Donald Trump and Xi Jinping’s battle over globalisation     
The US president’s rhetoric on trade reads like a declaration of economic warfare
      
by: Martin Wolf
   

    

Xi Jinping, president of China, made a speech last week on globalisation at the World Economic Forum that one would have expected to come from a US president. At his inauguration, Donald Trump made remarks on trade that one would never have expected to come from a US president. The contrast is astounding.

Mr Xi recognised that globalisation was not without difficulties. But, he argued, “blaming economic globalisation for the world’s problems is inconsistent with reality”. Instead, “globalisation has powered global growth and facilitated movement of goods and capital, advances in science, technology and civilisation, and interactions among people”. His vision matches that of the last US president to address the World Economic Forum. In 2000, President Bill Clinton argued that “we have got to reaffirm unambiguously that open markets and rules-based trade are the best engine we know of to lift living standards, reduce environmental destruction and build shared prosperity”.

Mr Trump rejects this vision: “We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs. Protection will lead to great prosperity and strength.” Moreover: “We will follow two simple rules: buy American and hire American.”




This is not chatter. Mr Trump has already cancelled US participation in the Trans-Pacific Partnership negotiated under his predecessor. He has announced his intention to renegotiate the North American Free Trade Agreement. Furthermore, he has made highly punitive threats against Mexico (imposition of a 35 per cent tariff) and China (imposition of a 45 per cent tariff).

Behind this is what Peter Navarro, Mr Trump’s trade policy adviser, and Wilbur Ross, his proposed commerce secretary, call the “Trump Trade Doctrine”, the view that “any deal must increase the growth rate [of the economy], decrease the trade deficit and strengthen the US manufacturing base”.

For a British reader, this brings back memories of the “alternative economic strategy” advanced by the leftwing of the Labour party in the 1970s. Just like Mr Navarro, Mr Ross and, apparently, Mr Trump, those leftwingers argued that trade deficits constrain demand. Controls on imports were their solution. Deals aimed at decreasing the US trade deficit seem to be Mr Trump’s. Who would have imagined that primitive mercantilism would seize the policymaking machinery of the world’s most powerful market economy and issuer of the world’s principal reserve currency?




The frightening fact is that the people who seem closest to Mr Trump believe things that are almost entirely false.

They believe, for example, that a value added tax not levied on exports is a subsidy to exports.

It is not: US goods sold in the EU pay VAT, just as European goods do; and European goods sold in the US pay sales taxes (where levied), just as US goods do. In both cases, no distortion between domestic and imported goods is created. Tariffs are levied only on imported goods. So they do distort relative prices.

Again, these people believe trade policy determines the trade deficit. To a first approximation, this is not so, because the trade (and current account) balances reflect differences between income and spending. Assume imposition of an across-the-board-tariff. Purchases of foreign exchange will fall and the exchange rate will appreciate, until exports fall and imports rise enough to return the deficit to where it started. Protection then just helps some businesses at the expense of others. The Trump proposals seem to aim at resurrection of the economically dead. True, protection might lower the external deficit by making the US a less attractive destination for foreign investment. But that hardly seems a sane strategy.




Yet another mistake is belief in the merit of bilateral deals. Trade deals are not like deals between companies. They set the terms on which all businesses transact. Bilateralism fragments world markets. It is extremely difficult for firms to create long-term arrangements if new bilateral deals might destabilise competitive conditions at any moment.

Unfortunately, as Martin Sandbu argues, unwise policies might do huge damage. The US president possesses the legal authority to do virtually whatever he wants. But reneging on past deals is sure to make the US seem an unreliable partner. Its victims, particularly China, are also likely to retaliate. According to analysis by the Peterson Institute for International Economics, China and Mexico together account for a quarter of US trade. In a full trade war, US employment might fall by 4.8m private sector jobs. The disruption of supply chains is likely to be especially serious.

Beyond this are huge geopolitical consequences. Beating up Mexico will overturn three decades of reform, probably delivering power there to a leftwing populist. Beating up China may poison an essential relationship for decades. Abandoning TPP may hand a number of the Asian allies of the US over to China. Ignoring World Trade Organisation rules might destroy the institution that provides stability to the real side of the world economy.

