATO’s Article 5, committing all alliance nations to the defense of any other when attacked, should be scrapped in favor of language that calls for U.S. intervention only in the event of a true threat to Western Civilization itself.
And while a European-led NATO would find it difficult to pull back from its forward eastern positions after adding so many nations in the post-Cold War era, it should extend assurances to Russia that it has no intention of acting provocatively—absent, of course, any Russian provocations.
The Middle East: The United States should reduce its footprint in the region on a major scale. It should get out of Afghanistan, with assurances to the Taliban that it will allow that country to go its own way, irrespective of the outcome, so long as it doesn’t pose a threat to the United States or its vital interests. U.S. troops should be removed from Syria, and America should stop supporting Saudi Arabia’s nasty war in Yemen. We should make clear to Israel and the world that the Jewish state is a major U.S. ally and will be protected whenever it is truly threatened. But we should also emphasize that we won’t seek through military means to alter the regional balance of power based on mere perceptions of potential future threats to countries in the region, even allies. The United States won’t get drawn into regional wars unrelated to its own vital interests.
Far East: Once the other regional decks are cleared, America must turn its attention to Asia. The first question: do we wish to maintain our current position there, or can we accept China’s rise even if it means a U.S. retreat or partial retreat from the region? If a retreat is deemed acceptable, then America should secure the best terms possible over a long period of tough and guileful negotiations. But if we decide to maintain regional dominance, then China will have to be isolated and deterred. That will mean a long period of economic tension and even economic warfare, confrontations over China’s extravagant claims of sovereignty in the South China Sea and elsewhere, strong U.S. alliances with other Asian nations nurtured through deft and measured diplomacy, soaring technological superiority, and a continual upper hand in any arms race.
In this scenario, can war be averted? History suggests that may not be likely. But either way, America won’t remain an Asian power if it allows itself to be pinned down in multiple nonstrategic spats and adventures around the world. Asia is today’s Great Game and China is winning. That won’t be reversed unless America starts playing.
https://www.theamericanconservative.com/articles/the-great-power-game-is-on-and-china-is-winning/
Ron Insana: The market doesn’t realize this is more than a trade war — it’s a new Cold War
POINTS
The markets have been slow to recognize the high-stakes game that’s playing out on the world stage.
Like the neoconservatives, Trump’s closest advisors have all identified China as the foremost threat to the United States in the years, and decades, ahead.
While there is good reason to challenge China on a variety of fronts and force it to change behavior that disadvantages the U.S., it is not inevitable that China is as dangerous as members of this administration claim.
This is is a new Cold War to determine who will be the hegemonic power, economically and militarily, in the years to come.
https://www.cnbc.com/2019/05/24/ron-insana-the-market-doesnt-realize-this-is-more-than-just-a-trade-war-its-a-new-cold-war.html
Why China cares about this week’s EU elections
https://qz.com/1621047/eu-elections-2019-why-china-cares/
This week’s European Parliament elections will have immediate political consequences for many member states, and will serve as a referendum (paywall) on the 60-year experiment in cross-continental democracy that is the European Union. Thousands of kilometers away, another stakeholder in the bloc, one with an increasing amount of clout, will also be closely watching.
China’s involvement in the EU has ramped up significantly in recent years. That’s in part due to the enormous amount of trade that passes between the two parties: China is the EU’s second-largest trading partner after the US. Europe is also a crucial region for China’s growth ambitions, including its two signature initiatives: the Made In China 2025 plan and Belt and Road Initiative (BRI). But Beijing’s increasingly assertive role on the continent has some European nations, and their allies, worried.
The significance of that involvement was on display in March, when Chinese president Xi Jinping visited France, Italy, and Monaco (paywall) in a much-publicized tour meant to promote commercial partnerships between Chinese and European firms. During his visit, Xi said that China needs “a united and prosperous Europe” and that France and China should build a relationship based on “mutual trust, practical cooperation, and friendly sentiments.”
The visit was the culmination of months of unprecedented movement in the EU-China relationship. After a recent EU-China Summit in Brussels, Beijing agreed to work with the bloc to reform the World Trade Organization, a move European Council president Donald Tusk described as a “breakthrough.” In March, Italy became the first G7 country to sign a memorandum of understanding with China to join the BRI, for the tidy sum of €2.5 billion ($2.8 billion). Thus far, none of the bloc’s other large industrialized countries have signed up. China has also strengthened ties with western Balkan nations on the EU accession list and meets with them, as well as 12 EU nations, every year in what they have named the 16+1 group to discuss investment opportunities.
“In the Chinese original conception of the BRI, Europe is the final destination of this ambitious project, and still represents the largest and most attractive consumer market for Chinese products,” Philippe Le Corre, a senior fellow at the Carnegie Endowment for International Peace, testified to the US House of Representatives Foreign Affairs Committee earlier this month.
But China has also faced some setbacks. In March, the European Commission released an unusually confrontational strategic policy proposal (pdf) that called China a “systemic rival.” In April, the EU put in place a screening mechanism for foreign investments (pdf) aiming to make the process of foreign countries investing in Europe more transparent. Analysts say the move was a direct response to China’s business practices (paywall) in Europe. And anti-China sentiment is rising in the leadership ranks of the EU: Senior officials have expressed concerns about China’s role in the Balkans (paywall) and about Chinese companies threatening European companies in industries like commercial aviation, telecom infrastructure, robotics, and solar panels.
That’s why, at this critical juncture in their relationship, China is paying close attention to the results of an election that may influence its ability to do business on the continent. The country is reportedly reaching out (paywall) to individual European MEPs to “win support for [its] agenda through alternatives to official diplomatic channels.” And China has invited MEPs across the political spectrum (paywall), from far-right populists to staunch Communists, to visit in an effort to secure support for its European push, and hedge against the unpredictable results of this election.
“They realize in China that the European Parliament is not as insignificant a body as a lot of people say,” says Le Corre. “They are monitoring the situation in the European elections, because depending who runs the parliament … it may affect their interests.”
Le Corre gives the example of the EU’s policy on fifth-generation cellular networks, or 5G. Chinese telecom giant Huawei is the world leader in 5G technology, but the US accuses the company of using its tech to spy on behalf of the Chinese government. Brussels is in the process of building an EU-wide national security risk assessment for 5G technology. In the meantime, Huawei has already signed deals to install 5G networks in several European countries. The continent is divided (paywall) over its 5G strategy broadly, something both China and the US have criticized, for very different reasons.
“If the EU was to put together a plan on 5G that would help European players in that field to emerge to counter Chinese players, that would be of interest to the Chinese,” says Le Corre. “The European Parliament does have a say on trade and investments and on what China is doing economically in Europe, and that is the main concern of the Chinese government.”
By electing certain political parties to parliament, EU voters also have an indirect say in who will become the next president of the European Commission, a body that has huge power over EU policy, law, and funding, as well as EU expansion, issues that concern China.
The bloc’s approach to China’s growing presence in Europe has been mixed. Italy’s governing coalition is split over the decision to join the BRI because of concerns over China “colonizing” the country, as deputy prime minister Matteo Salvini put it. Intelligence agencies and opposition parties have objected to UK prime minister Theresa May’s decision to allow Huawei to supply “non-core” telecom equipment. And Emmanuel Macron has been vocal in his criticism (paywall) of China—but recently invited Xi to France, where he signed billions of euros worth of commercial agreements with Beijing.
China certainly knows what it wants to do in Europe. It won’t sit idly by while Europe decides what to do with China.
Why Trump wants to break up the European Union
Andrew Hammond is an associate at LSE IDEAS at the London School of Economics.
U.S. President Donald Trump meets with European Commission President Jean-Claude Juncker at the White House on Wednesday. While there are low expectations of a breakthrough in the U.S.-EU trade spat, Mr. Juncker’s broader objective is to try to calm wider transatlantic tensions that boiled over at the rancorous Group of Seven and NATO summits.
At the heart of this diplomatic discord is Mr. Trump’s disdain for the European Union, which goes significantly beyond that of any president since the bloc’s establishment. While he has concerns with Europe’s low levels of defence spending vis-a-vis Washington, it is on the economic front that the Brussels-based club is the deepest source of frustration for him with its large goods surplus with the United States.
On Tuesday, Mr. Trump tweeted that: “Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs. It’s as simple as that – and everybody’s talking. Remember, we are the ‘piggy bank’ that’s being robbed.”
This latest tweet builds on remarks last week from Mr. Trump when he remarkably declared, “I think the EU is a foe, what they do to us [the United States] in trade.” While some have dismissed this remark as just another spur-of-the-moment presidential outburst, Anthony Gardner – who served as U.S. ambassador to the European Union under Barack Obama – has warned that, “Europe wake-up; the U.S. wants to break-up the EU. Remember Belgium’s motto L’Union Fait la Force (Unity creates strength).”
The contrast between Mr. Trump, with his calls for more “Brexits” within the European Union, and U.S. policy at the start of the European integration process could not be starker. Embodied in John Kennedy’s 1962 Atlantic Partnership speech, the core U.S. view then was that a united Europe would make future wars on the continent less likely; create a stronger partner for the United States in meeting the challenges posed by the Soviet Union; and offer a more vibrant market for building transatlantic prosperity. Yet, U.S. attitudes gradually became more ambivalent as integration deepened, particularly in recent Republican administrations.
In the economic arena, for instance, the drive toward the European Single Market led to U.S. concerns about whether this would evolve into a “Fortress Europe.” Similarly, the creation of the European Monetary Union prompted worries about the dilution of U.S. primacy in the financial sector and macroeconomic policy. Moreover, in competition policy, the increasing assertiveness of the European Commission has raised U.S. concerns about EU overreach. Only last week, for example, Mr. Trump tweeted “The EU just slapped a Five Billion Dollar fine on one of our great companies, Google. They truly have taken advantage of the US, but not for long!”
Before Mr. Trump, the administration of George W. Bush came closest to questioning the value of European integration. For instance, the controversy over the Iraq conflict saw Washington querying the benefits of EU collaboration in the security and defence arena. On the eve of the NATO defence review in 2003, U.S. defence secretary Donald Rumsfeld even drew a distinction between “old” and “new Europe” with the latter perceived as more favourable to U.S. interests.
However, while the Bush team eventually recognized the need to draw back from this approach, it appears Mr. Trump may not be willing to do the same and has indeed raised the rhetoric several notches. In so doing, one of the features of the President’s approach is an attempt to prise apart Germany and France, the traditional two motors of EU integration. In May, it is reported that Mr. Trump advised French President Emmanuel Macron, who he appears to hold in high regard, that France would be better to quit the European Union to get a better trade deal with Washington than the United States is willing to offer the European Union as a whole.
This remarkable suggestion comes in the context of the U.S. President’s denunciation of Germany, which he has called “very bad” because of its significant trade surplus with the United States. While the White House’s gambit in trying to split Germany and France is unlikely to succeed, it underlines how U.S. ambivalence about European integration has reached its apotheosis under Mr. Trump. The scale of the challenge facing Mr. Juncker is therefore huge, given that this is the first U.S. president who appears to want to not just weaken, but also splinter the Brussels-based club.
https://www.express.co.uk/news/politics/785813/European-Union-EU-boss-threatens-break-up-US-retaliation-Trump-Brexit-support
“Managing the Dollar: From the Plaza to the Louvre” (Peterson Institute for International Economics, 1989).
In the 1980s, during the Reagan administration, trade friction between the United States and Japan extended to every possible area: electronics, automobiles, machine tools, precision machinery, construction equipment, semiconductors, communication equipment, supercomputers, tobacco and rice. In the U.S., this led to a rising flood of calls for regulations on Japanese imports.
Left unaddressed, the trade imbalance would have prompted a greater eruption of protectionist appeals in the U.S., threatening the system of free trade. U.S. Treasury Secretary James Baker possessed both the historical perspective to recognize that “the isolationism and protectionism of that era [during the aftermath of World War I] in part helped caused the Great Depression,” and a determination to avoid repeating that folly.
The result of Baker’s initiative was the 1985 Plaza Accord between the U.S., Japan, (West) Germany, England and France, which centered on adjustments to the currency exchange rates. The Plaza Accord resulted in a 50 percent depreciation of the dollar relative to the yen and the deutschemark.
My book offered a behind-the-scenes account of the “currency diplomacy” conducted between the various countries during the negotiation of the accord.
A Chinese edition of my book, titled “Managing the Dollar: The Plaza Accord and the Fate of the Yuan,” was published by CITIC Press in China in March. The promotional words accompanying the Chinese language title read: “A behind-the-scenes look at macroeconomic policy, bargaining between the great powers, and a guide to the future of the yuan.”
The belated publication of a Chinese edition of my book can be explained by the current trade friction between the U.S. and China. Stressing the damages incurred by China’s intellectual property infringement, the Trump administration has invoked Section 301 of the U.S. Trade Act to sanction China by imposing tariffs on Chinese products. The Chinese government initiated retaliatory tariffs in response. The U.S. then initiated a complaint with the World Trade Organization, claiming China’s actions violate WTO agreements.
The Chinese financial market is on edge. There are concerns about a simultaneous depreciation of the yuan and fall in stock prices, as occurred in 2015-2016. Guiding macroeconomic policy is also proving difficult. Buying up huge amounts of the yuan in order to maintain its value will deplete the country’s foreign currency reserves. Raising interest rates may put a damper on the economy. Capital controls may scare off foreign investment.
At present, Chinese products account for 20 percent of American imports; this is the same as Japan’s share of the American import market in 1989. The Trump administration may be lashing out against all the countries that have a trade surplus with the U.S., but China remains its primary target.
