Donald Trump has sounded America’s global retreat

Russia and China will be the big winners from the end of US leadership

Philip Stephens

The guiding assumptions of modern American foreign policy were set out in a document written in 1950 for president Harry Truman. NSC-68 as it was called (the paper was prepared at the National Security Council) was Washington’s answer to Soviet communism. At its core was a belief that US national interests were best pursued through international leadership. This is the foundation stone to which Donald Trump has taken a sledgehammer.

Much of NSC-68 focused on countering the military threat from the Soviet Union. Signed off by Truman at the start of the Korean war, it was the basis for a rapid build-up in US defence spending. But mindful of how the national mood could turn to isolationism, it also aimed to quash the idea that America could retreat again into its own hemisphere.

Thus: “Our overall policy at the present time may be described as one designed to foster a world environment in which the American system can survive and flourish. It therefore rejects the concept of isolation and affirms the necessity of our positive participation in the world community.” Here was the strategic rationale, lasting beyond the cold war, that enmeshed the US in the fabric of what we call the west.

When today’s US diplomats remark they expect Russia’s Vladimir Putin to take great care in preparing for his Helsinki meeting with Donald Trump this month, they leave the next thought hanging in the air. The US president, they know, has already decided how he wants to spend the time immediately preceding the encounter. He intends to be hitting a golf ball in Scotland.

If the only concern was Mr Trump’s preference for watching Fox News over reading anything resembling an official policy brief, it would be manageable. After all, Ronald Reagan stole time at international meetings to watch videos of old Hollywood westerns. But Helsinki will follow on the heels of a Nato summit in Brussels. The fear among diplomats, US as well as European, is of a rerun in Brussels of the angry exchanges at the G7 meeting in Canada.

A shouting match with America’s allies might then be followed by a day of backslapping with Mr Putin. The president, after all, has made plain his disdain for Nato. He says the Europeans set up the EU as part of an economic conspiracy against the US. His response to the myriad allegations of Russian interference in the 2016 presidential election campaign has been to double up on his professed admiration for Mr Putin.

The mistake made by the rest of us has been to imagine that Mr Trump could somehow be managed through his presidency — that the ignorance and prejudice that inform his worldview could be sidestepped and softened. With enough teeth-gritting indulgence and flattery, the argument has run, the president could be kept within boundaries. Yes, he wanted to shake things up, but to tilt them to US advantage rather than to bring the house down.

The evidence is increasingly otherwise. The more persuasive explanation of the US president’s behaviour is that he simply does not accept the assumptions made by the authors of NSC-68 about global leadership, alliances and international institutions. Instead his instincts say that, as the world’s most powerful nation, the US is better off setting its own, bilateral, terms with allies and adversaries alike. Donald Tusk, the president of the European Council, got it right when he remarked the other day that “He [Trump] has a method and is serious in his mission against an international rules-based order . . . He is on a mission against what we stand for.”

Seen through this lens, Mr Trump’s admiration for Mr Putin is readily explicable. They are both self-declared strong men. They share an outlook that says the prizes should go to the powerful, that multilateral institutions and rules are calculated to ensnare them, and that norms, values and what they call moralism do not have a place in the conduct of relations between states. As for the weak, well they can go hang.

This is the mindset that leads Mr Trump to tear up the Iranian nuclear accord, to suggest that Mr Putin has a point in wanting to run Russia’s near-abroad, to tell French president Emmanuel Macron France should leave the EU to do a trade deal with Washington, and to indicate he will bargain away America’s security commitments to east Asia in return for trade concessions from China’s Xi Jinping. Infusing it all is a powerful dose of manic self-delusion. Thus, against all the evidence, Mr Trump may really believe that after their recent summit in Singapore North Korea’s Kim Jong Un will give up his nuclear weapons programme.

On Mr Trump’s present course — and even his unashamedly America-first national security adviser John Bolton is showing signs of alarm at the president’s behaviour — the concept of a western order will be drained of substance and meaning. US allies, in Asia as well as Europe, will have to find other ways to safeguard their security. Some may look to China; others may think about a nuclear deterrent; Europe may understand it has to be able to defend itself.

The big winners of course are Mr Putin and Mr Xi. Their shared strategic goal has long been to put an end to the American-led order sketched out by Truman. China has bristled at the US presence in Asia; Russia wants a return in Europe to 19th-century power balancing. They could never have imagined that a US president would deliver to them such a prize.