The rhetoric of “America First” reads like a declaration of economic warfare. The US is immensely powerful. But it cannot even be confident it will get its own way. Instead, it may merely declare itself to be a rogue state.

Once the hegemon attacks a system it created, only two outcomes seem at all likely — its collapse or recreation of the system around a new hegemon. Mr Xi’s China cannot replace the US: that would take co-operation with Europeans and other Asian powers. The more likely outcome is collapse into a trade policy free-for-all. Mr Xi’s vision is the right one. But, without Mr Trump’s support, it may now be unworkable. That would benefit nobody, including the US.


Another Reset with Russia?

Robert Skidelsky

Newsart for Another Reset with Russia?


LONDON – The question of the West’s relationship with Russia has been buried by media stories of hacking, sex scandals, and potential blackmail. The dossier by former British spy Christopher Steele about US President Donald Trump’s activities in Moscow some years ago may turn out to be as credible as the claims that Saddam Hussein possessed weapons of mass destruction – or it may not.
 
We simply don’t know. What is clear is that such stories have distracted attention from the task of bridging the diplomatic chasm now dividing Russia and the West.
 
It’s hard for a Westerner, even one of Russian ancestry like me, to warm to Vladimir Putin’s Russia. I hate the way his government has used the “foreign agent” law to harass and effectively close down NGOs. I hate its human-rights abuses, assassinations, dirty tricks, and criminal prosecutions to intimidate political opponents.
 
What seems indisputable is that today’s anti-liberal, authoritarian Russia is as much a product of the souring of relations with the West as it is of Russian history or the threat of disintegration that Russia faced in the 1990s.
 
This souring is rooted in Russia’s perception, underpinned by a large dose of paranoia and a misreading of post-communist history, that the West – and the United States, in particular – has aggressive designs on it. It is simply not true that Russia willingly gave up its empire to join the democratic West, only to be rebuffed by it. The Soviet Union had become too decrepit to hold on to its post-World War II gains or even its pre-war frontiers. The peoples of Eastern Europe, and those absorbed by the Soviet Union, were delighted to be free of Kremlin control.
 
Nonetheless, as Dmitri Trenin, Director of the Carnegie Moscow Center, points out, Robert Gates, who headed the CIA in the early 1990s, later conceded that the West, and particularly the US, “badly underestimated the magnitude of Russian humiliation in losing the Cold War.” The spectacle of “American government officials, academicians, businessmen, and politicians” arrogantly “telling the Russians how to conduct their […] affairs” inevitably “led to deep and long-term resentment and bitterness.”
 
In this context, NATO’s expansion between 1999 and 2004 to include the Baltic states was, in my view, a serious mistake. I remember a leading Russian liberal telling me in the 1990s that a democratic government in Moscow was a much more secure guarantee against Russian adventurism than NATO troops in Vilnius.
 
Russia’s own overture to join NATO in 2001-2002 was predictably rejected. NATO’s essential post-communist purpose, after all, was to protect Eastern Europe against Russian revanchism.

But it was a kick in the face when, at NATO’s Bucharest summit in 2008, the Alliance’s then-secretary general, Jaap de Hoop Scheffer, said that Ukraine would “someday” join. Although NATO’s leaders rejected Scheffer’s position at that very summit, many Russians came to believe that wherever Russia’s power receded, it was being replaced by the expanding power of the West, with no middle ground or buffer.
 
Putin called NATO membership for Ukraine “a direct threat” to Russia.
 
Although Russia and the West each claim to uphold a rules-based international order, both sides have flouted the United Nations Charter when it suits them, accusing the other of hypocrisy. Did no Western policymaker heed the warnings of responsible Russian politicians that NATO’s bombing of Belgrade in 1999 and Kosovo’s subsequent detachment from Serbia – both in violation of international law and the UN Charter – might set a dangerous precedent?
 
Despite the manifest corruption of Ukrainian President Viktor Yanukovych, and his betrayal of his pledge to sign an association agreement with the EU, Russia saw only the West’s hand in the popular uprising that resulted in Yanukovych’s ouster in 2014. The West, in turn, was unanimous in condemning Russia’s subsequent annexation of Crimea and clandestine military support for a pro-Russian separatist uprising in Ukraine’s eastern Donbas region.
 
