A Perfect Storm

Democracy on the Defensive in Trump's America

Coronavirus, economic collapse and now mass demonstrations for racial equality: The United States is facing a trio of deep crises. Instead of offering leadership, President Donald Trump is exacerbating divisions and showing authoritarian tendencies. With the presidential election still several months away, the country's health is at stake.

By Guido Mingels, Roland Nelles, Ralf Neukirch, René Pfister und Marc Pitzke

Once darkness had fallen, the general went to see the situation for himself. Mark Milley strode across the battlefield in olive-green camouflage and heavy boots, not to inspect a residential street in Fallujah or mountains in Afghanistan, but the streets of Washington, D.C.

A reporter asked Milley, the chairman of the Joint Chiefs of Staff, if he had a message for the American people. His response: "Just allow freedom to assemble, freedom of speech, that's perfectly fine, we support that," he said. "We took an oath of allegiance to the Constitution of the United States of America to do that, and to protect everyone's rights and that's what we do."

It was a striking statement given that it came just a short time after security personnel, including members of the military police, deployed batons and flashbang grenades to forcibly push peaceful protesters out of the streets surrounding the White House. There are competing narratives as to whether they had been warned before force was deployed, but it is clear why they were moved: to provide a photo op for U.S. President Donald Trump.

Around 6 p.m. on Monday, after several days in which the White House had looked like a defensive fortress surrounded by a sea of furious demonstrators, Trump stepped outside. Up to that point, the president had hardly said a word about the largely peaceful protests or the limited rioting that had beset Washington, D.C., and dozens of other towns and cities across the nation. He was unable to find the courage or desire to give a consoling speech following the horrific slaying of George Floyd, a black man who was murdered by a white policeman who kneeled on his neck for almost nine minutes.

Once the crowds were cleared on Monday evening, Trump stood in front of St. John's Church, which had been damaged by fire the previous evening. He fiddled with a Bible, then held it aloft, as though unsure exactly what to do. When Trump was asked about his favorite verse in what he described as his "favorite book" last year, he had been unable to come up with one. 

In front of the church, a journalist asked the president about his thoughts about the current situation. Trump muttered a few unintelligible comments into the wind. He was surrounded exclusively by white men and women, including Defense Secretary Mark Esper and the four-star General Milley, who had been tasked by the president a short time earlier with coordinating the military response to the unrest in the country.

Quick Pushback

The scene was as ridiculous as it was ominous, more reminiscent of South American potentates than of American democracy. Trump, who is fond of taking about "my generals" and also claimed to have the "support of the army," had arranged for a military escort for his foray into the streets of America. He also indicated that he wanted to send military units into American cities to confront the protesters, whom he has described as "terrorists." 

The pushback came quickly. Defense Secretary Esper voiced his disapproval of the plan, as did several others. After Trump’s church appearance, retired General John Allen, who once commanded NATO troops in Afghanistan and was part of the fight against Islamic State, said, "The slide of the United States into illiberalism may well have begun on June 1, 2020." James Mattis, also a retired general and once Trump's defense secretary, wrote in The Atlantic that Trump was the first president who was seeking to divide the country rather than unite it. But Trump's political allies were still there for him. The New York Times published an op-ed by Republican Senator Tom Cotton headlined, "Send In the Military."

Trump and his political accessories are using the rhetoric of authoritarianism. Militarized police forces haven't just been using violence to quell plundering and rioting, they have also been attacking peaceful demonstrators. Journalists have been arrested as well.

Should we be worried about the United States? Is a fundamental shift taking place in a country that is synonymous with deeply rooted democracy? The current chaos on the streets of America isn't just the product of the country’s economic and societal tensions. The president himself has repeatedly exacerbated those conflicts with his rhetoric. Trump, it seems, needs the chaos. He feeds off it.

Few other democratically elected leaders have as much power as the U.S. president, a reality that can lead to abuse. Trump has made personal loyalty the most important qualification for those with whom he surrounds himself. He harbors deep admiration for Russian President Vladimir Putin and once voiced his support for the violent crushing of the pro-democracy protests on Beijing's Tiananmen Square, saying it was a sign of strength.