In the U.S. today, just as in the early 1980s, fiscal spending is expanding while monetary policy is tightening. Meanwhile, the dollar is strengthening as the yuan depreciates. Thus, structurally speaking, the current trade friction between the U.S. and China is quite similar to the U.S.-Japan trade friction of the 1980s.
All of this has led China to suspect that the Trump administration will soon press for some kind of currency adjustment akin to the 1980s Plaza Accord — Plaza Accord II, if you will.
Several reviews of the Chinese edition of my book from the Chinese blogosphere caught my attention:
“We all saw the Plaza Accord as an attempt by the U.S. to crush the rise of Japan, and this was also the argument that Japan’s right wing fabricated to fan the flames of anti-American sentiment. I now know that this was not the truth of the matter.
“I was impressed that the author viewed the Plaza Accord rather as a positive development — as the product of policy coordination between the major countries of the world to counter protectionism and redress the global imbalance in trade revenue. Today, China is in the same position as Japan at that time. We should learn from the history of the Plaza Accord, and develop a strategy for handling trade wars.
“I thought that the Plaza Accord had brought about Japan’s recession, but I learned from this book that Germany was also pressed to accept a sweeping revaluation of its currency — but the German market did not collapse.”
The Plaza Accord and a broader set of international agreements, which included the easing of fiscal and monetary policies, were later criticized for bringing about Japan’s “bubble” boom. It has also been argued that the fact that these policies were not accompanied by structural reform in such areas as banking and residential housing regulations aggravated the effects of the bubble economy.
However, the Plaza Accord did prove effective in correcting the U.S. trade imbalance. By 1991, the U.S. had erased the deficit in its current account balance. Yet that did not mark the end of the U.S.-Japan trade wars. The fierce battle for dominance in high-tech industries continued. The conflict over semiconductors brought about the worst period of tension between the U.S. and Japan.
The U.S. demanded that Japan secure a specific share of domestic semiconductor sales for foreign-made products. While the Japanese side agreed, the U.S. later invoked Section 301 of the Trade Act to impose sanctions upon Japan for not meeting the specified target.
In 1991, the U.S. and Japan revised their semiconductor agreement, with Japan promising effectively to ensure a 20 percent domestic market share for foreign-made semiconductors. Of all postwar trade agreements between the U.S. and Japan, this can be cited as the worst example of managed trade.
The current trade friction between the U.S. and China is unlikely to end in a ceasefire following a long war of attrition involving endless imposition of punitive tariffs. On the contrary, it seems very likely that the current trade dispute will develop into a fierce conflict over currency and high-tech industries.
CNN Anchor Jim Sciutto Says the U.S. Is at War. We Just Don't Know It.
We made a good run of it, didn’t we? For the past three-quarters of a century, the United States dominated the world stage. We were the keepers of the peace, the pioneers of technological innovation, the top dogs of military might. Like all good things, American exceptionalism must come to end. We just didn’t realize how swiftly that reckoning would come.
In his new book, The Shadow War: Inside Russia’s and China’s Secret Operations to Defeat America, Jim Sciutto, chief national security correspondent for CNN, explores the many, varied ways our adversaries to the East have chipped away at the U.S.’s standing as king of the global hill. By design, their tactics have remained far enough under the radar so as to avoid provoking military conflict. The sooner we recognize the threat to the rules-based international order we helped build in the wake of World War II, the better chance we have of preserving our supreme standing.
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This is not a work of dispassionate analysis. Sciutto is unabashedly pro-America, and he casts Russia and China as our villains. If the U.S. is to blame, he argues, it’s for misapprehending and underestimating the competition. The sources he most relies on are former U.S. officials—Jim Clapper, Michael Hayden, Ashton Carter. Sciutto says he reached out to Chinese and Russian officials, but they rebuffed his requests.
This past Monday, fresh off the set of CNN Newsroom, which he co-anchors each weekday morning, Sciutto stopped by the offices of Esquire to talk about his book. During the conversation, which has been edited for length and clarity, we discussed which adversary in the shadow war we should be most concerned about, whether the U.S. has undermined its own international credibility, and the ways in which Donald Trump has sped up our decline.
Esquire: What is the shadow war?
Jim Sciutto: It’s an undeclared war that most Americans don't know about. China and Russia, two very different countries, are using a very similar strategy: The idea is to attack and undermine the United States on multiple fronts at the same time, just below the threshold of a shooting war in a way that doesn't lead the U.S. to fight back. They know if they were to attack us head on, aircraft carrier to aircraft carrier or nuclear bomb to nuclear bomb, they would lose. At least, no one would win. By attacking around the margins, they’ve gained a lot over time, particularly because we were not paying attention. Even now that we know about it, we still haven’t figured out how to respond.
Give me some examples.
Russia’s interference in our 2016 presidential election, for instance. They targeted one of our most sacred institutions—shouldn’t that lead to a sea change in our relations with them? Lo and behold, that’s a very political issue in the U.S. Our president won't even acknowledge that it happened, because he takes it personally. In effect, Russia gets away with it. Some sanctions here and there, but not enough to change their behavior. So they did it again in the midterm election, in 2018, and are probably going to do it in 2020.
China, for its part, has been stealing U.S. trade secrets for decades, to the tune of hundreds of billions of dollars in losses. Companies can't stand it, but at the end of the day the U.S. has to trade with China. Of course, there's a trade war going on now. Still, they kind of get away with it.
There are the more aggressive actions, like old-school territorial games in defiance of the global order established post-World War II. People forget that Russia invaded the Ukraine. They're like, "Ukraine's a billion miles away." Well, it's in Europe, and it's a U.S. ally. Russia now controls Crimea and a big portion of Eastern Ukraine. In the South China Sea, China decided to just up and create territory out of thin air. They thought the U.S. would not going to go to war over it, and they were right.
Then you have their use of new technologies. Both Russia and China have literal space weapons floating around above our heads, designed to take out satellites that control stuff that you and I depend on. They could take it out in seconds.
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A satellite image of Subi Reef, an artificial island being developed by China in the Spratly Islands in the South China Sea.
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The U.S. media has reported extensively on all of the examples you mentioned. Why do you say that most Americans are not aware of what’s going on?
For one, you have to connect the dots. Americans are aware of the dots but not how the dots connect. Most people grant that Russia interfered with the election. But do they connect that to territorial gain in Europe? Do they even know that there are satellite weapons? No.
Who should we be more worried about, Russia or China?
In the short term, arguably Russia. It’s like a cornered rat; it could be very dangerous if it lashed out. If that happens, the situation could escalate to a degree that no one wants.
But if you talk to folks in U.S. military, or who work on national security, almost without exception, they'll say China is the bigger long-term threat. They're bigger, stronger, and have more tools at their disposal. They're our real challenger.
Do you consider Russia and China as allies in the Shadow War, in the traditional sense?
No, because they're not working together on this, and they have their own interests. China out and out wants to surpass the U.S. in every way. Their ambition is to be king of the world, to reclaim their rightful place as the most dominant country—economically, militarily, politically, diplomatically.
Russia is more of a spoiler. They don't think they're going to overtake the U.S. But they act from a place of feeling victimized, brought down by the fall of the Soviet Union. They’re playing a zero-sum game: “If I poke the U.S. in the eye, it’s a gain for us.”
Their goals may differ, but China and Russia have struck on the same asymmetric tactic as a way to beat their stronger competitor.
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Russians rally of "We are together" at the Red Square after Russias president Vladimir Putin signed the treaty of annexation of Crimea, on March 18, 2014 in Moscow, Russia.
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This sounds a lot like Cold War 2.0.
It's similar in the sense that it is global. During the Cold War, everything was seen through that Cold War lens. This is similar, except that the fronts are arguably closer to home: Our elections, our technology. The other way it's similar is that you have the potential for escalation in any one of these arenas. At some point, do you push that threshold too far and end up in a place where you don't want to be?
I'll give you two examples. Since China succeeded in the South China Sea, there’s been a lot of talk about whether they’ll invade Taiwan. If they do, will the U.S. go to war? We have a military alliance with Taiwan, but will we really honor it? Will there be political support here for sending Americans there to die in a bloody conflict? And what if Japan is invaded next?
One chapter of my book is about Russia’s cyberattack on Estonia, our NATO ally, in 2007. What if Moscow were to send troops there? Will Americans go fight for Estonia?
In the book, you take it as a given that the U.S. remains the best country to lead global affairs. Is there a chance that our time at the steering wheel is over?
Well, I would question whether I'm making the case for America being number one. What I do believe is that Russia and China are challenging an American-designed system, or at least a rules-based international order that we’ve invested in and fought to preserve for decades. My argument is for that kind of system, because it keeps the peace and, arguably, the prosperity.
Now, when I make that case, I'm an American speaking from New York City, and I carry some bias. People in China and Russia might say, "But those are rules that you imposed. Why should you be allowed to police my backyard?"
This is a clash of systems—authoritarianism in Russia and China, and democracy, however imperfect, in the U.S. The question is, who do you want to be in control of making those rules?
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Donald Trump and China’s President Xi Jinping leave a business leaders event at the Great Hall of the People in Beijing on November 9, 2017.
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Aren’t we dialing back on that notion of Pax Americana? It’s hard to make our case when we’ve, for example, left the Paris Climate Accord and abandoned the Trans-Pacific Partnership.
Clearly, we are pulling back. Some of that is driven by domestic politics and an exhaustion over endless wars. We're still in Iraq; we're still in Afghanistan. Many of the former officials I talked to for the book implied that we’ve been fighting the wrong war.
It’s more than that, right? We invaded Iraq based on faulty and outright wrong intelligence. Afghanistan is now the longest war in American history. Why should we, let alone other countries, maintain faith in the ability of the U.S. to lead global affairs?
I get it. The U.S. has made enormous mistakes with its exercise of power. I just finished watching the Ken Burns Vietnam documentary. What a chronicle of repeated mistakes and unnecessary losses. The U.S. has a faulty record, no question. But don't compare it to Russia and China. I don't think it's a close call between whose system is better.
That assumes it’s either/or: Russia and China will lead, or we will. Can you foresee an outcome in which no one country dominates the world stage?
We may be. We may be.
"China is basically on par with us. They don't have the same military, nor the same influence in various international organizations. But they’re moving closer."
Maybe? Or definitely?
Well, economically, we clearly are. China is basically on par with us. They don't have the same military, nor the same influence in various international organizations. But they’re moving closer. Maybe that's a fact of life that we'll have to deal with. Then the question becomes, how much do you lose by backing off?
How has the U.S. exacerbated the Shadow War?
One universal assessment, and this is from sources who served in Republican and Democratic administrations, is that we misunderstood the other side. George W. Bush famously said that he looked into Putin's eye and saw a guy he could deal with. We thought Russia and China wanted the same thing we wanted—an international rules-based system. Not only were we wrong; we were slow to realize it.
What about offensive moves? We, along with Israel, built a computer virus designed to cripple Iran’s nuclear facilities. If you ding Russia for its cyberattack on Estonia, shouldn’t you ding us for Stuxnet?
It's a fair question. The Obama administration debated this kind of stuff for a while. Once you go on the offense in cyber space, your adversaries are going to, too. I don't mean to portray the U.S. as an innocent actor here. We've done our own things to spark this conflict.
How would your book be written from their side? Could you understand the perspective of the Jim Sciutto of Russia?
I could if I was willing to swallow that my leaders are not elected, and that criticizing them might land me in prison. Listen, one motivation to write this book was because I’m a concerned American. I care about my country, and I'm not shy about saying that I think that we have more to offer the world. For me, there's not a gray area as to who's the better actor.
I say that as a person who’s witnessed it firsthand. I've lived in China, where I saw people carted away to prison for writing a controversial tweet. I've chased around the murderer of a Russian dissident in the U.K.
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People hold banners of Jamal Khashoggi during a symbolic funeral prayer for the Saudi journalist, killed and dismembered in the Saudi consulate in Istanbul.
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We may not openly kill our own citizens. But the current administration refuses to acknowledge the all-but-certain fact that the Saudi Crown Prince ordered the brazen murder of Saudi journalist Jamal Khashoggi in Istanbul.
Well, the president and his supporters presented a false choice with how to respond to the Khashoggi killing. They said we can't abandon a relationship with one of our few allies in the region because of this one murder, no matter how horrible. I do believe we stand for more than that. The U.S. has taken its allies to task before and have managed to maintain the relationship. But what is different about our system if we don't hold an ally accountable when they intentionally murder their own? If you're willing to give up that, you've given up the ball game.
So, we’ve given up the ball game?
On that issue, it seems so. Does Trump bring up human rights during negotiations with North Korea, or with China? No. He talks about trade. I'm not saying that we've abandoned human rights, but it's clearly not a priority for him.
How has the current administration has affected the Shadow War?
Each administration has thought they could get it right but didn’t. The Trump administration is full of contradictions on this issue. His senior intelligence officials say Russia interfered, and he says, “Maybe they didn’t.” Diplomats, secretaries of state, and military commanders say NATO is a bedrock that we’ll always stand behind, then the president accuses our allies of not paying their fair share. You have very public contradictions in this administration about America's foreign policy. That opens an opportunity to our adversaries to push the limits. But I’ll give credit where credit is due. Trump is confronting China in a way that no previous president has.
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Donald Trump and Russia’s President Vladimir Putin shake hands before attending a joint press conference after a meeting at the Presidential Palace in Helsinki, on July 16, 2018.
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About that: Last Friday, Trump escalated the trade war against China—which he began—by imposing tariffs on an additional $200 billion worth of Chinese goods. Today, China responded in kind, which will surely raise the cost on all sorts of things we depend on. One of Trump’s main motives is the theft of intellectual property from U.S. companies. Yet, during a press conference in Beijing in 2017, with Xi Jinping by his side, Trump said, "I don't blame China. Who can blame a country for being able to take advantage of another country for the benefit of its citizens?" How do you reconcile those two things?