From the perspective of Realpolitik, Putin’s intervention in Ukraine was a catastrophic error: in addition to the economic sanctions Russia incurred as a result, Russian policy shifted Ukraine decisively into the Western camp. With its links to the US and the European Union fracturing, Russia has looked to a Eurasian alliance with China to bolster its crumbling geopolitical position. But this is neither country’s favored partnership.
 
Trenin believes that the West should fear Russia’s weakness more than its imperial designs. Russia’s fundamental post-Soviet shortcoming has been its failure to modernize its economy. The Putin-Medvedev governments that have ruled for the last 17 years have failed to overcome the “oil curse.”
 
The state’s continued dependence on resource revenues has entrenched corruption, sustained autocracy, and encouraged foreign-policy adventurism as a substitute for broad-based material prosperity.
 
The Trump administration is set to make a new effort to build bridges. Trump proposes a “deal” to lift Western sanctions on Russia in exchange for an agreed reduction in nuclear stockpiles. This would be a good confidence-boosting start.
 
There are at least three positives to build on. First, Putin’s foreign-policy coups, while opportunistic, have been cautious. He talks big, but respects his limits. Having made his point in Georgia and Ukraine, he drew back. He is a gambler, but not for the highest stakes.
 
Second, the Russian thesis of “multipolarity” offers much to international relations. With American power on the wane and China’s on the rise, a restructuring of international relations is inevitable. The rules of the game forged in the era of US supremacy will have to be revised to accommodate different interests and perceptions. Russia could play a constructive role in this revision, if it does not overestimate its strength.
 
Finally, Russia has shown – on the nuclear deal with Iran and the elimination of Syria’s chemical weapons – that it can work with the US to advance common interests. And, in my view, Putin’s “realism” in providing military support to Syrian President Bashar al-Assad is preferable to futile Western efforts to orchestrate a “political settlement.” If successful, millions of refugees may be able to return to their homes.
 
The conflict of values between the two sides will continue. But, provided the West treats Russia and its concerns with respect, there is no reason why a much better working relationship cannot be established.
 
 


As China Extols Open Markets, Price Controls Sprout Back Home

New ‘color coded’ coal price controls are emblematic of deeper problems with China’s reform agenda

By Nathaniel Taplin
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China's President Xi Jinping after his speech at the World Economic Forum in Davos, Switzerland, Jan. 17. Photo: Associated Press


What is odder than watching the president of China, a nominally socialist nation, at Davos publicly assume the mantle of the global champion of unfettered markets?

Answer: watching the above, while the bureaucracy back home quietly churns out new price controls.

China has developed a new color coding system for coal prices, with increasing levels of intervention to control prices as they move outside a “green” zone of $70 to $80 a ton. The move follows intense volatility in global coal prices, which gained over 70% in 2016 after sharp Chinese capacity cuts collided with rebounding industrial electricity demand.

Coal price controls in China have a long and unhappy history, and there is little doubt that prices are far freer than at the turn of the century.

But further progress under the current administration has been scattershot. Under Xi Jinping, markets have been allowed to play a greater role in the economy—as long as they move in a direction policy makers like. When they don’t, however, rhetorical homage to free markets quickly goes out the window. That helps smooth short term volatility. But the costs are substantial. The government is willing to bear those costs because coal is China’s main energy source and rising prices have political and social implications.

For China, it means slower growth and a higher risk of a big financial blowup in the long run as, in the absence of proper market signals, capital allocation runs amok in the state-owned sector.

And for foreign investors eyeing Chinese firms, it often means poor returns, as state-owned firms are forced into national service or miss opportunities to profit off rising prices due to administrative diktats.

The recent struggle to control coal prices is a classic example of the latter. Chinese coal production has finally rebounded in response to rising prices, but big state-owned miners, which are easier to police, have largely missed the bonanza. Output from key state-owned mines in November was still down 8% on the year following forced capacity cuts in early 2016.

But production for the country as a whole was only down 4%, suggesting that more flexible small and midsize mines have actually reaped much of the benefits of rising prices.