The Russia investigation and his impeachment did not show him the limits of his power, and instead awakened in him a desire to hit back hard and to get rid of anyone within government who does not fulfill his every whim. In the waning months of his first term in office, just a few months before Election Day, he is increasingly putting his authoritarian tendencies on full display.

In the Hands of Loyal Acolytes

Not long ago, it seemed absurd to question the strength of America's system of checks and balances. U.S. democracy, more than 200 years old, has survived numerous crises and its resilience has always withstood attempts to grab power. But after more than three years of Trump, and despite him being the democratically elected president, the foundations of American democracy have grown brittle. Trump has continually pushed back the limits of what was considered acceptable under his predecessors. Flouting tradition, he placed the powerful Department of the Interior and the intelligence agencies in the hands of loyal acolytes.

"It's very frightening," says Rosa Brooks, a professor of law at Georgetown University. "I hope that I'm being much too paranoid but it's hard not to think of things like the Reichstag fire at this moment."

From the German perspective, of course, the comparison seems farfetched. In February, 1933, the National Socialists used the fire in Berlin’s Reichstag building as an excuse to issue the "Decree of the Reich President for the Protection of People and State.” This essentially meant the suspension of the Weimar-era constitution and the beginning of the Nazi dictatorship.

The U.S. is far away from that. The system of checks and balances is a long way from being defanged and opposition is lively, as the streets in recent days have shown. In the House of Representatives, the Democrats have a solid majority and both Washington and New York are home to newspapers that wield tremendous power.

But the president is flirting with authoritarianism. And his party is following along.

On Monday, Trump retweeted a post by Cotton, the Republican senator, reading: "If local law enforcement is overwhelmed and needs backup, let's see how tough these Antifa terrorists are when they're facing off with the 101st Airborne Division."

On Monday night, military helicopters circled at low altitude above the streets of the capital to intimidate demonstrators and looters. In military jargon, the tactic is known as a "show of force," and tends to be used in foreign battlefields in places like Iraq or Afghanistan. Meanwhile, National Guard troops in battle equipment lined up in front of the Lincoln Memorial, their faces covered. And then, suddenly, a high fence was erected around the White House on Thursday. To protect the president from the American people.

Daniel Ziblatt, a professor of the science of government at Harvard, co-authored the book "How Democracies Die" two years ago. It quickly became a widely respected work about the rise of autocrats and the strategies they employ. "When we wrote the book, we wanted to avoid seeming too alarmist," Ziblatt says today. "Now, I think we were too optimistic. We thought the Republican Party would break with Trump when he began attacking the democratic system. But that hasn't happened."

Destructive Rioting and Curfews

The U.S. has been beset by a perfect storm. In absolute numbers, no other industrialized country has been hit as hard by the coronavirus pandemic as the United States, with more than 100,000 dead. The economic consequences of the virus have also been devastating: More than 40 million Americans have lost their jobs, a disaster second only to the Great Depression. And now, the killing of George Floyd has torn open the country's oldest wound: the deep-seated racism left behind by slavery.

During the initial weeks of the coronavirus crisis, many people took comfort in the notion that "we’re all in this together.” The phrase was repeated daily by news anchors, politicians and celebrities. But many black people in the United States saw it as an affront. They have been hit much harder than white Americans by unemployment - even George Floyd had lost his job as a bouncer at a restaurant in Minneapolis. Furthermore, the chance that a black American will die from COVID-19 is three times higher than for white people.

"Our country will thrive and prosper again," Trump said in his inaugural address in January 2017. But now, dozens of U.S. cities have seen destructive rioting, and curfews have been imposed on 60 million Americans.

Racist police violence has a long, ugly tradition in the United States and white terror existed long before Trump rose to power, but almost all presidents in recent history have tried to unite the country. When a white terrorist shot and killed nine black people during a Bible study on June 17, 2015, in Charleston, South Carolina, Barack Obama sang a moving rendition of "Amazing Grace" at the memorial service. It comforted the nation.