Listen, the president is just flat-out wrong on much of this stuff. He’s even said that we're just as bad as the Russians. That’s the president of the United States saying that. I’m amazed his comment fell by the wayside like water off a duck’s back. His supporters find themselves in the position saying, "That's just Trump being Trump.” But it’s not clear that his art-of-the-deal method is working. Russia certainly hasn't changed its behavior.
What would losing the Shadow War look like, practically speaking?
I'm not Kissinger, but: Less influence abroad, and consequences for us and our allies. Arguably, an international system that doesn't maximize the public good.
Does Trump’s approach have any chance of working?
I don't know. Because what's the strategy? He hasn't articulated it, and he contradicts himself in the span of a day or even a tweet. We don't know what the strategy is. His own aides and cabinet members can't articulate it.
We’re almost two and half years into his presidency. Shouldn't we know by now?
Absolutely.
2019 Second-Quarter Forecast
https://worldview.stratfor.com/article/2019-second-quarter-forecast-geopolitics-global-business-risk
A Trade Truce Won't End the U.S.-China Trade War. A deal on trade between the United States and China is imminent. However, competition between two of the world's most dominant powers will continue this quarter, even broadening out to envelop other sectors — including but not limited to emerging technologies. Beijing won't sit idly by in the face of continued U.S. action and will attempt to counter Washington's activities using its economic heft, trade relationships, market access and considerable influence to compel other countries. Those on the sidelines will be increasingly drawn into the fight, and even countries trying to balance between Washington and Beijing will be pulled into the fray as harsher measures are applied to force a choice for one side or the other.
The United States is the Key Dynamic Actor on the World Stage. Washington will make a decision on whether or not to enforce its tariff threat against auto imports in Q2. Most major exporters to the United States will receive some type of exemption, though exceptions for Japan and the EU will not be indefinite. Because of this, Washington will wield the continued specter of tariff implementation to wrest serious concessions on pending trade deals from Tokyo and Brussels. The United States is also making tangible changes to its military posture and focus throughout the world, most notably in Syria and Afghanistan, forcing regional actors to take up the slack. The eventual U.S. departure from certain theaters, such as Syria, increases the potential for state-to-state conflict and could facilitate a resurgence of regional and transnational militancy.
Key Pillars of the Global Economy Will Experience Tremors. In the Asia-Pacific region, China's economy will slow throughout the second quarter, affecting a number of local trading partners in the short term. Europe is experiencing a similar economic malaise. Italy and Germany have both slashed growth estimates, and Rome's banking sector faces the most economic risk in the eurozone. On top of this, there is much uncertainty on the Continent surrounding exactly how the United Kingdom exits the European Union. Within the quarter, however, there will be no hard Brexit.
Nuclear Deals and Negotiations Hang in the Balance. Iran will be increasingly dissatisfied with the Joint Comprehensive Plan of Action (known as the JCPOA or the Iran nuclear deal) but will stay within the framework for now. European payment mechanisms such as INSTEX will keep an economic lifeline open for the Islamic republic and are contingent upon Tehran complying with the terms of the deal. Still, this will not be enough to offset the pain from continued U.S. sanctions, though Iran won't resume nuclear activities prohibited by the JCPOA this quarter. On the Korean Peninsula, the abrupt end of the nuclear summit between North Korea and the United States doesn't mean that negotiations are dead. They will, however, remain in a stalemate this quarter as regional stakeholders — primarily China and South Korea — work to reset the talks.
Venezuela Under Pressure From Within and Without. Starved by U.S. sanctions, Venezuela will experience increasing support for the country's political opposition over the quarter. The ultimate success of a forced political transition, however, will depend on the country's armed forces breaking from Maduro en masse. In the coming weeks, lower-level military personnel will continue to throw in with the opposition while crucial high-ranking officers debate their prospects. Protests will continue to grow and more violence is expected. The United States and its allies will exert influence from afar, but a foreign military intervention is unlikely.
EU Parliament Elections Will Suck All the Oxygen From the Room. The leadup to — and results of — the European Parliament elections will fundamentally delay decisions on significant issues beyond the quarter. Major structural reform initiatives will be put on hold until the end of May, when voting concludes and results are announced. Following the elections, a more fragmented body can be expected as Euroskeptic parties gain influence. Though pro-EU parties will ultimately maintain control, representatives of EU countries will be more heavily guided by domestic concerns when it comes to deciding matters of the Continent, leading to a political stalemate in Brussels.
The Thucydides Trap: How to stop the looming war between China and the U.S.
https://bigthink.com/mike-colagrossi/thucydides-trap-historical-conflicts-of-nation-states
The Thucydides Trap leads us to believe a U.S.-China war is inevitable. But is a 2,400-year-old school of thought really what the U.S. should base its foreign policy on?
Brutality and warfare have followed humankind wherever we have gone. Throughout the years there have been epic battles between people that have been carved into Neolithic caves and immortalized in the Homeric Hymns. If we were naive enough, we might actually believe that this was the only mode of human existence and interaction.
By looking at the historical clashes of nations we can learn how the ancients overcame adversity through warfare and early types of diplomacy. Studying the choices of ancient nations can also prompt us to ask whether these solutions are still relevant to us today. Everyone now faces a new enemy worldwide that we must face together: ourselves. In a globalized and interconnected cultural ecosystem such as ours, we are required to come up with solutions for the common good of the world.
Through diplomatic and humanitarian efforts we can enter into a new world stage where peace and prosperity are the norm and diplomacy is the ultimate goal of those in power.
Revisiting the Thucydides Trap with China
Harvard Professor and political scientist Graham T. Allison has weighed the historical theory told originally by the ancient Greek historian Thucydides and put it into perspective with current U.S.-Chinese relations. In History of the Peloponnesian War (431–404 BC), Thucydides writes:
"War began when the Athenians and the Peloponnesians broke the Thirty Years Truce which had been made after the capture of Euboea. As to the reasons why they broke the truce, I propose first to give an account of the causes of complaint which they had against each other and of the specific instances where their interests clashed: this is in order that there should be no doubt in anyone's mind about what led to this great war falling upon the Hellenes. But the real reasoning for the war is, in my opinion, most likely to be disguised by such an argument. What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta."
Allison coined the term 'Thucydides Trap' to describe the idea that when one great power is rising it will inevitably threaten to displace the established power, consistently resulting in war.
Allison believes that this doesn't have to be the case, and David C. Kang, Professor of International Relations at the University of Southern California who spoke with Big Think recently, also believes that the Thucydides Trap must be avoided at all costs.
Throughout time, the Thucydides Trap has been reenacted multiple times across the world stage. Allison writes that over the past 500 years, of 16 documented cases where one rising power threatened to displace a ruling one, 12 resulted in war.
We're all unconsciously familiar with this phenomenon. If you're an American, it's part of the history that's celebrated every year: The United States rebelled against the British Empire and war was waged in the 18th century, a victory that led to America overtaking Britain as the world's dominant superpower in the 20th century.
While there are lingering fears that China's rapid economic and political growth will leave us in a similar state of competition and warfare, many great thinkers believe that we can avoid this trap. Professor Allison thinks we can avoid war with China by taking into account five lessons from the Cold War:
War between nuclear superpowers can't work because of “mutual assured destruction" or MAD.
The nuclear paradox: Leaders must be prepared to engage in a war they may not be able to win just to intimidate adversaries. If war occurs, both nations lose and millions die. See the above point.
The superpowers must define a list of “precarious rules of the status quo ... By reaching agreements on contentious issues, the United States and China can create space to cooperate on challenges..."
Domestic performance is just as important as what a nation does abroad. The U.S.'s democratic-capitalist model must succeed at home to win against Xi's Leninist-Mandarin authoritarian model, and vice versa.
Coherent, concrete policy strategies for dealing with China must be created. As Allison succinctly puts it: "Hope is not a strategy."
Leaders must realize that all-out war spells the end of the human race when it comes to superpowers with nuclear weapon stockpiles. This is planetary suicide and there won't be any game theorists or policymakers left to debate the outcome.
Even so, military men in Washington and Beijing must play through these wargames in their minds in order to keep the risk of total annihilation a thought that must never be acted upon. They must both do their best to deter potential actions that could lead to this world-ending situation. This same idea must be applied between all nuclear powers, which makes it relevant for curbing any battle between nuclear superpowers.
Policy, or "precarious rules of the status quo" as President John F. Kennedy called it during the Cold War, must be enacted to ensure arms-control treaties are upheld and mutual guidelines might limit any future cyber attacks or border disputes between allies. Also by ensuring domestic performance and international policy are on the forefront, our diplomatic channels will always be open with a rising power. Thus we can reduce the challenges of the Thucydides Trap arising once more.
Allison believes that this will lead to more prosperous times in America and around the world—particularly at a time when he believes America needs it the most. In Destined for War: Can America and China Escape Thucydides's Trap?, Graham Allison states:
“I am a congenital optimist about America, but I worry that American democracy is exhibiting fatal symptoms. DC has become an acronym for Dysfunctional Capital: a swamp in which partisanship has grown poisonous, relations between the White House and Congress have paralyzed basic functions like budgets and foreign agreements, and public trust in government has all but disappeared.
These symptoms are rooted in the decline of a public ethic, legalized and institutionalized corruption, a poorly educated and attention-deficit-driven electorate, and a 'gotcha' press — all exacerbated by digital devices and platforms that reward sensationalism and degrade deliberation. Without stronger and more determined leadership from the president and a recovery of a sense of civic responsibility among the governing class, the United States may follow Europe down the road of decline."
Roots of historical diplomacy
There is some scant evidence that proto-diplomatic practices existed in some of the earliest of civilizations. We do know that the Romans used envoys to spread their messages in the late antiquities.
Left: The Egyptian–Hittite peace treaty, between the New Kingdom of ancient Egypt and the Hittite Empire of Anatolia. Right: A French ambassador in Ottoman dress, painted by Antoine de Favray, 1766, Pera Museum, Istanbul.
One notable instance of early diplomacy was between the Pharaoh of Egypt and rulers of the Hittite Empire in 1274 BCE. There is evidence on a stone tablet that a peace treaty was signed between the two rulers and it is considered one of the first known international peace accords.
Some of our earliest foundations of modern diplomatic practices can be traced to medieval Europe and beyond. In nation-states that were emerging during the 14th to 16th century (in the early days of the Renaissance) diplomacy was beginning to be conducted between ambassadors and consuls of different countries. These professional diplomats would eventually form into the ambassador practices we use today.
Furthermore, the Italian city-states began to develop new forms of diplomacy as their empires grew richer and stronger. For example, a city state such as Milan would send a resident diplomat on a mission with a clear code of conduct. This was a new way of thinking about intrastate and international relations. Italian diplomatic culture began to lead the way forward as these missions would become the equivalent of our modern permanent resident diplomatic missions.
Globalization's effect on avoiding future wars
There have been many false starts and stops with the future of a globalized network of peaceful interaction. For example, after World War I the impetus to join the League of Nations with the herculean efforts shown by President Woodrow Wilson were largely ignored by opposition in the Senate. The onset of World War II would prove that this was a failed endeavor for striving towards world peace.
Eventually, the United Nations was created with the hope that it would ensure diplomatic international cooperation on a global scale. It now boasts over 193 members and it just could be one of the ways we deal with future clashes between nations.
The UN's mission to ensure peace between nations has been challenged throughout the years, but arguably upheld as we have never experienced a massive all-out war between two superpowers.
As a result of international governing bodies like the UN and increased communication lines between foreign powers, we've slowly built up a world political apparatus that can withstand potentialities of war. The Thucydides Trap is just that—a potential trap, but not a destiny.
The Old U.S. Trade War With Japan Looms Over Today’s Dispute With China
https://www.wsj.com/articles/the-old-u-s-trade-war-with-japan-looms-over-todays-dispute-with-china-11544717163
A fast-rising Asian power has built up a huge trade surplus with the U.S. and threatens American economic supremacy. Washington is outraged at how this new giant has acquired U.S. technology—often, U.S. officials warn, by theft—and how it has used the heavy hand of government to thrust its companies into a dominant global position. Now a Republican president who won election with surprising support from blue-collar men in the Midwest says that the economic rival had better make a deal, or else.
That, of course, is a description of the mid-1980s, when the rise of Japan was a top challenge for President Ronald Reagan and the U.S. was constantly setting deadlines and threatening tariffs. Now the U.S. has a similar challenge on its hands—only this time, it is China, which has replaced Japan as the world’s No. 2 economy and America’s No. 1 challenger.
President Donald Trump announced a temporary truce after a grilled sirloin dinner with Chinese President Xi Jinping in Buenos Aires on Dec. 1, and talks have resumed with a quick Chinese offer to trim auto tariffs. But a U.S. deadline looms: Without a new overall agreement in 90 days, Washington will slap 25% tariffs on $200 billion in Chinese goods. Days before the dinner, Mr. Trump told The Wall Street Journal, “They have to open up China to the United States. Otherwise, I don’t see a deal being made.”
Under similar pressure three decades ago, Tokyo made a fateful choice: major concessions to the U.S., including in the 1985 Plaza Accord that let Japan’s currency rise against the dollar. What happened next offers important lessons for the U.S. about how trade conflicts can end in unanticipated ways.
Faster than anyone thought possible, Japan ceased to be a threat to U.S. economic primacy. Under U.S. pressure, it cut interest rates to stimulate demand for imports. That spurred a historic bubble, which collapsed in the early 1990s, sending Japan into a tailspin. Soon after, all the hand-wringing about a world economy controlled by Tokyo ceased.