Europe’s Nativist Swing Casts Shadow Over Establishment

German immigration shift, rise of Italian far right pressure continent’s status quo

By Marcus Walker in Rome and Valentina Pop in Vienna

German Chancellor Angela Merkel is has pledged to tighten immigration controls to prevent the collapse of her governing coalition, a sign of the nativist wave sweeping the EU. Photo: Emmanuele Contini/NurPhoto/Zuma Press 

In Europe’s long struggle between the political establishment and its challengers, the momentum this year is shifting toward nativists, deepening doubts about the continent’s multilateral order and divisions about how to respond.

German Chancellor Angela Merkel survived the near-collapse of her governing coalition this week by pledging to tighten immigration controls, backing further away from her pro-refugee stance at the height of Europe’s migration crisis, which continues to reverberate around the continent.

Few in Germany expect the calm to last. The European Union’s most powerful member is also becoming its central battleground in a rancorous debate over immigration, sovereignty and political leadership. 
In Italy, the relentless rise of Matteo Salvini and his nativist League party is creating a new hub of opposition to Ms. Merkel and the multilateral Europe she wants to defend. Mr. Salvini, Italy’s interior minister and on paper the junior coalition partner in the Rome government, is dominating his country’s discourse with blunt rhetoric against immigrants and EU authorities. His open challenge to Ms. Merkel’s vision of Europe is emboldening politicians in other countries who want a looser EU, and to put their own nation first.

    Italian Interior Minister Matteo Salvini visited a farm confiscated from the mafia in Siena, Italy on Tuesday. Photo: fabio di pietro/EPA/Shutterstock 

Austria’s vice chancellor and far-right Freedom Party leader Heinz-Christian Strache said on Thursday he is “very thankful” for Mr. Salvini. “We agree with him on his positions on Europe, we have very good cooperation,” Mr. Strache told a news conference.

“Bringing down the Berlin Wall seemed impossible. We will bring down the wall of Brussels,” Mr. Salvini said at the weekend, referring to the seat of the EU’s administration.

The challenge from the nationalist right is dividing Europe’s established conservative parties, including Ms. Merkel’s Christian Democrats, who helped build the EU and are now unsure how to defend it.

President Donald Trump’s verbal attacks on the EU, as well as his questioning of the North Atlantic Treaty Organization and multilateral trade rules, are adding to the sense in EU capitals that the integrated Europe of the post-Cold War era is under siege.

Some EU countries are even challenging the bloc’s norms on liberal democracy, with Hungary’s Viktor Orban saying he wants to build an “illiberal state” inspired by authoritarian regimes and Poland accused by the EU of weakening the rule of law.

Central Europe’s nationalists, as skeptical about non-European migrants as they are about checks and balances, are becoming another schism within the EU, challenging the post-Cold War belief that Europe would converge on a single model of governance.

“We are seeing a continentwide struggle about what we perceived as the permanent status quo, the multilateral order of the West,” said Ulrich Speck, a foreign-policy scholar at the German Marshall Fund of the United States.

Austria, the small Alpine country sandwiched between Germany and Italy, has gained an outsize role in the struggle for Europe’s soul. 
Austria’s 31-year-old chancellor, Sebastian Kurz, has gone further than any other leader from the EU’s center-right establishment in co-opting the far-right in a quest to tame it, bringing a nativist party into his coalition and championing border controls as the only way to stop migrants and save the EU.

On Saturday, as Austria took over the EU rotating presidency for six months, Mr. Kurz hosted some EU leaders on a mountain top. Surrounded by hikers wearing traditional Alpine garb, he lauded the “magnificent view over our beautiful country,” and promised to focus the EU’s agenda on homeland security. Mr. Kurz has aligned himself with Ms. Merkel’s German critics who want a migration crackdown.

Only a year ago, EU supporters were celebrating the landslide election of fresh-faced French President Emmanuel Macron, who trounced a nationalist rival after campaigning for deeper European unity.

Today, Mr. Macron looks like Europe’s exception, rather than the herald of a centrist surge. His proposals for revitalizing the EU, including with common fiscal policies to bolster the euro currency zone, have found few takers.

Instead, questions of immigration and security continue to dominate European voters’ concerns, surveys show, and politicians’ attempts to shore up their support.

Today’s pressure on Europe’s status quo from the nationalist right is as serious as the ideological challenge from the anticapitalist left after 1968, says Ivan Krastev, a Bulgarian political scientist and author of the book “After Europe,” focused on the strains in the EU.

The challenge for mainstream politicians, as in the 1970s, is “how to integrate some of the legitimate concerns of the voters, without giving in to the extremes,” Mr. Krastev says.