The contrast to Trump could hardly be greater. Last year, the current president awarded one of the country’s two highest civilian honors to the racist radio host Rush Limbaugh – a man who once said: "If any race of people should not have guilt about slavery, it's Caucasians." When the first disturbances began following the killing of George Floyd, Trump issued a warning that culminated in the sentence: "When the looting starts, the shooting starts." The sentence was used in the 1960s by racist politicians and police chiefs. Trump seemed to intentionally be throwing a match into a barrel of gasoline. And now, the country is burning.

"I am here to fight for my black skin," says a breathless Tranesha Smith, 25, in Oakland. She is holding up a homemade sign as a dark wall of police assembles in front of her. The sign reads "Peace for George Floyd" on the front and, on the back: "You killed my black brother." She says she is fighting for her children, for all black people. And for justice.

Understanding the Rage

"No justice, no peace," is one of the most frequently chanted slogans at the demonstrations. It is often followed by a second sentence: "No racist police!" Thousands have taken to the streets of Oakland in recent days, just as they have in dozens of other cities and towns around the country: in Minneapolis, New York, Los Angeles, Dallas, Washington, Houston, Portland, Louisville and Chicago. Windows have been broken in Oakland, which is located across the bay from San Francisco, and there has been looting.

But on this recent afternoon, the protests are peaceful, at least in physical terms. The anger is still there, expressed in slogans like "fuck the police!" which is chanted over and over again. The heavily armed officers, dressed in dark-colored riot gear, show no emotion under their helmets. Tranesha Smith, who works as an elder-care nurse, is wearing sandals, torn jeans and a colorful top.

Oakland is a good place to understand the rage of black people in America. Many African American people from the South moved to the so-called "Harlem of the West" in the middle of the 20th century. In the 1960s, it was the birthplace of the militant Black Panthers, who confronted the virulent police brutality of the time with violent force. Their logo can be seen these days on many of the T-shirts worn by demonstrators. Another popular motif is an image of Colin Kaepernick, the former quarterback for the San Francisco 49ers who popularized the practice of kneeling during the national anthem as a sign of protest. Oakland has a long tradition of black resistance.

And with good reason. Whereas black residents made up roughly half of the city's population in 1980, their share is below a quarter today. One reason for their displacement is the economic boom in Silicon Valley and the entire Bay Area, where high-salaried tech workers drove up housing prices, making it too expensive for many long-time residents to stay. Gentrification has long-since taken root in San Francisco, where black faces are frequently only seen among the homeless.

The geography of Oakland is itself evidence of structural racism: The neighborhoods where the city's black population tends to live are located in the lowlands and crisscrossed by highways raised on cement pillars. White residents tend to live higher up on the hillsides, with views of the bay.

As the demonstrators march past City Hall, they chant the names of the victims: "Say their names! George Floyd! Say their names! Breonna Taylor! Say their names! Ahmaud Arbery!"

Breonna Taylor was killed by police in Kentucky in March. Ahmaud Arbery was a young black man who was apparently shot and killed while jogging in Georgia by a white civilian. They are just three names in a long list of black victims. Many American cities have their own George Floyd.

"But this time, it's different," says Jackie Byers, 48, from a local human rights organization called Black Organizing Project, who is also marching with the demonstrators. It's different, Byers believes, than during the unrest in Ferguson in 2014, when Michael Brown was shot and killed. And different from the 1991 uprising in Los Angeles after police beat Rodney King half to death.

"A Stab in Our Hearts"

What’s new, says Byers, is that millions of Americans could see the expression on the face of the policeman Derek Chauvin as he presses his knee into the neck of George Floyd for eight minutes and 46 seconds. The video immediately went viral on the internet. The lack of emotion, the impassiveness, says Byers, "is like a stab in our hearts." It reflects, she says, the degree of arrogance of white law enforcement officers who don't have to fear ever having to face justice for their actions.

According to the Mapping Police Violence database, 99 percent of all deaths caused by police between 2013 and 2019 resulted in no charges whatsoever. Each year, around 1,000 people in the United States lose their lives at the hands of the police, though the likelihood of being one of those victims is almost three times higher for blacks than it is for whites.