Like Japan, China may show vulnerabilities America isn’t prepared for.
By that measure, the U.S. emerged from that trade war a winner, and many of those pushing Mr. Trump to get tough on Beijing would be more than happy to see a similar outcome this time. A weakened Beijing would have trouble threatening the U.S. Navy in the Pacific or dictating how the globe’s cellphones should work.
But Japan’s case shows that slapping down No. 2 doesn’t necessarily solve the fundamental problems driving trade imbalances—including America’s propensity to spend money it doesn’t have. The imbalances with Japan transferred, in effect, to China. The blue-collar, Midwestern manufacturing jobs that Mr. Reagan and later presidents hoped to protect continued disappearing, with consumers no more likely to buy a U.S.-made TV or microwave oven than before.
In 1981, amid tensions over Japanese exports and the loss of American jobs, members of the United Autoworkers Local 588 of Ford Motor Co. in Chicago Heights, Ill., used sledgehammers and crowbars to destroy a Toyota Corolla. . Photo: Associated Press
China has closely studied Japan’s experience and is likely to put up greater resistance to the concessions that the U.S. wants. But whether it gives in to Washington’s demands or resists and suffers a big tariff hit, the Chinese economy is in for a destabilizing jolt. Like Japan, China may show vulnerabilities America didn’t expect and isn’t prepared for.
The passage of three decades has erased some memories of just how big a challenge Japan was thought to pose in the 1980s. In 1984, the U.S. trade deficit soared to more than $100 billion for the first time. Democrats pushed legislation that would retaliate against countries running large trade surpluses with the U.S. with punitive tariffs. Japan was the top target.
“The Americans were always threatening Japan,” recalls Toyoo Gyohten, then a top Finance Ministry official in Tokyo, in an interview. Mr. Gyohten, now 87, says that Japan realized that it had to placate its American ally or risk getting blocked from the U.S. market. So one day in September 1985, Japanese Finance Minister Noboru Takeshita slipped out of his house wearing golf shoes, to put any reporters off his scent, and played nine holes. But instead of completing the back nine, he headed to the airport and boarded a flight to New York, as Mr. Gyohten recalled in a 1992 book co-authored with former Federal Reserve Chairman Paul Volcker.
On Sunday, Sept. 22, 1985, at the Plaza Hotel in New York City, the U.S., Japan and three European countries announced what later became known as the Plaza Accord, calling for a sharp devaluation of the dollar. The goal was to make American exports more attractive and to cut the U.S. trade deficit. Otherwise, warned the finance chiefs, the result could be “mutually destructive retaliation.”
One participant said “the element of surprise was complete.” The devaluation happened with breathtaking speed—“unstoppable,” Mr. Gyohten recalls. A dollar bought about 240 yen just before Plaza. Within a year, it bought only 154 yen.
Pressures Then and NowA breakthrough deal known as the PlazaAccord helped ease a major trade skirmishwith Japan in the 1980s. But many of theproblems Washington wanted to fixpersisted, with China simply replacing Japanas the U.S.'s main trade adversary.Share of global gross domestic product*
%U.S.Japan
China19902000’10010203040
U.S. current-account deficitSources: International Monetary Fund (GDP); FederalReserve Bank of St. Louis (current account deficit)Note: 2018 figure is a projection
%
1985: Plaza Accord19902000’10-6-5-4-3-2-101
President Reagan wanted more action. The day after Plaza, with Japan in mind, he told a business group, “When governments permit counterfeiting or copying of American products, it is stealing our future, and it is no longer free trade.” U.S. companies, belatedly noticing Japanese rivals grabbing a bigger share of global markets, sometimes said they were getting cheated. International Business Machines Corp. alleged that Fujitsu Ltd. copied IBM’s mainframe operating-system software; Honeywell said Minolta stole its patented technology for a hit camera in 1985. Both disputes were later settled, but Washington barred foreign scientists from a 1986 conference on superconductivity for fear that Japan would take the lead, and pushed Japan to do more basic research on the theory that it would stop Japanese scientists from free-riding on American innovation.
Meanwhile, urged on by U.S. officials, Japan embarked on a quick stimulus program to boost imports. The Bank of Japan ratcheted down interest rates by half within a year and a half. The U.S. economy boomed, and the trade surplus shrank somewhat.
Still, America’s concern deepened. The late 1980s and early 1990s were full of alarms from trade officials and experts about how Japanese bureaucrats were plotting to control the world. U.S. trade officials warned in 1989 that a Japanese technology standard called Tron could undercut American dominance in computers.
A 1991 book, “The Coming War With Japan,” by George Friedman and Meredith LeBard, predicted that Japan, irked by U.S. trade demands, would “once more seek to become an empire on its own, dominating the western Pacific and eastern Asia.” Reviewers called it thought-provoking and disturbing. James Fallows, in the New York Review of Books, wrote that the authors’ prediction of “more and more open rivalry” between Japan and America “may well seem prescient.”
Japan’s Finance Minister Noboru Takeshita, right, meets with U.S. Treasury Secretary James Baker in Tokyo in 1986. The year before, Mr. Takeshita met secretly with Mr. Baker and others to hash out the multi-nation Plaza Accord. Photo: Associated Press
What few saw coming—even though it was already happening—was the crumbling of Japan’s juggernaut. The Plaza Accord and interest-rate cuts had exposed little-noticed flaws in economic management. Conflicted regulators let banks lend huge sums with inflated real estate as collateral. The Bank of Japan, lacking independence, hesitated to remove the punch bowl when Japan’s party of the century was in full swing. “Easy money, instead of generating greater demand for consumption and imports—it stimulated an asset bubble. Every Japanese was totally mesmerized,” says Mr. Gyohten, the former Finance Ministry official.
When the inevitable crash came, regulators were caught with their pants down—almost literally—as it was discovered that Finance Ministry officials and the bankers they regulated had enjoyed “no-pants shabu-shabu” meals together, where scantily clad waitresses served a beef delicacy.
Japan plunged into two decades of stagnation. Banks went bankrupt under the weight of bad loans, and prices started falling. Personal-computer software and chips based on the Tron technology proved no match for Microsoft Corp.’s Windows and Intel Corp.’s processors as a global standard. The Japanese bureaucrats pushing it watched helplessly as giants such as Google and Amazon were born on the West Coast.
Washington learned that it had limited skill at micromanaging a distant economy to lift imports, but America’s power to innovate surpassed anything the Japan doomsayers foresaw. By the turn of the century, Japan had ceased to be a top trade issue for the U.S. It was no longer worth arguing about.
There was one place where people didn’t forget the U.S. tussle with Japan: China.
“We have been paying close attention to the Japanese experience,” says Yu Yongding, a leading Chinese economist who has served as a planning adviser to the government. Mr. Gyohten and other top Japanese officials who lived through the bubble and its aftermath describe frequent visits from Chinese representatives.
Trading PlacesChina now represents the biggest portion of the U.S. trade deficit.U.S. trade deficits with Japan and China as percentage of total U.S. trade deficit.Source: U.S. Census Bureau
%JapanChina
1988’90’92’94’96’982000’02’04’06’08’10’12’14’16010203040506070
Initially, many in China focused on the simplest lesson of the Plaza Accord: the need to control one’s own currency. Even today, when most nations of China’s economic stature let their currencies move freely against the dollar, Beijing keeps daily trading of its renminbi within a narrow band.
“I wish to advise people to give up the illusion that another Plaza Accord could be imposed on China,” China’s ambassador to the U.S., Cui Tiankai, said in August. “They should give up the illusion that China will ever give in to intimidation, coercion or groundless accusation.”
Currency manipulation was among the biggest U.S. complaints against Beijing until a few years ago. Under Mr. Trump, the discussion has broadened into a critique of the entire way China runs its economy.
In place of Japan’s Tron, once-obscure bureaucratic plans in China are now at the center of global trade conflicts, particularly “Made in China 2025,” a policy adopted in 2015 calling on Chinese manufacturers to boost domestic production of critical high-tech components. China is considering changes to the policy under U.S. pressure, people familiar with the matter said this week. “I’m amazed at how this became such a big deal,” says Mr. Yu, the economist. “I don’t think any government can be so clever to know the new technologies.”
The parallels with Japan weaken when it comes to military tensions. While some in the 1980s feared that Japan could remilitarize and become a strategic rival to the U.S., China already plays that role, challenging the U.S. Navy by building up fortified outposts in disputed areas of the South China Sea. With a population more than 10 times Japan’s and a nuclear arsenal, China is far better-positioned to take on the U.S. globally than Japan was.
Yet amid the talk of superpower conflict, people may miss the risk of China going in the other direction, says Takahide Kiuchi, a former Bank of Japan policy board member now at the Nomura Research Institute in Tokyo. “The Chinese financial system is the biggest threat to global stability,” Mr. Kiuchi says. “The U.S.-China trade problem is occurring at exactly the wrong time.”
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China’s economy isn’t the same as Japan’s in the 1980s—for one thing, the average Chinese is much poorer today than the average Japanese was then—but some structural flaws are similar. Beijing’s regulators still have an inadequate grasp of risks in the financial system, especially the trillions of dollars in deposit-like investment products. Real-estate prices in China’s biggest cities have risen far beyond the average person’s budget, recalling the 100-year loans people used in the late 1980s to buy tiny Tokyo apartments. And China’s working-age population has begun shrinking because of a low birthrate—resembling the demographic time bomb that underlies Japan’s long stagnation.
As the trade conflict with the U.S. wears on, economists such as Mr. Kiuchi say that Chinese leaders are already backing away from overhauls such as exposing state-owned companies to more market competition. And they may turn to short-term stimulus such as public works, the kind of move that Japan tried after the Plaza Accord and later regretted.
If China’s economy hits the brakes, the U.S. would have plenty of reason to breathe a sigh of relief. Beijing might have to dial back its military buildup, and middle-class frustration could jump-start the political liberalization that President Xi has halted.
The risk is the instability that could ripple out into the world. It isn’t just the Iowa soybeans or made-in-South Carolina BMWs that China buys. Global commerce is intertwined far more than it was three decades ago. If China buys fewer Japanese robots or German gas turbines, those countries may take a hit that spreads to the U.S. The mere fear of a recession in a country like China, which accounts for one-sixth of the global economy, can hit markets and create a self-fulfilling prophecy.
If the U.S. is perceived as rooting for Beijing’s downfall, it could be self-fulfilling in another way by turning a country that has some common interests with the U.S.—a frenemy, one might say—into an outright enemy. Mr. Trump himself seems aware of the risks. At a news conference on Nov. 7, he started one answer with what sounded like characteristic crowing about a policy success. “China has come down tremendously. Tremendously,” he said. “China would have superseded us in two years as an economic power; now, they’re not even close.”
But then he caught himself. “I don’t want them to go down,” he said. “We’re going to see what we can do.”
Chinese Media Warns of Japan's Plaza Accord Lessons
https://www.bloomberg.com/news/articles/2018-08-17/chinese-media-warns-of-japan-s-painful-lessons-from-plaza-accord
As China and the U.S. prepare to resume trade talks, a Chinese state-run media outlet has reminded its readers of Japan’s economic plight after it agreed to U.S. demands in 1985.
That year, under pressure from the U.S., Japan signed the Plaza Accord, agreeing to strengthen its currency against the U.S. dollar. Rapid and steep yen appreciation and Japan’s domestic policy mistakes eventually brought about the nation’s "lost decade," according to an article published Friday by China’s official Xinhua News Agency.
The article, which didn’t mention the Chinese currency, came as China and the U.S. prepare for the first major negotiations in more than two months in an effort to head off all-out trade war. President Donald Trump has prodded China to offer more at the bargaining table.
"The currency and international trade are not only global economic issues, but also domestic political issues," the story said, after recounting the U.S. exporters’ lobbying efforts in the early 1980s. "Although it cannot solve fundamental issues of trade imbalance, the U.S. government always, again and again, looks for scapegoats."
Many economists blame the Plaza Accord -- which was also signed by France, West Germany and the United Kingdom -- and subsequent Bank of Japan rate cuts for worsening Japan’s asset-price bubble and the aftermath, a deflationary period.
The authors of the Chinese article said the currency intervention narrowed the U.S. trade deficit, but that it didn’t last long. Meanwhile, the Japanese companies relocated production abroad and expedited innovation, boosting their global competitiveness, they wrote.
"It’s worth learning from the lessons of the Japanese government, which inappropriately handled the changing situation, leading to serious consequences for the domestic economy. And from the Japanese companies which actively made adjustments to face the challenges," they said.
Michael Kimelman: How Obama committed "biggest theft in history"
FNMA
What a complete embarrassment that guy is to not only this country's history but to the ideals of democracy and inclusion in general. Hopefully just a one and done street corner dictator...
DONALD J. TRUMP CONTRACT WITH THE AMERICAN VOTER
“Therefore, on the first day of my term of office, my administration will immediately pursue the following six measures to clean up the corruption and special interest collusion in Washington, DC:
FIRST, propose a Constitutional Amendment to impose term limits on all members of Congress;
SECOND, a hiring freeze on all federal employees to reduce federal workforce through attrition (exempting military, public safety, and public health);
THIRD, a requirement that for every new federal regulation, two existing regulations must be eliminated;
FOURTH, a 5 year-ban on White House and Congressional officials becoming lobbyists after they leave government service;
FIFTH, a lifetime ban on White House officials lobbying on behalf of a foreign government;
SIXTH, a complete ban on foreign lobbyists raising money for American elections.