One result: lagging share prices for listed Chinese miners. Hong Kong-listed China Coal Energy’s sales were still down almost 6% on the year in the third quarter, even though coal prices were up 35% over the same period. China Shenhua and China Coal Energy shares are up 33% and 39% since end-December 2015 respectively, against gains of more than 100% for Glencore, Yancoal Australia and Rio Tinto.

On scale and market size alone, China and its key state-owned enterprises should be leaders of the next phase of globalization. But unless the nation is prepared to put more faith in markets back home, it is hard to see other nations following its lead.


Thinking Through Trump’s Views on the Islamic State

The president has said he will eradicate IS, but how might this happen?

By George Friedman


During President Donald Trump’s inauguration speech last Friday, he reiterated his promise to destroy the Islamic State. Previously, he also pledged to reduce international commitments that don’t benefit the United States. The two statements are not incompatible. Trump is simply saying that the destruction of IS is fundamental to the national interest. On the surface, this is not an obvious priority, so we must try to understand why IS is so important in his thinking.

IS is a Sunni movement, primarily located in Syria and Iraq, committed to re-establishing the caliphate and dominating the Islamic world. It has established a relatively contiguous area of control stretching from Mosul to Palmyra. Within this space, it has developed a government, and its capital is Raqqa. It maintains rudimentary services, raises taxes and conducts trade. It also maintains a substantial military that has been battling forces trying to retake Mosul. If it succeeds in uniting the Islamic world under a caliphate, it could represent a global challenge. A modern industrialized society governed by a single, integrated state based on Shariah and possessing that much territory would be a very real challenge to American interests.


U.S. President Donald Trump pumps his fist after addressing the crowd during his swearing-in ceremony on Jan. 20, 2017 at the U.S. Capitol in Washington. MANDEL NGAN/AFP/Getty Images


IS is far from this goal and has many steps to execute on the way there, so the likelihood of this happening is extremely low. If it was moving in that direction, future intervention would make more sense. It also should be remembered that a Shariah-based industrial force able to project power globally would face tension between the social order commanded by Shariah and a truly global power. In addition, IS threatens regional powers like Turkey Iran, Saudi Arabia and Israel with its military capabilities, and others, including the United States, with intermittent terrorist attacks. In the end, the single power most hostile to the Islamic State is Iran, which IS challenges theologically and politically.

Looked at in this way, it would seem to follow that IS does not pose a direct threat now to the United States, and that plenty of intermediate, regional powers are in a position to block IS.

Therefore, given the overarching theme of Trump’s global strategy, IS should be a problem for regional powers to deal with; the U.S. does not need to address it until much further down the line, if ever. We need to understand the reasoning for this.

We tend to think of the Middle East as we think of Europe: a group of independent nation-states collaborating or fighting with each other. Maps create this image, but they are deceiving.

Thinking of only the Middle East is also problematic. To make sense of the issue, you need to think of the Muslim world, stretching from Morocco to the Philippines, and from Central Asia to Africa. It is a world of over 1.6 billion humans, roughly a quarter of all humanity.

The Muslim world was never under the control of a single caliphate, but massive regional powers emerged. For example, at one point the Mediterranean basin was controlled by Muslims. Their power dominated the Iberian Peninsula and stretched toward Vienna.

Reasonable people might have thought that Christian Europe was vastly outclassed by Islam during that period. However, the balance of power there, in the Indian subcontinent and in Southeast Asia shifted back and forth between Muslims and their adversaries.

From roughly the 18th century, the balance began to shift toward the Europeans. As Christian European empires enveloped the world, this included the Muslim world as well. The Dutch in Indonesia imposed force that shattered political Islam in the East Indies. British and French imperialism overwhelmed political Islam in South Asia and North Africa, respectively. The Russian Empire imposed its force on the Caucuses and Central Asia. And as the Ottoman Empire weakened and fell, the Europeans overran the Middle East. European imperialism fragmented the political power of Muslims. It did not shatter the religious principles that powered political Islam. The ability to express them as a political force was limited by European power, but the core was not broken. And that core did not regard Islam as a private religion; it saw Islam’s public and private legitimacy and power as part of the same fabric. The religion was theocratic at its core. Its inability to act politically was developed over time, but it was not a permanent condition.