Another new aspect, says Byers, is that there are now two life-threatening viruses fueling the rage of black Americans: racism, which is deeply rooted in American culture and history, and SARS-CoV-2, which has hit blacks much harder than whites. Together, they have created a social explosion.

The fact that a greater proportion of black Americans die from COVID-19 is also a consequence of the conditions in which they live. On average, black Americans are much poorer than white Americans, which frequently translates to worse health and inadequate access to quality medical care. The average income of a black household in the United States is around $40,000 per year.

For white households, that number is $70,000. Black Americans are also relatively more exposed to the virus because they are more likely to work at lower paying jobs that they cannot perform from home – working in supermarkets, delivering packages or caring for patients in the hospitals.

Walking around the Chicago’s Austin neighborhood with Elce Redmond, one gets a sense of how American capitalism has treated black residents. A community organizer, Redmond has spent 30 years focusing his attentions on Austin, one of the city's poorest and most dangerous districts. Some 81 percent of its population are African-American, and 13 percent are Latino.

Broken Out or Boarded Up

Until the end of the 1980s, Redmond says, Austin was a solid, stable neighborhood. But then, spurred by globalization, numerous companies moved production overseas, plunging many people into unemployment and the neighborhood into a constant battle against poverty, drugs and crime. In some streets, nice homes with well-tended yards show that not everyone is losing the battle. But just one block away, entire rows of houses stand empty, with the windows either broken out or boarded up.

Children who grow up in Austin have a difficult start in life. "People used to think they had a chance if they worked hard and didn't give up," says Redmond. But that faith is waning. "The American dream doesn't work because there is a wall: institutional racism." To show what he means, Redmond points to a large building whose windows have been bricked up. It used to be Emmet Elementary School, but like many schools in Chicago's poorer neighborhoods, the school was closed down in 2014. "The only path to advancement is education," says Redmond.

"There are plenty of dedicated teachers here, but there is a lack of financial means and there is a lack of desire to change things."

The American education system is heavily tilted toward the haves and away from the have nots. Schools in wealthy neighborhoods receive more public funding than those in poor neighborhoods because funding is dependent on local tax revenues. "Children who need help don't have a chance," Redmond says. And the many local initiatives in Austin can hardly change that situation. Now they are having to deal with the coronavirus as well. "This is a virus hotspot," says Redmond, a situation, he says, that came about in part because of high residential density and a lack of quality health care. The local hospital was shut down years ago.

The virus has combined with this widespread rage to feed the current unrest on American streets. The sentence George Floyd uttered as he was dying, "I can't breathe," has become the slogan of the nationwide demonstrations against police violence. But it also reflects the particularly hard impact of the COVID-19 pandemic on the black population in the past several months.

Colin Kaepernick's kneel of protest has also taken on new meaning in recent days, mirrored as it is by the way the policeman knelt on George Floyd's neck. In many parts of the U.S., kneeling has become a way for the police to demonstrate solidarity with protesters. These scenes shouldn't be forgotten amid the news coverage of burning buildings, plundered shops and clouds of tear gas.

A Question of Power

America finds itself at a high-stakes crossroads. Although there has been looting and rage, hundreds of thousands of white Americans have joined the anti-racist protests. Indeed, the protests seem to also be aimed at the man in the Oval Office, whose administration does not include a single black person in a prominent cabinet position and whose campaign events are almost exclusively attended by white supporters.

Outside the White House, the United States is becoming increasingly diverse, making it increasingly difficult to win an election without support from black and Latino voters. The unrest is thus not just about racist police officers or jobs, but about who has the say in the United States, about power.

In 2016, Trump received 3 million fewer votes than Hillary Clinton, who won 89 percent of the African-American vote. Trump only won because of the Electoral College, which grants the primarily white states in the Midwest influence far outstripping the size of their populations. Demographically, though, whites are shrinking as a share of the population.