On the same day, I will begin taking the following seven actions to protect American workers:
FIRST, I will announce my intention to renegotiate NAFTA or withdraw from the deal under Article 2205
SECOND, I will announce our withdrawal from the Trans-Pacific Partnership
THIRD, I will direct my Secretary of the Treasury to label China a currency manipulator
FOURTH, I will direct the Secretary of Commerce and U.S. Trade Representative to identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately
FIFTH, I will lift the restrictions on the production of $50 trillion dollars’ worth of job-producing American energy reserves, including shale, oil, natural gas and clean coal.
SIXTH, lift the Obama-Clinton roadblocks and allow vital energy infrastructure projects, like the Keystone Pipeline, to move forward
SEVENTH, cancel billions in payments to U.N. climate change programs and use the money to fix America’s water and environmental infrastructure
Additionally, on the first day, I will take the following five actions to restore security and the constitutional rule of law:
FIRST, cancel every unconstitutional executive action, memorandum and order issued by President Obama
SECOND, begin the process of selecting a replacement for Justice Scalia from one of the 20 judges on my list, who will uphold and defend the Constitution of the United States
THIRD, cancel all federal funding to Sanctuary Cities
FOURTH, begin removing the more than 2 million criminal illegal immigrants from the country and cancel visas to foreign countries that won’t take them back
FIFTH, suspend immigration from terror-prone regions where vetting cannot safely occur. All vetting of people coming into our country will be considered extreme vetting.
Next, I will work with Congress to introduce the following broader legislative measures and fight for their passage within the first 100 days of my Administration:
1. Middle Class Tax Relief And Simplification Act. An economic plan designed to grow the economy 4% per year and create at least 25 million new jobs through massive tax reduction and simplification, in combination with trade reform, regulatory relief, and lifting the restrictions on American energy. The largest tax reductions are for the middle class. A middle-class family with 2 children will get a 35% tax cut. The current number of brackets will be reduced from 7 to 3, and tax forms will likewise be greatly simplified. The business rate will be lowered from 35 to 15 percent, and the trillions of dollars of American corporate money overseas can now be brought back at a 10 percent rate.
2. End The Offshoring Act Establishes tariffs to discourage companies from laying off their workers in order to relocate in other countries and ship their products back to the U.S. tax-free.
3. American Energy & Infrastructure Act. Leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years. It is revenue neutral.
4. School Choice And Education Opportunity Act. Redirects education dollars to gives parents the right to send their kid to the public, private, charter, magnet, religious or home school of their choice. Ends common core, brings education supervision to local communities. It expands vocational and technical education, and make 2 and 4-year college more affordable.
5. Repeal and Replace Obamacare Act. Fully repeals Obamacare and replaces it with Health Savings Accounts, the ability to purchase health insurance across state lines, and lets states manage Medicaid funds. Reforms will also include cutting the red tape at the FDA: there are over 4,000 drugs awaiting approval, and we especially want to speed the approval of life-saving medications.
6. Affordable Childcare and Eldercare Act. Allows Americans to deduct childcare and elder care from their taxes, incentivizes employers to provide on-site childcare services, and creates tax-free Dependent Care Savings Accounts for both young and elderly dependents, with matching contributions for low-income families.
7. End Illegal Immigration Act Fully-funds the construction of a wall on our southern border with the full understanding that the country Mexico will be reimbursing the United States for the full cost of such wall; establishes a 2-year mandatory minimum federal prison sentence for illegally re-entering the U.S. after a previous deportation, and a 5-year mandatory minimum for illegally re-entering for those with felony convictions, multiple misdemeanor convictions or two or more prior deportations; also reforms visa rules to enhance penalties for overstaying and to ensure open jobs are offered to American workers first.
8. Restoring Community Safety Act. Reduces surging crime, drugs and violence by creating a Task Force On Violent Crime and increasing funding for programs that train and assist local police; increases resources for federal law enforcement agencies and federal prosecutors to dismantle criminal gangs and put violent offenders behind bars.
9. Restoring National Security Act. Rebuilds our military by eliminating the defense sequester and expanding military investment; provides Veterans with the ability to receive public VA treatment or attend the private doctor of their choice; protects our vital infrastructure from cyber-attack; establishes new screening procedures for immigration to ensure those who are admitted to our country support our people and our values
10. Clean up Corruption in Washington Act. Enacts new ethics reforms to Drain the Swamp and reduce the corrupting influence of special interests on our politics.
On November 8th, Americans will be voting for this 100-day plan to restore prosperity to our economy, security to our communities, and honesty to our government.
This is my pledge to you.
And if we follow these steps, we will once more have a government of, by and for the people.”
When it comes to ‘saving globalization’ world leaders are still missing the point
“Philosophers have only interpreted the world, in various ways. The point, however, is to change it,” or so Karl Marx once wrote. As trade liberalization and globalization more broadly are called into question, G20 leaders could do with both interpreting the situation and changing it.
It is not an easy task for the G20, which is a diverse group of developed and emerging economies, accounting for around 80% of GDP. In spite of their great success in launching a trade and investment working group and agreeing on guiding principles of investment policy-making, G20 leaders failed to address the emergence of anti-globalization voices. Here are four things they got wrong – and three ways they can turn the situation around in 2017.
When protectionism makes sense
Here’s the first thing they got wrong when they met in China: their statement reaffirming their “opposition to protectionism on trade and investment in all its forms”. In fact, this is not only legally inaccurate, but it’s beyond their political mandate.
In the World Trade Organization’s current rule book, certain defensive trade measures are totally legitimate. That includes anti-dumping and countervailing duties, safeguard measures, and other restrictive policy instruments to protect public interest. The only caveat is these measures must be applied in a way that is consistent with the conditions and methodologies agreed by all members.
Opposing all forms of protection unnecessarily raises public fears and is politically hazardous. Some protectionist measures are designed to function as indispensable safety valves, to ensure that nations have the right to restrict trade and investment in certain, clearly defined conditions, while still benefiting from progressively liberalized trade and investment. Far from being condemned, this type of protective trade measure should be guaranteed.
In 2017, G20 leaders may wish to take a more legally sensible and politically nuanced approach. They could instead, for example, call on all members to refrain from using any illegal measures that seek to restrict trade and investment. They could also reiterate that any legal protective measures that are put in place should be strictly applied according to international economic laws and regulations.
Stop harping on about the benefits of globalization
The second thing G20 leaders spoken about in their China meeting was the importance of communicating “the benefits of trade and open markets to the wider public more effectively”.
Is this what the situation calls for right now: more preaching from trade evangelists? On the contrary, I would argue that so far, the benefits of trade have been oversold. People aren’t idiots: they’re well aware of the benefits of globalization, trade and open markets. They see the evidence in their latest smartphone, their kitchen appliances and the clothes in their wardrobe.
What leaders and policy-makers haven’t done is communicate the inevitable side-effects. As a result, those who lose out are taken by surprise when these negative consequences start to affect them. When they complain, they’re dismissed rather than shown the understanding and empathy they deserve.
In 2017, I hope G20 leaders will speak out about these negative consequences and make it clear that those people left behind by globalization have not been abandoned by their leaders.
Sharing the costs and benefits
The final thing G20 leaders spoke about in China was the need for “appropriate domestic policies to ensure that benefits are widely distributed.” In fact, it’s not just that the benefits are unevenly distributed – it’s that the negative consequences are as well. Any policies we put in place will fail unless they recognize this subtle but important distinction.
At the domestic level, that calls for policies of vertical redistribution. Public authorities should use tax revenues from globalization’s winners to empower the less competitive portion of the population who fail or gain much less in more open markets, with targeted skills training and social safety nets. A similar approach could be used for creating new job opportunities: for example, authorities could use tax revenue to increase public investment in infrastructure, improving the quality of affordable education, and lowering administrative and logistic costs for micro and small businesses.
Change is also needed at an international level. This has been very difficult to achieve so far, largely because there is an enormous amount of polarization between rich and poor countries. When workers in developed countries hear trade liberalization, they think offshoring and job losses to places like China, Mexico or Vietnam. When those in developing countries hear the term, they think of the multinationals that seem to benefit more from their cheap labour than they themselves do. Both complaints need to be addressed.
2017: a time for change?
In 2017, Germany will take over the G20 presidency. In her video outlining her vision, Chancellor Angela Merkel spoke of the need to “shape an interconnected world”, make globalization work for all, intensify international cooperation, and oppose isolationism and any return to nationalism. Interestingly, she stayed away from the ambiguous term “protectionism”.
In attempting to do so, G20 leaders should consider three important points.
Make trade, not war
First, while leaders must stop focusing so much on the benefits of globalization – which, as we’ve discussed, the public already know – they should still remember the strategic value of open trade regimes for international peace and prosperity.
“If we could increase commercial exchanges among nations through lowered trade and tariff barriers and remove international obstacles to trade, we would go a long way towards eliminating war itself”, former US Secretary of State Cordell Hull wrote in his memoirs following two devastating world wars.
The GATT, the predecessor of the World Trade Organization, was a brain child of many of those war-time statesmen. Their goal was to ensure an open, non-discriminatory and predictable trading environment. They knew all too well that when goods don’t cross borders, soldiers will.
The power of listening
Secondly, trade liberalization alone is not sufficient for guaranteeing international peace and economic wellbeing. Other international and domestic policies should be put in place if we are to reap all the benefits of trade and tackle some of its disrupting side effects.
Before developing hard policies, political leaders and opinion leaders should take a softer approach. They could start by attempting to gain a better understanding of one another’s domestic difficulties and supporting policies that could alleviate these problems and therefore help safeguard open trade.
Us against the robots
Finally, G20 leaders need to prepare for a new world where jobs are replaced by computers and automation.
This has already altered the trade landscape. According to a new study, about 88% of job losses in the US manufacturing sectors were because of automation and other domestic factors, rather than international trade.
If academics at the Oxford Martin School are to be believed, this trend will continue over the next two decades, with 47% of all jobs falling victim to automation.
No nation will escape this future, so it is up to us all to work together. We can do that by sharing best practices on how to ensure our citizens are equipped with skills that even robots can’t do, or how to strengthen laws and legislations to protect worker bargaining power. We should also look to increase level of policy harmonization between nations on taxation and employment policies.
The time for action
The economic case for trade leaves no room for uncertainty, and yet trade and globalization are coming under increasing attack. Whether the sum total of benefits and downsides of trade is positive depends not just on trade. Sustainable development also requires upgrading education, infrastructure and in-country innovation, as well as mutual understandings and policy harmonization on employment, taxation and other factors unrelated to trade.
To trade or not to trade, that is not a question. But if we want to make sure we reap the benefits it has to offer, in 2017 G20 leaders must not just talk a good talk; they must start acting to protect an open trading system in which nobody is left behind.
https://www.weforum.org/agenda/2017/01/when-it-comes-to-saving-globalization-world-leaders-are-still-missing-the-point/
Truthfully, I don't know how it will all unfold next year and beyond. Hoping for the best but will not know until I see "actions" from Trump on what he is saying publicly. Can't seem to know how much of what he is saying is rhetoric to satisfy disenfranchised America or something that is feasible. I am leaning toward that things are changing not only in America but rest of world in this fourth industrial revolution where many people are being left behind.
Something needs to be done for this at the same time not do anything dumb policy wise to go backwards while rest of world is progressing. I am not smart enough to forecast future but below article was interesting on 2017 forecast by Statfor.
https://www.stratfor.com/forecast/2017-annual-forecast
The convulsions to come in 2017 are the political manifestations of much deeper forces in play. In much of the developed world, the trend of aging demographics and declining productivity is layered with technological innovation and the labor displacement that comes with it. China's economic slowdown and its ongoing evolution compound this dynamic. At the same time the world is trying to cope with reduced Chinese demand after decades of record growth, China is also slowly but surely moving its own economy up the value chain to produce and assemble many of the inputs it once imported, with the intent of increasingly selling to itself. All these forces combined will have a dramatic and enduring impact on the global economy and ultimately on the shape of the international system for decades to come.
These long-arching trends tend to quietly build over decades and then noisily surface as the politics catch up. The longer economic pain persists, the stronger the political response. That loud banging at the door is the force of nationalism greeting the world's powers, particularly Europe and the United States, still the only superpower.
Only, the global superpower is not feeling all that super. In fact, it's tired. It was roused in 2001 by a devastating attack on its soil, it overextended itself in wars in the Islamic world, and it now wants to get back to repairing things at home. Indeed, the main theme of U.S. President-elect Donald Trump's campaign was retrenchment, the idea that the United States will pull back from overseas obligations, get others to carry more of the weight of their own defense, and let the United States focus on boosting economic competitiveness.
Barack Obama already set this trend in motion, of course. Under his presidency, the United States exercised extreme restraint in the Middle East while trying to focus on longer-term challenges — a strategy that, at times, worked to Obama's detriment, as evidenced by the rise of the Islamic State. The main difference between the Obama doctrine and the beginnings of the Trump doctrine is that Obama still believed in collective security and trade as mechanisms to maintain global order; Trump believes the institutions that govern international relations are at best flawed and at worst constrictive of U.S. interests.
No matter the approach, retrenchment is easier said than done for a global superpower. As Woodrow Wilson said, "Americans are participants, like it or not, in the life of the world." The words of America's icon of idealism ring true even as realism is tightening its embrace on the world.
Revising trade relationships the way Washington intends to, for example, may have been feasible a couple decades ago. But that is no longer tenable in the current and evolving global order where technological advancements in manufacturing are proceeding apace and where economies, large and small, have been tightly interlocked in global supply chains. This means that the United States is not going to be able to make sweeping and sudden changes to the North American Free Trade Agreement. In fact, even if the trade deal is renegotiated, North America will still have tighter trade relations in the long term.