After the collapse of the European empires, a set of states remained, floating atop the wreckage the Europeans left behind. But beneath that wreckage was the layer of political Islam that had never gone away, however powerless it might have been the previous few centuries. It was that layer, freed from constraints, that gave rise to al-Qaida and IS, as well as numerous other organizations centered in the Sunni world, such as the Taliban. The emergence of political Islam was not an aberration, but a struggle on the part of Islam to return to its historical normal.

There is a great debate raging in the West about how to distinguish average Muslims from Islamist radicals. In the thinking that flows from Trump’s position, that is the wrong question to ask. Political Islam is Islam. Various weakened strands of Islam, broken by Europe’s domination, have pushed the political aspect to the side, but Islam is inherently a political religion. The core question is not distinguishing Islam and political Islam. They are one.

However, this does not mean that political Islam must be savage.

But that doesn’t work at this point in history. After emerging from European domination, Islam is undergoing a wrenching revolutionary process. It is trying to reconstruct itself within the context of a dispirited Muslim community. Urgency and external pressure don’t radicalize Muslims. Rather, the entire process of reassertion is impossible without a radicalization of the Muslim community, because that process liberates the repressed beliefs of Islam. This pressure does not turn Muslims into radicals. It is release from pressure that opens the door to it.

European revolutions, such as the Russian, German and French revolutions, proceeded barbarically. This should not bring anyone comfort. It signals what the human toll of creating an Islamic polity might be.

For the United States to back away from this and let nature take its course ignores the reality that radicalism tends to displace moderation, not the other way around. Therefore, simply allowing it to be contained by Turkey or Saudi Arabia fails to take into account that they are also subject to radicalization. Or to put it differently, the idea that radicalization is taking place misstates the reality.

Islam is not searching for radicalization or moderation – but for authenticity. And an authentic Islamic state emerging to power is not in the American interest.

How, then, should it be dealt with? One solution is to continue the 15-year war that started after 9/11.

All this does is strengthen the emergence of political Islam. The other is to use the balance of power, particularly Iran and Israel. The problem is they may decide not to be used, and in the case of Iran, what might result would be no solution.

Trump’s strategy would be to return the Muslim world to the status quo ante 1945. For centuries, Islam was political, on the defensive, demoralized and fragmented. That was achieved by Europe hurling itself against the Muslim world as it did against the rest of the world. And obviously, the Europeans are in no position to repeat that.

The key is to break the Islamic world’s growing confidence in itself. Defeating IS is not an end in itself but a means to an end. IS is merely a new construction of political Islam in its revolutionary form. But unlike other such movements, IS has stood and fought, indicating political Islam’s growing vigor. For Trump, the enemy is this rising confidence and vigor.

Political Islam cannot be eradicated.

But its confidence can. And notions such as “radicalization” that are used to argue against harsh measures miss the point. It is not anger at harshness that radicalizes, but pride and hope for the future that draws on it. That future has to be made enormously more distant.

Accepting this notion would lead to arguing for a massive insertion of U.S. forces designed not only to shatter a particular movement but to demonstrate the hopelessness of political Islam establishing itself for another century. This is what European powers did during their reign.

The hopelessness of the situation was evident, and with it, the virtue of moderation. Without hopelessness, it is unclear what advantage there is in being moderate.

It is difficult to imagine what this attack would look like. I do not think that the Trump team believes defeating IS will solve this problem. The roots are in the population, and the population must be convinced that their hopes are beyond realization. The pronouncement on defeating IS and a large increase in the defense budget are of note. In my view, Trump appears to operate in a disjointed manner in order to keep his options open. He is aided in this by his enemies who deny there is any coherence to his thought process. But I have seen no evidence of incoherence, only things he doesn’t have the power to do at this point.

I do not understand what the military operation will look like, and I am of the generation that has seen too many plans burst into flames. I can follow his reasoning to the point that he wants to break political Islam. But in defense of his approach, we can say that the strategy of the last 15 years hasn’t worked, that former President Barack Obama’s attempt to be friendly didn’t help and that doing nothing and hoping for the best seems risky. None of the reasoning matters until the strategy is worked out.