In Texas, a Republic stronghold for decades, the non-white population has already overtaken the white population. "We are experiencing the death rattle of the America represented by Donald Trump," believes Eddie Glaude, an historian at Princeton University. "Politically, that leads to panicked efforts to hold onto an America that is dying out. It has been accelerated by COVID-19."

The Republicans have entered into a devil's bargain with Donald Trump. He delivered all that the party has ever pined for: tax cuts, conservative judges and sharp anti-abortion rhetoric. In return, the party has completely subordinated itself to Trump, whose re-election strategy hinges on the support of white voters without a college education. The strategy can only be successful if large portions of the electorate are kept away from the voting booth.

The Republican conception of free and fair elections was on full display in Wisconsin in early April, during a vote in which Democrats also chose their favored candidate for the presidency. Governor Tony Evers, a Democrat, wanted to delay the vote to give citizens an opportunity to vote by mail due to the coronavirus pandemic.

Endlessly Long Lines

But Republicans in the Wisconsin statehouse didn't just reject that effort, they ensured that the number of voting booths was drastically reduced – particularly in areas where many African Americans lived. In Milwaukee, 175 of 180 polling stations were closed. Those wanting to cast their ballots had to stand in endlessly long lines.

It was part of a long tradition. "There is no Republican majority in America, except on election days," wrote the New York Times in a recent editorial. Instead of striving to attract new groups of voters, the Republicans have adopted a different strategy: They are trying to prevent minorities from voting at all. And it is made easier by America's system of administration, which is not easy for Continental Europeans to understand.

Because American's do not carry federal IDs, citizens must register to vote. And every state decides on its own which document is required to do so. Since 2014, the state of Alabama has demanded a driver's license. Documents entitling holders to social housing are no longer sufficient, but for many African Americans, they are the only official documents that they possess.

The exclusion of black voters was an invention of the Democrats, once the party of Southern slave owners. After the end of the Civil War in 1865, they wanted to prevent former slaves from rising to positions of power. The Republicans, who have almost no black support today, expanded and modernized those efforts in the 20th century. "It used to be: If you vote, you die," says historian Carol Anderson, referencing the lynchings that used to take place in the South. "Today, intimidation works differently." 

Troops from the National Guard standing on the steps of the Lincoln Memorial in Washington, D.C. / Martha Raddatz / TWITTER

Crystal Mason is familiar with that intimidation. In the 2016 presidential elections, she wanted to cast her ballot for Hillary Clinton. Because her name was no longer the registration rolls, however, she cast a provisional ballot. It is a standard procedure and votes thus cast are examined after the election to determine if they are valid.

The mother of three had served a five-year jail sentence for a tax offense, but because she was on parole, she was ineligible to vote. By phone, she explains that she didn’t know about the rule, and received a shocking surprise a few months later: She was being charged with voter fraud. Mason was ultimately sentenced to ten more months in prison for violating her parole and sentenced to additional five years in jail for voter fraud.

A court rejected her appeal. The three judges who ruled on her case had all been appointed by Republicans. "Prison for a vote cast in good faith that wasn’t counted – this is a textbook example of voter intimidation,” argues Anderson, the historian.

The Notion of American Exceptionalism

Another popular method Is to cleanse voter-registration rolls. The Republican-run state of Georgia stalled 53,000 people’s voter applications shortly before the state’s gubernatorial election in 2018. Because of alleged discrepancies within the registration system, these residents were made to meet confusing identification requirements in order to vote. Of those affected, 70 percent were black – hardly a coincidence. Ultimately, Republican Brian Kemp, a fervent admirer of Trump, won by approximately 55,000 votes.

It’s unclear if these kinds of tactics will help Trump win the election in November. The virus has shattered the strong economy he hoped would propel his election campaign. Millions of Americans have lost not only their jobs, but also their health insurance in recent weeks. The economic hardship in the U.S. is now so severe that many families no longer know how to feed their children. Miles-long queues have formed in front of food banks, and American downtowns are on fire.

Trump is trying to profit from the anger felt by many Americans about the looting, which has been especially serious in New York, Washington D.C. and Minneapolis, all of which are run by Democratic mayors. "I am your president of law and order,” Trump said in a White House address on Monday. But it is unclear if those kinds of appeals will actually help him.