The United States will, however, have more space to selectively impose trade barriers with China, particularly in the metals sector. And the risk of a rising trade spat with Beijing will reverberate far and wide. Washington's willingness to question the "One China" policy – something it did to extract trade concessions from China – will come at a cost: Beijing will pull its own trade and security levers that will inevitably draw the United States into the Pacific theater.
But the timing isn't right for a trade dispute. Trump would rather focus on matters at home, and Chinese President Xi Jinping would rather focus on consolidating political power ahead of the 19th Party Congress. And so economic stability will take priority over reform and restructuring. This means Beijing will expand credit and state-led investment, even if those tools are growing duller and raising China's corporate debt levels to dangerous heights.
This will be a critical year for Europe. Elections in the pillars of the European Union — France and Germany — as well as potential elections in the third largest eurozone economy — Italy — will affect one another and threaten the very existence of the eurozone. As we have been writing for years, the European Union will eventually dissolve. The question for 2017 is to what degree these elections expedite its dissolution. Whether moderates or extremists claim victory in 2017, Europe will still be hurtling toward a breakup into regional blocs.
European divisions will present a golden opportunity for the Russians. Russia will be able to crack European unity on sanctions in 2017 and will have more room to consolidate influence in its borderlands. The Trump administration may also be more amenable to easing sanctions and to some cooperation in Syria as it tries to de-escalate the conflict with Moscow. But there will be limits to the reconciliation. Russia will continue to bolster its defenses and create leverage in multiple theaters, from cyberspace to the Middle East. The United States, for its part, will continue to try to contain Russian expansion.
As part of that strategy, Russia will continue to play spoiler and peacemaker in the Middle East to bargain with the West. While a Syrian peace settlement will remain elusive, Russia will keep close to Tehran as U.S.-Iran relations deteriorate. The Iran nuclear deal will be challenged on a number of fronts as Iran enters an election year and as the incoming U.S. government takes a much more hard-line approach on Iran. Still, mutual interests will keep the framework of the deal in place and will discourage either side from clashing in places such as the Strait of Hormuz.
The competition between Iran and Turkey will meanwhile escalate in northern Syria and in northern Iraq. Turkey will focus on establishing its sphere of influence and containing Kurdish separatism while Iran tries to defend its own sphere of influence. As military operations degrade the Islamic State in 2017, the ensuing scramble for territory, resources and influence will intensify among the local and regional stakeholders. But as the Islamic State weakens militarily, it will employ insurgent and terrorist tactics and encourage resourceful grassroots attacks abroad.
The Islamic State is not the only jihadist group to be concerned about. With the spotlight on Islamic State, al Qaeda has also been quietly rebuilding itself in places such as North Africa and the Arabian Peninsula, and the group is likely to be more active in 2017.
Crude oil prices will recover modestly in 2017, thanks in part to the deal struck by most of the world's oil producers. (Notably, no country will fully abide by the reduction requirements.) The pace of recovery for North American shale production will be the primary factor influencing Saudi Arabia's policy on extending and increasing production cuts next year. And though it will take time for North American producers to respond to the price recovery and to raise production, Saudi Arabia knows that a substantial rise in oil prices is unlikely. This means Saudi Arabia will actively intervene in the markets in 2017 to keep the economy on course for a rebalance in supply, especially in light of its plan to sell 5 percent of Saudi Aramco shares in 2018.
Higher oil prices will be a welcome relief to the world's producers, but it may be too little, too late for a country as troubled as Venezuela. The threat of default looms, and severe cuts to imports of basic goods to make debt payments will drive social unrest and expose already deep fault lines among the ruling party and armed forces.
Developed markets will also see a marked shift in 2017, a year in which inflation returns. This will cause central banks to abandon unconventional policies and employ measures of monetary tightening. The days of central banks flooding the markets with cash are coming to an end. The burden will now fall to officials who craft fiscal policy, and government spending will replace printing money as the primary engine of economic growth.
Tightening monetary policy in the United States and a strong U.S. dollar will shake the global economy in the early part of 2017. The countries most affected will be those in the emerging markets with high dollar-denominated debt exposure. That list includes Venezuela, Turkey, South Africa, Nigeria, Egypt, Chile, Brazil, Colombia and Indonesia. Downward pressure on the yuan and steadily declining foreign exchange reserves will meanwhile compel China to increase controls over capital outflows.
Calm as markets have been recently, steadied as they were by ample liquidity and by muted responses to political upheaval, they will be much more volatile in 2017. With all the tumult in 2017, from the threats to the eurozone to escalating trade disputes, investors could react dramatically. Asset prices swung noticeably, albeit quickly, in the first two months of 2016. 2017 could easily see multiple such episodes.
The United States is pulling away from its global trade initiatives while the United Kingdom, a major free trade advocate, is losing influence in an increasingly protectionist Europe. Global trade growth will likely remain strained overall, but export-dependent countries such as China and Mexico will also be more motivated to protect their relationships with suppliers and seek out additional markets. Larger trade deals will continue to be replaced by smaller, less ambitious deals negotiated between countries and blocs. After all, the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership were themselves fragments spun from the breakdown of the Doha Round of the World Trade Organization.
Economic frustration can manifest in many ways, not all of which are foreboding. In Japan, the government will be in a strong position in 2017 to try to implement critical reforms and adapt its aging population to shifting global conditions. In Brazil and India, efforts to expose and combat corruption will maintain their momentum. India has even taken the ambitious step of setting its economy down a path of demonetization. The path will be bumpy in 2017, but India will be a critical case study for other countries, developed and developing alike, enticed by the efficiencies and decriminalized benefits of a cashless economy and who increasingly have the technology at their disposal to entertain the possibility.
What you expect from Stock Market in Trump's first Year
Pundits say it all the time. Donald Trump is not like any ordinary Republican president. That may prove to be a good thing for the stock market in 2017.
That's because stocks have underperformed in the first year of Republican presidents most of the time, according to CFRA data.
The S&P 500 has been down two-thirds of the time in the first years of all Republican presidential terms since World War II, whether it was the first or second term. The index, in those years, averaged a 1.8 percent decline.
That compares with big first-year gains in Democratic terms. The S&P 500 averaged a 17 percent first-year advance, and the market was up 89 percent of the time in the first year.
As for Republicans, the performance was even worse when it was the first year of the first term of a GOP president. In those five instances, the S&P 500 was only up once and the average loss was 2.7 percent.
Wall Street strategists certainly are not forecasting a decline in stocks for 2017, and many see the S&P 500 between 2,300 and 2,400 next year. A few, like RBC's Jonathan Golub see the S&P reaching 2,500 by year-end. The S&P 500 was just under 2,250 on Thursday.
Sam Stovall, CFRA's chief investment strategist, said the theory has been that Republicans inherited a mess made by Democrats, but instead it may be a matter of timing. Every Republican president since Teddy Roosevelt has had a recession in their first term. Richard Nixon and George W. Bush had two while in office.
Nobel economist Angus Deaton on a year of political earthquakes
Over trout in Princeton, the laureate says he’s glad the Clinton era is over and it isn’t only Trump voters who feel ‘excluded’
Having never lunched with a Nobel laureate before, I land early and prepared in the parking lot outside Mistral. The sleek Princeton eatery, whose chefs playfully blend local produce and global inspiration and describe themselves as “food activists”, is Angus Deaton’s favourite place to eat in town. Yet things quickly start to go awry when I find myself standing in the cold rain trying to wrestle my credit card out of a parking meter that is not just refusing to recognise it but seems to want to confiscate it. Getting increasingly wet, I am also caught in a logistical bind. The clock is ticking. Do I keep the laureate waiting or risk having to explain a parking ticket to the editor? I finally extract the card and decide to risk the fine. My boss will understand. My guest might not.
By the time I make it inside, I am a few minutes late and Deaton, winner of the Nobel Prize for economics in 2015 and optimistic defender of globalisation, is installed already at a small table on the far side of the room. I shake his hand and offer my apologies.
Deaton is gracious about my bind and offers some advice. It helps that he looks like he has been plucked from central casting for emeritus professors: requisite tweed jacket, jumper and wire-rimmed glasses; white hair just unkempt enough to give a flicker of Ivy League eccentricity. He is also wearing a blue bow tie with vivid red stars that once belonged to one of his mentors, the late Richard Stone, fellow Nobel Prizewinner and the godfather of British national accounts.
Mistral is bright and airy despite the rain outside, and filled with music, cheer and the clanging of cutlery and plates. The noise forces us — two slightly rumpled large men — to lean across the small table to hear each other. I can’t help thinking that we are also, in the parlance of 2016, two “metropolitan elites”, sipping a smooth Oregon pinot noir and pondering death, pain and Donald Trump.
The president-elect is one reason I am here, of course. At the close of a year that has upended western politics, Deaton is among those best placed to explain the populist earthquakes.
Just weeks after he won the Nobel Prize, Deaton and his wife, fellow Princeton economist Anne Case, published a paper revealing an alarming trend in US society: a surge in suicides and other “deaths of despair” among high school-educated white men had reached such an alarming level that middle-aged whites collectively had become the only demographic group in America in decades to see rising mortality. By their calculations, between 1999 and 2013 as many as 490,000 extra lives were lost as a result of the shift.
The Case/Deaton study was seized on as causal evidence for the rise of Trump and his appeal to disgruntled white voters in the American heartland. When President Obama welcomed Deaton and his fellow 2015 laureates to the White House, he spent most of a 45-minute meeting with the group interrogating the two economists about their findings. “He opened the door himself and shook my hand and I said, ‘I’d like to introduce you to my wife’. And he said ‘Professor Case needs no introduction. I’m a huge admirer of her work’,” Deaton recounts. “She just melted because we’d published the paper like the week before on the dying white people and he said, ‘We’re going to talk about your paper.’ And he’d read it down to the footnotes!”
Our waitress is full of American efficiency and the first of our food arrives quickly, a trout rillette served with pickled fennel and potato chips that Deaton has nominated as a favourite. An avid fly fisherman, he spends his summers stalking trout in Montana. “After a day’s fishing I’ll know the solution to something or have good ideas that were not accessible before,” he tells me later.
Back to Obama. “The man has a lot of class,” says Deaton. “He may not have been a very effective president. But that’s beside the point now I guess.”
In the wake of November’s US presidential election result, the quip is telling. Deaton is among those who sees Trump’s election — and the Brexit vote that shocked the UK earlier in the year — as a consequence of the arrogance of political elites.
He is scathing about the Clintons, and Hillary Clinton in particular, for their links to a broken establishment. “One of the great benefits of the election to me is that I don’t have to pretend that I like her,” he tells me at one point, even as he confesses he reluctantly voted for her.
But his bigger frustration is with what he sees as the detached and technocratic backgrounds of so many people in centrist politics nowadays.
“If you think about the first leaders of the UK’s Labour party, they were singing hymns on the train platform as they went off to work. And they were of ‘those people’,” he says. “If you think of someone like Gordon Brown, who I have immense admiration for, and Obama — and the high point of my year this year was my meeting with Obama — he’s not one of ‘those people’ any more. He’s an intellectual with progressive views who is making policy in a way that he judges is good for those people.”
***
Deaton’s view is derived from his own background. Born in Edinburgh in 1945, he is the grandson of a Yorkshire coal miner, and the son of a civil engineer whose own battles to get an education drove him to push young Angus into a rigorous study routine that eventually led to a scholarship to Fettes, Scotland’s Eton, then Cambridge.
“I’ve always — and not always happily — considered myself an outsider,” Deaton tells me. “Certainly at Fettes. And then the Scots are always outsiders in England. They are always putting you in your place in one way or another and there is this pretty rigid class hierarchy.
This, he considers, “is a true sympathy that I think I have with these people who support Trump.”
Fishing in Montana has also contributed to his understanding. “You meet these people who are quite impoverished and they have a different set of values?.?.?.?Fishing guides with health problems, who are veterans and refuse to go to the [Veterans Administration hospital for free care] because they see it as a handout.”
Deaton is conscious that there is an irony to his feeling of alienation from the elite. A few days after we meet he is to be knighted by the Queen “for his services to research in economics and international affairs”, capping a remarkable year. While we lunch, Case is in New York picking up a hat to wear to Buckingham Palace.
“I’ve always shared the idea of being excluded,” he says. “Maybe I should stop feeling that. I think there’s this sense of not being recognised, which in my case is absurd and it’s just not true.”
Brexit has only amplified his feelings of detachment, however. He is against both a UK exit from the EU and Scottish independence. Yet 2016 has left him, like many Scots, reconsidering the latter. “I think the dilemma [Brexit] poses for Scotland is pretty intolerable,” he says. “If Scotland has to clean out all its universities of European citizens there are really horrible things that are going to happen.”
He has ordered a roasted pepper and broccoli rabe flatbread pizza with pine nuts, feta cheese, pickled raisins and a fried egg on top. I dig into a plate of creamy burrata served with beets, pear and hazelnuts. We toast. “So are you happy with this the way it is?” Deaton asks. I nod enthusiastically, confessing that if he has an obsession with data then I have one with burrata.
Deaton retired from his position at Princeton in the spring but he and Case are continuing to dig into the data. Since the election others have seized on the correlation between places with high white mortality rates and votes for Trump. But the link to those who report suffering from physical pain is even greater, Deaton says. He sees an epidemic of pain and a related flood of opioids into communities over the past decade as being, more than globalisation or economic dislocation, the real cause of rising mortality among middle-aged white Americans.