Germany’s latest drama erupted when Ms. Merkel’s junior partner, the conservative Christian Social Union from the region of Bavaria, threatened to pull out of her coalition unless she agreed to block migrants from entering Germany who have already registered an asylum application in another EU country.

Ms. Merkel insisted that such cases should be handled only in agreement with neighboring countries, reflecting her belief that Europe needs a collective response to the heavy migration pressures from the poor and war-torn continents that surround it.

Her CSU critics argue she is falling behind the zeitgeist. “In Europe and the world,” Bavarian regional Premier Markus Söder said last month, “the time of orderly multilateralism is being superseded somewhat by individual countries that can make decisions too.” German authorities “should think also of the indigenous population and not always just of Europe as a whole,” he said.

The CSU fears losing its ruling majority in Bavarian regional elections in October, thanks partly to the rise of the far-right Alternative for Germany, which has garnered votes from Germans angry about Ms. Merkel’s decision in 2015 to take in nearly a million Syrian refugees. 
That decision continues to define Ms. Merkel in the eyes of many in Germany and Europe, even though Ms. Merkel has repeatedly tightened Germany’s immigration policies since 2016.

The chancellor’s bruising argument and last-minute compromise with the CSU concerned policy measures that would in practice affect only a small subset of migrants. But the details mattered less than what Ms. Merkel symbolizes to her critics: a Germany that can’t control its borders.

The CSU’s quest to show the public that asylum seekers can be refused entry to the country has created an awkward tactical alliance around Europe: between establishment conservatives who want a migration crackdown, and some of the nativist insurgents who want to destroy them. Hostility to Ms. Merkel binds them together, as well as a sense that the chancellor’s authority is waning.

Mr. Salvini openly encouraged the CSU to challenge Ms. Merkel and push for unilateral border controls, even as he rejected taking back any migrants refused entry to Germany.

At a raucous rally on Sunday of his League party, Mr. Salvini launched his manifesto for the year ahead, vowing to build a pan-European alliance of nationalist movements, “a league of leagues,” to sweep away Europe’s old political elites.

“They accuse us of xenophobia, but the Italy that we will govern for the next 30 years…has no fear of anyone,” Mr. Salvini told the sea of flags.

Is Cyber the Perfect Weapon?

Joseph S. Nye

CAMBRIDGE – For years, political leaders such as former US Secretary of Defense Leon Panetta have warned of the danger of a “cyber Pearl Harbor.” We have known for some time that potential adversaries have installed malicious software in our electricity grid. Suddenly the power could go out in large regions, causing economic disruption, havoc, and death. Russia used such an attack in December 2015 in its hybrid warfare against Ukraine, though for only a few hours. Earlier, in 2008, Russia used cyber attacks to disrupt the government of Georgia’s efforts to defend against Russian tropos.

Thus far, however, cyber weapons seem to be more useful for signaling or sowing confusion than for physical destruction – more a support weapon than a means to clinch victory. Millions of intrusions into other countries’ networks occur each year, but only a half-dozen or so have done significant physical (as opposed to economic and political) damage. As Robert Schmidle, Michael Sulmeyer, and Ben Buchanan put it, “No one has ever been killed by a cyber capability.”

US doctrine is to respond to a cyber attack with any weapon, in proportion to the physical damage caused, based on the insistence that international law – including the right to self-defense – applies to cyber conflicts. Given that the lights have not gone out, maybe this deterrent posture has worked.

Then again, maybe we are looking in the wrong place, and the real danger is not major physical damage but conflict in the gray zone of hostility below the threshold of conventional warfare. In 2013, Russian chief of the general staff Valery Gerasimov described a doctrine for hybrid warfare that blends conventional weapons, economic coercion, information operations, and cyber attacks.

The use of information to confuse and divide an enemy was widely practiced during the Cold War. What is new is not the basic model, but the high speed and low cost of spreading disinformation. Electrons are faster, cheaper, safer, and more deniable than spies carrying around bags of money and secrets.

If Russian President Vladimir Putin sees his country as locked in a struggle with the United States but is deterred from using high levels of force by the risk of nuclear war, then perhaps cyber is the “perfect weapon.” That is the title of an important new book by New York Times reporter David Sanger, who argues that beyond being “used to undermine more than banks, databases, and electrical grids,” cyberattacks “can be used to fray the civic threads that hold together democracy itself.”

Russia’s cyber interference in the 2016 American presidential election was innovative. Not only did Russian intelligence agencies hack into the email of the Democratic National Committee and dribble out the results through Wikileaks and other outlets to shape the American news agenda; they also used US-based social-media platforms to spread false news and galvanize opposing groups of Americans. Hacking is illegal, but using social media to sow confusion is not. The brilliance of the Russian innovation in information warfare was to combine existing technologies with a degree of deniability that remained just below the threshold of overt attack.