The nthe Iron Curtain fell, and it seemed like the age of American dominance was upon us.

This notion of American exceptionalism also came up in Trump’s inauguration speech in January of 2017, albeit in a vulgar form: "American will start winning again, winning like never before,” the president said. Three and a half years later, there are no signs of victory. The defeat in the war in Afghanistan, the longest in U.S. history, is now as good as certain. The war will soon have lasted 19 years and cost the lives of 2,400 U.S. soldiers and Trump is eager to withdraw from the country, though there is little doubt that the Taliban will take over in Kabul when he does, much like the Communists overran Saigon after the last GIs left Vietnam. China is seizing the opportunity provided by the crisis to impose itself on Hong Kong, and Trump is in danger of destroying the G-7 Summit, the last influential venue for discussion among the Western developed nations.

Capable of Anything

As a result, older voters in particular seem to increasingly be turning away from Trump and toward Biden and the Democrats. In a survey conducted by Morning Consult, a polling institute, 45 percent of those asked said they would vote for Joe Biden, Trump’s challenger, due to the protests. What’s particularly unsettling for Trump is that his challenger is currently ahead in the polls in Wisconsin, Michigan and Pennsylvania. Biden now even has a chance of winning in erstwhile Republican strongholds like Arizona, Georgia and Texas. Polls predict a very close race in these states, something would have been unthinkable a few months ago.

Now a seemingly outrageous question is increasingly being asked: Would Trump accept defeat? "The next five months before the election could become very serious. Trump has the potential to significantly affect free and fair elections. He can undermine the entire electoral process and create maximum chaos,” says Bill Kristol, who was long one of the country's leading conservative voices. Kristol is known for bringing Sarah Palin, John McCain’s running mate in the 2012 presidential election, into the spotlight, and was the editor-in-chief of the Weekly Standard, a now-defunct conservative magazine once owned by Rupert Murdoch.

Kristol broke away from Trump early on, partly because he argues Trump is leading the Republican Party to disaster. He believes Trump is capable of anything in a fight for political survival. "He can fake a crisis, spread false information, for example, by simply claiming a week before the election that he discovered a conspiracy.”ation is watching footage on its screens of burnt-out police cars and shattered storefronts, of an America in chaos. In a recent CBS News survey, 49 percent of respondents said they were dissatisfied with Trump’s management of the crisis, compared to 32 percent who thought he was doing a "good job.”

American self-confidence has always been predicated on the belief that it is special. In his farewell address on January 11, 1989, Ronald Reagan spoke of a "shining city upon a hill,” admired not only for its prosperity but for its richness in ideas, its goodness and cosmopolitanism. Ten months later, the Iron Curtain fell, and it seemed like the age of American dominance was upon us.

This notion of American exceptionalism also came up in Trump’s inauguration speech in January of 2017, albeit in a vulgar form: "American will start winning again, winning like never before,” the president said. Three and a half years later, there are no signs of victory. The defeat in the war in Afghanistan, the longest in U.S. history, is now as good as certain.

The war will soon have lasted 19 years and cost the lives of 2,400 U.S. soldiers and Trump is eager to withdraw from the country, though there is little doubt that the Taliban will take over in Kabul when he does, much like the Communists overran Saigon after the last GIs left Vietnam. China is seizing the opportunity provided by the crisis to impose itself on Hong Kong, and Trump is in danger of destroying the G-7 Summit, the last influential venue for discussion among the Western developed nations.

A look back to February 2016 is instructive when it comes to Trump's view of democratic mores. At the time, he was only one of many candidates for the Republican nomination and he had just lost the first primary in Iowa to Texas Senator Ted Cruz. The voting was fair, but Trump still claimed he had been cheated. "Ted Cruz didn’t win Iowa, he stole it,” Trump wrote on Twitter. "Based on the fraud committed by Senator Ted Cruz during the Iowa caucus, either a new election should take place or Cruz results nullified.” Neither of those things happened.