With Gallup’s help he has been collecting data on how many people report having felt physical pain in the past 24 hours and says the numbers are staggering in the US. What is causing that epidemic — and its links to Trump’s rise — remains unclear, he says. He seems more willing to blame pharmaceutical companies and doctors for overprescribing opioids. A surge in addiction (drug overdoses caused more deaths in the US last year than auto accidents) has, he argues, proved far more fatal than globalisation.
***
Deaton’s 2013 book The Great Escape argued that the world we live in today is healthier and wealthier than it would otherwise have been, thanks to centuries of economic integration. He sees efforts to blame globalisation for woes in the US Rust Belt or Britain’s beleaguered industrial areas as a mistake.
“Globalisation for me seems to be not first-order harm and I find it very hard not to think about the billion people who have been dragged out of poverty as a result,” he says. “I don’t think that globalisation is anywhere near the threat that robots are.”
Our next course has landed. Deaton has a grilled shrimp Caesar salad placed before him while I have Weisswurst served in a hotdog bun with apple kraut.
In his book, Deaton argues there is an inextricable link between progress and inequality and his views on wealth and innovation are complicated by that. “It’s hard to think that Mark Zuckerberg is actually impoverishing anyone by getting rich with Facebook,” he tells me. “But driverless cars are another matter entirely,” with millions of truck and other drivers likely to lose jobs.
It’s hard to think Mark Zuckerberg is actually impoverishing anyone by getting rich with Facebook. But driverless cars are another matter entirely
Asking whether inequality is bad for economic growth is, Deaton says, a “simple-minded question”. Yet inequality manifested in wealthy people or corporations buying control of government is a different matter. “That surely is a catastrophe. So I have come to think that it’s the inequality that comes through rent-seeking [the use of wealth to influence politics for selfish gain] that is the crux of the matter.”
I ask him what we should make of president-elect Trump’s installation of fellow billionaires in his first cabinet?
He shrugs. “I know. But then the Obama administration was elected on that platform [of change] and tried and didn’t succeed very well. And the Clintons just seem like the opposite of the way you want to do this stuff.”
Deaton’s work on wellbeing is among his best-known and he once argued that happiness effectively peaked once a person was earning the equivalent of $75,000 a year. Would Trump be happy on $75,000 a year? Would Deaton?
Deaton points out the paper’s conclusion was actually that gains in happiness flattened out once you rose out of poverty. “And I’ve been there where your life is really, really shadowed by not knowing where the money is going to come from?.?.?.?It’s a misery.”
“I doubt that Donald Trump would be happier?.?.?.?if he was a different person. But Trump is always telling people how great his life is and about all the great things that he’s done and that’s also all about his income. And that’s also what we found. If you ask people how their lives are going, as a whole, it seems they tend to point to income,” regardless of the diminishing gains in happiness.
He pauses. “I certainly have had more income in the last year.”
What have you done with the [Nobel] prize money? I ask.
“Well, I retired from Princeton,” he says, smiling.
Our dessert arrives. Deaton has recommended what turns out to be a delicious brown butter cake with crispy slices of fried fig and lemon poppy seed ice cream.
It feels like time to ask about the future. What of all those who see — in Brexit, Trump and the rise of populism in Europe — a looming end to the postwar liberal economic order?
“Let’s hope not,” he answers. “You can certainly draw a picture of 2016 which makes it look like the 1930s, which of course is what everyone is doing.” Deaton takes the long view and is convinced of the durability of progress, partly because he is also a product of globalisation and views things more broadly.
Although he holds both US and British citizenship, he identifies most strongly as an expatriate Scot and part of a tradition of ambitious young Scots who have ventured out into the world since 1707, when the union with England opened the British colonies to them.
“It was that opening which created those opportunities, which those people seized, and prospered. That’s why it’s hard for me to think differently,” he says. In places such as India, where he has worked extensively, the gains from globalisation have also contributed to “a huge decline in social oppression and it has happened worldwide,” he says, pointing to the gains made in women’s rights and gay rights in recent decades.
In Trump — and those he has appointed to cabinet posts — Deaton actually sees a reversion to the Republican mean, rather than a revolution. A Republican’s win was something that, according to US history, was always a more likely scenario than the election of another Democratic president.
He also welcomes the shaking up of liberal institutions and expects an adjustment. “The good story is these will all be warnings to the elites that you can’t go on like this.”
As the waitress refills our sparkling water, Deaton returns one last time to “dead white people”. “Despite what I said before, economics is a big part of the story that we haven’t put our fingers on,” he offers. “My guess is that economics and the decline of unions and the sense of not being represented any more prepared the soil for this horrible upheaval. They certainly lost these jobs in manufacturing and those jobs came with unions which provided them with representation. So they are deprived of that and that makes them more susceptible to suicide and depression.”
Would The Great Escape be less optimistic if he wrote it today? “No. I don’t think so. Because I’m talking about the last 250 years.”
A few minutes later we say goodbye and I wander back to my rental car. There is a limp, wet parking ticket stuck to my windscreen, a $40 fine. I smile. I’m also drawn back to the advice Deaton offered when I first sat down and mentioned my fear of a looming ticket.
“I’m sure you can get out of it,” the Nobel laureate told me. “Just tell them the system was broken.”
NOBEL ECONOMIST: 'I don’t think globalisation is anywhere near the threat that robots are'
http://www.businessinsider.com/nobel-economist-angus-deaton-on-how-robotics-threatens-jobs-2016-12
A Nobel Prize-winning economist has warned that the rise in robotics and automation could destroy millions of jobs across the world.
Angus Deaton, who won the Nobel Prize last year for his work on health, wealth, and inequality, told the Financial Times he believes robots are a much greater threat to employment in the US than globalisation.
Addressing the theory that Donald Trump's victory in the US presidential elections was fueled by a backlash against globalisation, Deaton told the FT: "Globalisation for me seems to be not first-order harm and I find it very hard not to think about the billion people who have been dragged out of poverty as a result. I don’t think that globalisation is anywhere near the threat that robots are."
He added: "It’s hard to think that Mark Zuckerberg is actually impoverishing anyone by getting rich with Facebook. But driverless cars are another matter entirely."
Obama's White House warned on Thursday that advances in artificial intelligence and robotics have the potential to wipe out millions of jobs in factories and industries like trucking, potentially increasing inequality.
The World Economic Forum (WEF) predicted a "Fourth Industrial Revolution" at the start of this year, as automation and robotics transform the global economy and the way we work. WEF expects 5 million jobs to be destroyed by 2020 by the trends. An in-depth study by Citi and Oxford University also found that 77% of all jobs in China are at risk of automation and 57% of all jobs across the OECD.
Changes are already starting to be seen. Foxconn, a key manufacturing partner for Apple, Google, Amazon, and the world's 10th largest employer, has already replaced 60,000 workers with robots. And two of the world's ten largest employers globally — Walmart and the US Department of Defence — are using drones, for warehouse delivery and surveillance respectively.
The Fourth Industrial Revolution
https://forecastingeconomy.wordpress.com/2016/12/25/the-fourth-industrial-revolution/
How should we compensate the losers from globalisation?
http://blogs.ft.com/gavyndavies/2016/12/11/how-should-we-compensate-the-losers-from-globalisation/
The rise in political “populism” in 2016 has forced macro-economists profoundly to re-assess their attitude towards the basic causes of the new politics, which are usually identified to be globalisation and technology. The consensus on the appropriate policy response to these major issues – particularly the former – seems to be changing dramatically and, as Gavin Kelly persuasively argues, probably not before time.
Unless economists can develop a rational response to these revolutionary changes, political impatience will take matters completely out of their hands, and the outcome could be catastrophic. Unfortunately, while the nature of the problem is coming into sharper focus, the nature of a solution that makes economic sense while also being politically feasible remains embryonic at best (see Danny Leipziger).
Until very recently, the mainstream attitude of economists towards globalisation was straightforward. Free trade was overwhelmingly believed to increase productivity and overall economic welfare, both in developed economies and emerging economies.
Therefore, it was argued that barriers to trade and international capital movements should be reduced as rapidly as possible, wherever they existed. While it was recognised that there could be losers from free trade in the developed economies, these losers were thought to be few and temporary, compared to the gainers, who were many and permanent.
The political upheavals of 2016 have forced economists to reconsider. The final shape of what is now called “populism” is not yet entirely clear. It does not seem to fit easily on the traditional right/left, or liberal/conservative, spectrum. This is why two of the most obvious benefits of the political revolution, Theresa May and Donald Trump, are hard to categorize in this regard [1].
There does, however, seem to be one unifying theme and that is a resurgence in economic nationalism, with a collapse in support for internationalism or globalisation. Since the “elites” are seen as the main beneficiaries of globalisation in the developed economies, this has gone hand in hand with anti-elitism and a rejection of advice from “experts”. The latter could easily develop into anti-rationalism, which would surely prove disastrous in the long term.
Economists have now recognised these dangers, and a new consensus has started to emerge. There has been (almost) no change in the overwhelming belief that free trade and globalisation are good things for society as a whole. But it is now much more widely accepted that the losers from these changes can be more numerous, more long lasting and more politically assertive than previously thought.
The new consensus holds that the gains from globalisation can only be defended and extended if the losers are compensated by the winners. Otherwise, pockets of political resistance to the process of globalisation will begin to overwhelm the gainers, even though the latter remain in the majority [2].
While the compensation principle seems clear enough, the complexity of actually getting it done is much greater. As Jared Bernstein says, the rust belt needs help, but it is not clear how to help the rust belt. Nor is it at all obvious that there would be a political or economic consensus supporting some of the most obvious measures that could be adopted, at least on the scale that would be needed to make a noticeable difference.
The main gainers from globalisation have been twofold: unskilled labour in the emerging world, and those at the upper end of the income scale in the developed economies. The main losers have been industrial workers in the developed world. (See Mark Carney for some compelling evidence on this topic.) The most direct “solutions” to the problem would presumably be to take measures that would reverse these changes in income distribution, either globally or within the boundaries of the developed world.
This is why President-elect Trump has focused protectionist proposals on imports from Mexico and China, which are clearly the most important threats to the manufacturing sector in the United States. Unfortunately, tariffs on manufactured imports from these two countries are likely to displace production to other emerging economies, not to the industrialized regions of America.
Furthermore, a more general restriction on all manufactured imports into the US would raise prices to American consumers, cause disruptions to domestic output as key imported components became scarce, and worsen the productivity crisis that is already serious enough anyway. This would also redistribute income away from workers in the emerging world, who are still low paid by global standards. That would not deserve to command general consent in the political process, but there is a rising danger that it could happen anyway.
What about compensating the losers by redistributing income away from those who have gained inside the developed economies, mainly at the upper end of the income scale? That approach might be seen to respect the principles of natural justice, since it would reverse the “windfall” redistribution in income and wealth caused by free trade.
It does, however, run into very familiar difficulties with a generalized redistribution of this type. It would be difficult to distinguish between those who have lost from globalization, and those who have hit upon hard times for other reasons, including the results of their own choices. And it would undermine economic incentives to take risk and promote expansion.
The principle of compensation for loss already operates through the tax and benefits system, and it could be argued that this already provides the safety net that society has seen as optimal in the past. Why does this new source of loss merit a new and larger form of compensation than previously provided against other economic shocks, like recessions and shifts in the composition of demand away from certain types of production?
One answer to this question is that the losers from globalization tend to be concentrated in particular regions, like the American rust belt and Northern England. It is particularly hard for people in these regions to recover. This would argue for regional transfers, away from more successful regions like the coastal states in America, and London in the UK. These ideas have been tried in the past, without any great success, even when implemented in large scale, such as the transfers made to East Germany after the Berlin Wall came down (see Paul Krugman).
Is this a counsel of despair? No, but it does warn of great difficulties ahead, and of the dangers (entirely ignored by candidate Trump) of raising false hopes in the afflicted regions.
Some progress is certainly being made. Lawrence Summers calls for “responsible nationalism”. Maurice Obstfeld, the outstanding Chief Economist at the IMF, has outlined a long list of appropriate policy measures, including programmes of retraining for the unemployment, regional infrastructure spending, etc. [3]
But while he calls for “trampoline” policies that offer a springboard to new jobs, rather than “safety net” policies, these interventions are rather familiar to Obama-style liberals. Meanwhile the Republicans in the US and the Conservatives in Britain seem to have decided to go down a very different path. Liberal economic solutions, while attractive to the IMF, have the wrong set of politicians in power.
If we cast our minds back 12 months, no one predicted Brexit or Donald Trump’s victory. Politics is moving fast, and economics needs to catch up. How to compensate the losers from globalisation will be the big story in macro in 2017.
——————————————————————————————————–
Footnotes
[1] A “populist” uprising would not normally be expected to lead to a large and immediate reduction in corporate tax rates, which is the most obvious consequence of Brexit and Trumpism in their early days. This surprising development shows how difficult it will be for investors to predict the policy changes that “populism” will bring.
[2] The victory of Donald Trump over Hillary Clinton was an obvious case in point. Trump won because he attracted disproportionate support in the rust belt states, while Clinton attained an overall majority of the popular vote. This was a good example of the age-old electoral principle that a few large losses can have a greater effect on electoral outcomes than a huge number of small gains.
[3] The policy menu suggested by Maurice Obstfeld includes: retraining, education, infrastructure, health investment, better housing, lower barriers to entry for new businesses, partial wage insurance for displaced workers, the earned income tax credit, and international co-ordination against tax avoidance.
The CEO of United Technologies just let slip an unintended consequence of the Trump-Carrier jobs deal
Greg Hayes, the CEO of United Technologies, the parent company of the heating and air-conditioner manufacturer Carrier, just let slip a consequence of a deal struck to keep jobs in Indiana.
And American workers won't like it.