US intelligence agencies alerted President Barack Obama of the Russian tactics, and he warned Putin of adverse consequences when the two met in September 2016. But Obama was reluctant to call out Russia publicly or to take strong actions for fear that Russia would escalate by attacking election machinery or voting rolls and jeopardize the expected victory of Hillary Clinton. After the election, Obama went public and expelled Russian spies and closed some diplomatic facilities, but the weakness of the US response undercut any deterrent effect. And because President Donald Trump has treated the issue as a political challenge to the legitimacy of his victory, his administration also failed to take strong steps.

Countering this new weapon requires a strategy to organize a broad national response that includes all government agencies and emphasizes more effective deterrence. Punishment can be meted out within the cyber domain by tailored reprisals, and across domains by applying stronger economic and personal sanctions. We also need deterrence by denial – making the attacker’s work more costly than the value of the benefits to be reaped.

There are many ways to make the US a tougher and more resilient target. Steps include training state and local election officials; requiring a paper trail as a back-up to electronic voting machines; encouraging campaigns and parties to improve basic cyber hygiene such as encryption and two-factor authentication; working with companies to exclude social media bots; requiring identification of the sources of political advertisements (as now occurs on television); outlawing foreign political advertising; promoting independent fact-checking; and improving the public’s media literacy. Such measures helped to limit the success of Russian intervention in the 2017 French presidential election.

Diplomacy might also play a role. Even when the US and the Soviet Union were bitter ideological enemies during the Cold War, they were able to negotiate agreements. Given the authoritarian nature of the Russian political system, it could be meaningless to agree not to interfere in Russian elections. Nonetheless, it might be possible to establish rules that limit the intensity and frequency of information attacks. During the Cold War, the two sides did not kill each other’s spies, and the Incidents at Sea Agreement limited the level of harassment involved in close naval surveillance. Today, such agreements seem unlikely, but they are worth exploring in the future.

Above all, the US must demonstrate that cyber attacks and manipulation of social media will incur costs and thus not remain the perfect weapon for warfare below the level of armed conflict.

Joseph S. Nye, Jr., a former US assistant secretary of defense and chairman of the US National Intelligence Council, is University Professor at Harvard University. He is the author of Is the American Century Over?

Can US triple C-rated bonds stay ahead of the pack?

High-yield debt is looking vulnerable after strong outperformance in the first half

Alexandra Scaggs 

For the US corporate bond market, current conditions can be described with a comparison made famous in the financial crisis film Margin Call: the proverbial game of musical chairs is still on but the pace of the song has become more frenetic.

This year, the corporate bond market has been defined by a marked shift away from quality with lower-rated issues outperforming bonds from companies with stronger balance sheets.

This has been driven by expectations that the economy will continue to expand. But with the US Federal Reserve now raising rates, investors who ploughed into lower quality credit are now clearly vulnerable to the turn in the market cycle.

Investment grade companies rated at triple B minus and higher lost 3.1 per cent this year through to the end of June, according to ICE BofAML indices, while those rated in the junk tier (double B plus and below) have eked out a positive return of 0.1 per cent.

The divergence is even starker in the lowest triple C-rated tier of debt that makes up just 12 per cent of the high-yield market’s value. Triple C plus, triple C and triple C minus bonds have outperformed the rest of the market by a wide margin in the first half, posting a total return of 3.9 per cent, according to ICE BofAML indices.

Some of the outperformance is due to simple supply and demand. Investors had anticipated a much sharper drop-off in the supply of investment grade bonds in the first half of this year than the 5 per cent drop estimated by Bloomberg.

Demand from foreign investors was also 13 per cent lower than last year as hedging costs increased with rises in US short-term interest rates and the dollar, according to estimates from strategists at Bank of America Merrill Lynch.

But the shift also reflected reduced perceptions of risk. The gauge of market risk implied by the spread between the yields on those securities and government debt has narrowed by 135 basis points, according to CreditSights.

The question for the second half of the year for high-yield debt is trade and the economy. Many of the US’s junk-rated companies are plays on global growth, which could be hamstrung by a trade war if one comes to pass.

More broadly, the question is how high the Fed can raise rates before companies struggle to service their cost of debt and whether companies in the triple B segment will be downgraded to junk after piling on leverage in deals.

When that happens, higher quality and less leveraged companies will probably benefit — but at that point, equity markets and other risky securities might start to struggle as well, which would hurt investors’ ability to earn returns.