Large-Scale Fraud

Back then, few took Trump's allegations seriously. Now, though, he’s in the White House, and many people he trusts occupy positions in the state apparatus. Briefings on the security of the presidential election, for example, are now being given by Director of National Intelligence John Ratcliffe, a Trump acolyte who has spread the abstruse theory that the scandal about Russian interference in the 2016 presidential election was in fact a conspiracy perpetrated by Barack Obama.

Rosa Brooks of Georgetown University argues that there can be no doubt that Trump is setting the stage for a refusal to accept a potential election defeat in November. Brooks has formed a working group for the Democrats that is tasked with preparing Biden’s campaign team for the worst-case scenario: a president planning a coup d’état. If Biden doesn’t win by a landslide, Trump will most likely claim victory, Brooks believes.

Trump had peaceful protesters cleared out of the way for his photo op in front of St. John's Church near the White House.

Trump has been saying for weeks that his opponents in the fall presidential election are preparing to carry out large-scale fraud. The Democrats believe it’s no coincidence that the president’s criticism is focused on postal voting, even though it makes no sense at first glance. A study by Stanford University published in mid-April concluded that neither Republicans nor Democrats would benefit from a U.S. vote carried out entirely by mail.

Around half the American electorate wants to vote by mail this fall, more than ever. This is mainly because of the coronavirus, which has led millions of Americans to want to avoid waiting in long lines for hours in front of their polling locations, as is common in the U.S. At the same time, Trump and congressional Republicans are refusing to provide additional money to ensure an orderly election process. "That's a recipe for distrust,” says Nathaniel Persily, who teaches at Stanford University Law School and specializes in American electoral law.

Trump already declared in 2016 that he won’t voluntarily concede defeat, and the chaotic electoral system in the U.S. gives him several opportunities to question a Biden victory. Over 10,000 different bodies are responsible for carrying out the presidential elections – cities, municipalities, counties – and the postal voting system is a patchwork quilt. In some states, like Texas, vote-by-mail is only permitted if the voter gives a valid reason. Other states have switched entirely to mail voting. There are also different deadlines and security standards. In some states, the signature on the envelope must match the signature given at the time of vote-by-mail registration, which opens the door to challenges to the validity of hundreds of thousands of postal votes.

Now Rosa Brooks and many other American lawyers are working through scenarios that, until recently, seemed unthinkable. What if, on election day, Republicans imposed a curfew on cities with traditionally large numbers of Democratic voters? What should be done if the outcome is close and the president refuses to recognize the result in a swing state like Pennsylvania? Given that it takes days to receive and count all postal votes, what should be done if Trump proclaims himself the winner before that happens?

Bringing the Peace Back

"We don't have some single entity that can validate" the outcome of the election, Brooks says.

"It’s purely political.” The more the professor has looked into the subject, the more pessimistic she has become that a president can be stopped if he has no qualms about ignoring the will of the people. It’s not even clear that the Supreme Court would accept a suit against a president who refuses to vacate the White House. And even then, what if Trump simply disregards a Supreme Court ruling?

The Secret Service would have to escort the president out of the Oval Office. But the Secret Service reports to the Department of Homeland Security, Brooks says. "Their boss is the secretary of homeland security. His boss is Trump."

There have been several extremely close election results in the United States. In 1960, Richard Nixon lost to John F. Kennedy by less than 113,000 votes. In 2000, the race between George W. Bush and his Democratic rival, Al Gore, came down to only a few hundred votes in Florida. But in both cases, the country was spared a constitutional crisis by the fact that the defeated candidates ultimately conceded defeat. This kind of humility can hardly be expected from Trump.

Bubble Meets Pandemic Consequences

Doug Nolan

For posterity, some numbers: Over the past three weeks (14 sessions), the S&P500 gained 11.5%.

The KBW Bank Index surged 36.1%, with the NYSE Financials up 23.9%.

The Dow Transports rose 27.2% in 14 sessions, with the Bloomberg Americas Airlines Index up 75.8%.