Carrier said last month that it would keep more than 1,000 jobs across two locations in Indiana, following pressure from President-elect Donald Trump. The decision was touted as a win for the incoming president, who had pledged keep the jobs from moving to Mexico.
In a wide-ranging interview with CNBC's "Mad Money with Jim Cramer" that aired Monday, Hayes set out the comparative advantages of moving to jobs to Mexico, the motivation behind his decision to keep those jobs in Indiana, and the ultimate outcome of the deal: There will be fewer manufacturing jobs in Indiana.
Before we get to that
First, Hayes was asked what's so good about Mexico. Quite a lot, it turns out. From the transcript (emphasis added):
JIM CRAMER: What's good about Mexico? What's good about going there? And obviously what's good about staying here?
GREG HAYES: So what's good about Mexico? We have a very talented workforce in Mexico. Wages are obviously significantly lower. About 80% lower on average. But absenteeism runs about 1%. Turnover runs about 2%. Very, very dedicated workforce.
JIM CRAMER: Versus America?
GREG HAYES: Much higher.
JIM CRAMER: Much higher.
GREG HAYES: Much higher. And I think that's just part of these — the jobs, again, are not jobs on assembly line that people really find all that attractive over the long term. Now I've got some very long service employees who do a wonderful job for us. And we like the fact that they're dedicated to UTC, but I would tell you the key here, Jim, is not to be trained for the job today. Our focus is how do you train people for the jobs of tomorrow?
So Mexico has cheaper labor with a much more dedicated workforce, and these are the kinds of low-skilled jobs most people don't find that attractive. Elsewhere in the interview, he made clear that United Technologies intended to keep engineering jobs in the US and that these higher-skilled jobs were not at risk of being moved overseas.
"The assembly lines in Indiana — I mean, great people," Hayes said. "Great, great people. But the skill set to do those jobs is very different than what it takes to assemble a jet engine."
Hayes was then asked why he decided to cancel the move to Mexico. From the transcript (emphasis added):
GREG HAYES: So, there was a cost as we thought about keeping the Indiana plant open. At the same time, and I'll tell you this because you and I, we know each other, but I was born at night but not last night. I also know that about 10% of our revenue comes from the US government. And I know that a better regulatory environment, a lower tax rate can eventually help UTC of the long run.
But here's the kicker
The result of keeping the plant in Indiana open is a $16 million investment to drive down the cost of production, so as to reduce the cost gap with operating in Mexico.
What does that mean? Automation. What does that mean? Fewer jobs, Hayes acknowledged.
From the transcript (emphasis added):
GREG HAYES: Right. Well, and again, if you think about what we talked about last week, we're going to make a $16 million investment in that factory in Indianapolis to automate to drive the cost down so that we can continue to be competitive. Now is it as cheap as moving to Mexico with lower cost of labor? No. But we will make that plant competitive just because we'll make the capital investments there.
JIM CRAMER: Right.
GREG HAYES: But what that ultimately means is there will be fewer jobs.
The general theme here is something we've been writing about a lot at Business Insider. Yes, low-skilled jobs are being lost to other countries, but they're also being lost to technology.
Everyone from liberal, Nobel-winning economist Paul Krugman to Republican Sen. Ben Sasse has noted that technological developments are a bigger threat to American workers than trade. Viktor Shvets, a strategist at Macquarie, has called it the "third industrial revolution."
Hayes said in the same interview that United Technologies was focused on how to "train people for the jobs of tomorrow."
In the same breath, he seems to be suggesting the jobs it is keeping in Indiana are the jobs of yesterday.
The Next Industrial Revolution
http://www.theatlantic.com/business/archive/2016/09/the-next-industrial-revolution/498779/
A “crisis of abundance” initially seems like a paradox. After all, abundance is the ultimate goal of technology and economics. But consider the early history of the electric washing machine. In the 1920s, factories churned them out in droves. (With the average output of manufacturing workers rising by a third between 1923 and 1929, making more washing machines was relatively cheap.) But as the decade ended, factories saw they were making many more than American households demanded. Companies cut back their output and laid off workers even before the stock market crashed in 1929. Indeed, some economists have said that the oversupply of consumer goods like washing machines may have been one of the causes of the Great Depression.
What initially looked like abundance was really something more harmful: overproduction. In economics, as in anything, too much of a good thing can be problematic.
That sentiment is one of the central theses of The Wealth of Humans, a new book by the Economist columnist Ryan Avent about how technology is changing the nature of work. In the next few years, self-driving cars, health-care robots, machine learning, and other technology will complement many workers in the office. Counting both humans and machines, the world’s labor force will be able to do more work than ever before. But this abundance of workers—both those made of cells and those made of bits—could create a glut of labor. The machines may render many humans as redundant as so many vintage washing machines.
Once again, what once seems like abundance will instead be over-supply: The machines may invent their makers out of work.
Last week, I spoke with Avent about his book, how his theories might help to explain the 2016 election, and the future of working. The following conversation has been edited for clarity and concision.
Derek Thompson: In classic Economist style, your title, The Wealth of Humans, is doing double or triple duty. First, it’s a play on Adam Smith’s The Wealth of Nations, and indeed there’s a lot of Smith in here. Second, it’s a book about the most common definition of wealth, money, and how it might be earned and distributed in the future. Third, it’s about Merriam-Webster’s second definition of wealth, which is a surfeit, a surplus, and your argument is that we may be entering a world with too many workers. Anything I’m missing?
Ryan Avent: Those were the ones I had in mind. There may be others lurking.
Thompson: There is an ongoing debate about whether technological growth is accelerating, as economists like Erik Brynjolfsson and Andrew McAfee (the authors of The Second Machine Age) insist, or slowing down, as the national productivity numbers indicate. Where do you come down?
Avent: I come down squarely in the Brynjolfsson and McAfee camp and strongly disagree with economists like Robert Gordon, who have said that growth is basically over. I think the digital revolution is probably going to be as important and transformative as the industrial revolution. The main reason is machine intelligence, a general-purpose technology that can be used anywhere, from driving cars to customer service, and it’s getting better very, very quickly. There’s no reason to think that improvement will slow down, whether or not Moore’s Law continues.
I think this transformative revolution will create an abundance of labor. It will create enormous growth in [the supply of workers and machines], automating a lot of industries and boosting productivity. When you have this glut of workers, it plays havoc with existing institutions.
I think we are headed for a really important era in economic history. The Industrial Revolution is a pretty good guide of what that will look like. There will have to be a societal negotiation for how to share the gains from growth. That process will be long and drawn out. It will involve intense ideological conflict, and history suggests that a lot will go wrong.
Thompson: Even I would admit that is a weird time to predict the end of work, considering that the unemployment rate has been at or under 5 percent all year, the private sector in the U.S. has created jobs for record-high 77 consecutive months, and wages are actually rising at their fastest rate since the Great Recession.
So what is the best evidence that your prediction is plausible?
Avent: I would say the best evidence comes from the wage growth numbers. I know we’ve experienced an uptick in recent months, but we’re seven years into the recovery and still well short of the level of nominal wage growth we would expect, even compared to recent disappointing recoveries. In the bigger picture, for a lot of middle-skilled workers, especially men, you have stagnating wages for several decades. Apart from the top 1 percent, a lot of people are having a lousy time.
If you look at the experience of rich countries across the world, you see there is a tradeoff between wage growth, productivity, and employment growth. Employment in Britain is at an all-time high, and wage growth there has underperformed America and most of Europe. This suggests that the main way that employers are using people in countries like the U.K. is to use them to do low-productivity work.
Thompson: There is a familiar story of technology and the labor force that one might call the “we used to” story. We used to work on farms, we used to work in textiles, we used to work in factories … What’s the next chapter of the “we used to” story? What sector currently employing a lot of Americans is the lowest-hanging fruit for disruption?
Avent: Driving is certainly an area where we’ve seen more rapid progress than I would have guessed. Truck drivers, bus drivers, and train drivers have pretty good pay and those account for millions of jobs. Most importantly, there seems to be an interest among companies employing those workers to bring [the tech that would replace humans] forward. In the long run, I’m optimistic for technology to transform health care, but that’s a harder sector to disrupt.
Machine intelligence will be applied in ways we cannot imagine yet. One example is talking. Today, if you have a problem with a car company, you might end up conversing with a bot over the phone. Those are conversations that we thought weren’t automatable that are now. We used to employ a lot of people to talk to people and people have those conversations with bots.
Thompson: At the moment, there is some evidence that wages are rising fastest at the bottom, which is an interesting challenge to these theories. You’ve predicted that wages won’t rise for a substantial share of middle and low-skill workers, because there is an abundance of labor. But you also predict that high wages for easily automated jobs will be a big fat target for automation, because employers will want labor-saving technology wherever they can save the most money.
So, I wonder, do you regard rising wages for fast-food workers today as a challenge to your theory, or a development that will hasten the automation of fast-food joints, because when McDonald’s workers are earning high wages, it’s more tantalizing for management to replace them with machines?
Avent: It will be interesting to see how increases in the minimum wage affect this. You see stories of robotic burger-flippers and people ordering food through iPads. It’s possible you see more of that as minimum wages rise. It seems like there is technology waiting on the shelf to displace that work.
I think I would say: If in 10 years time, workers in those jobs have received a substantial raise relative to current levels, and employment has not fallen, and productivity has not gone up, that would be evidence that I’m wrong. But my expectation is that as these workers become more expensive, you’ll see more interest in the technology that could displace them.
I should add that that would be a very good thing! We want businesses to invest in tech that makes the economy more productive.
Thompson: Your book is very good on the intersection of two ideas that don’t often interact in economic analysis, which is the future of work and housing policy. It is ironic that liberals, who in the abstract support more inclusive immigration and shared wealth, often live in coastal metros areas that are exclusive by design—they are built around water, limit housing height, and declare certain zones out-of-bounds for further construction. As you point out in the book, one of the tallest buildings in New York City is a residential tower on Park Avenue that is home to a stack of billionaires who, although they could live in any ZIP code on the planet, have chosen to live on top of each other, like candies in a Pez dispenser.
I can imagine a future where these rich liberal cities might also be on the frontline of the coming automation wave. It seems to me that technology adoption for services like Uber spreads fastest among densely populated areas with young, educated workers who are early adopters. That’s cities. Plus, labor-saving technology is most tantalizing where wages for low-skill work is highest. That’s cities, too. Might these rich cities be canaries in the coal mine for technology displacing human workers?
Avent: That’s an interesting question: I think I would say yes. Big cities like London, New York, and San Francisco play out in miniature the debates we’ll see at a national level. They’re generating phenomenal wealth, and people who don’t have access to it can be left behind.
These cities tend to be early adopters of Uber and other sharing economy apps, which are systematizing jobs in ways that make them more automatable. For example, once you take the brain out of the driving, it’s just a person following a map, and it’s easy to imagine a machine just following a map. I could also imagine that in these cities, in-person contact becomes something like a luxury good.
Thompson: Like the phenomenon of $120,000 nannies and Latin tutors on the Upper West Side.
Avent: Yes. The very rich will still want people, their own personal shoppers and assistants. Being able to retain human labor would be a sign that you’re wealthy. So even in a future city that had a lot of laborers replaced with technology, you might still have artisanal service sector workers.
Thompson: One of the popular solutions to this problem is the idea of a universal basic income, or UBI—a bare minimum that every adult would be owed that is paid out of this new wealth. What do you think of UBI?
Avent: Right now, our safety net is mostly insurance for the young and the old and people with bad luck. The expectation is that most people pay into it and therefore they expect insurance when they get old or sick. A universal basic income is a totally different social contract. It says that, on a permanent basis, a large class of people will probably be subsidized by a different class. That’s a much trickier thing politically, and it raises questions about the value that they are contributing to society.
Thompson: This question of who gets what in America and who is worthy of a piece of our national wealth seems in many ways to be at the heart of Bernie Sanders and Donald Trump phenomena, don’t you think?
Avent: Bernie Sanders and Donald Trump are two sides of the beginning of this social evolution. Bernie is pushing along the direction of, "let’s distribute more." Trump is pushing along a related direction which is, "let’s exclude others who are not like us." The book talks at the end about how redistribution creates political pressure to exclude those who don’t belong, who aren’t like the majority. The rise of nationalistic political figures in America and in Europe is related to the idea that the majority wants to draw the circle of society closer.
Thompson: I think that too often work is defined in these conversations as a narrow exchange: employee labor for employer money. But as you write—not only in this book, but also in your essay on hard work—a job is so much more than that. It’s a social network, it’s a distraction, it’s a way to fill the day, it’s a source of status and pride and ownership. Even if the number of salaried jobs as a share of the labor force declines, this is something we really don’t want to lose.
Avent: People enjoy work. Even those who don’t enjoy what they do enjoy the feeling of agency and being able to provide for others. For a world to work where a universal basic income accounts for the bulk of the consumer spending for many people, something else needs to account for the social side of work. It is disappointing to think that we’d have to create make-work for people, but it may be the hard truth.
We’re a long way away from that world. What comes next would be higher wage subsidies and in-kind benefits, like tuition-free college or subsidized health care. But it’s coming, and the debate will be: If we’re going to pay people to do work that isn’t necessary, who do we let into the system? Who is allowed to benefit?
Interesting argument....
thefederalist.com/2015/10/20/america-please-stop-glorifying-manufacturing-jobs/
When will people see the scam in Trump?
www.chicagotribune.com/news/opinion/commentary/ct-trump-white-working-class-scam-20161125-story.html
Trump’s first 100 days: Immigration, trade and more policy plans outlined
http://www.amny.com/news/politics/trump-s-first-100-days-immigration-trade-and-more-policy-plans-outlined-1.12651197
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