Over this period, the broader market significantly outperformed the S&P500. The small cap Russell 2000 jumped 19.9% and the S&P400 Midcaps 21.1%. The Philadelphia Oil Services Index surged 50.0%. The Homebuilders (XHB) jumped 26.2% and the Bloomberg REIT index rose 22.5%. The average stock (Value Line Arithmetic Index) surged 25.3% in three weeks.

Over three weeks, United Airlines rose 113%, American Airlines 106%, Norwegian Cruise Line 105%, Royal Caribbean Cruises 85%, CIT Group 86%, Delta Air Lines 78%, Simon Property Group 73%, L Brands 72%, Boeing 71%, Carnival Corp 68%, Macy’s 68%, Alaska Air Group 67%, Kimco Realty 66%, Gap 62%, and Southwest Airlines 60%.

The Nasdaq Composite rose 8.9% over the past three weeks to close this week at all-time highs.

The Semiconductors jumped 17.8% to end Friday at record highs. The Nasdaq100 (NDX) gained 7.3% in three weeks to new highs.

June 5 – Bloomberg (Sarah Ponczek): “The latest U.S. jobs report will go down in history as the data that shocked economists. And the market. Forecasts for a drop of 7.5 million in payrolls were met with the reality of a 2.5 million increase in May, supporting the view that the world’s largest economy may be more resilient than previously thought.

A stock market already up 40% in a record period of time rallied further, with particular pockets going haywire. From a blowup in the momentum factor trade to a surge in small-cap shares, here’s a sample of what was happening under the equity market’s surface Friday. The momentum factor, which in essence bets that the recent winners will keep on winning, got pummeled Friday.

At its lows, a Dow Jones market neutral momentum portfolio that goes long the highest momentum stocks and shorts those with the least momentum dropped 9% -- the worst day since at least 2002.”

I try to stay laser-focused on the analysis, conscious not to stray into the conspiracy realm. The Fed may buy S&P futures contracts at key market junctures and the government might at times fudge the numbers.

I don’t know, and I’m not going there. Some will question the veracity of Friday’s payrolls data.

Forecasts were for the May unemployment rate to jump to 19.0%, surging from April’s 14.7%.

Private Payrolls were to see a 6.75 million drop, with manufacturing jobs down 400,000.

Instead, Private Payrolls surged almost 3.1 million, with manufacturers adding 225,000 workers. The Unemployment rate fell to 13.3%. Bloomberg: “Economists Have Biggest Miss Ever in U.S. Jobs-Report Shocker.”

June 5 – Fox News (Tyler Olson): “President Trump declared Friday that jobs are coming back on the heels of a surprise labor report that may indicate the start of an economic recovery amid historic job losses, as he also upped his demands on states to lift lingering coronavirus-related lockdowns… ‘We’re bringing our jobs back,’ Trump said during upbeat remarks to members of the media in the Rose Garden. ‘We’re gonna be back there. I think we’re actually going to be back there higher next year than ever before.’ He added, in reference to predictions that the economy could eventually bounce back to where it was before the pandemic: ‘We’ve been talking about a ‘V.’ This is far better than a ‘V.’ This is a rocketship.’”

Securities markets are indeed on a moonshot; the real economy not so much.

The 2016 election cycle was nothing short of unbelievable. We’re now only five months from what is poised to be a historic election. The President has stumbled in a most challenging backdrop – and is down in the polls.

With the pandemic, economic turmoil, protests and riots, it’s a surreal environment. We should expect things to turn even crazier in the months heading into voting. It was as if the presidential campaign finale officially commenced, buoyed by a stunningly better-than-expected employment report.

We’re witnessing final convulsions from a historic global speculative Bubble.

Markets enjoy unparalleled support from the President and Federal Reserve, along with central bankers and other policymakers spanning the globe.

Keep in mind, the Fed began aggressively expanding its balance sheet – injecting marketplace liquidity – back in September in response to heightened repo market strain. So-called “insurance” policy measures were adopted: apply stimulus measures early and aggressively to ward off potential instability.

Employing liquidity injections in an environment of record securities prices significantly exacerbated speculative excess. Bubble markets could not have been in a more vulnerable state when the pandemic hit.

As powerful self-reinforcing de-risking/deleveraging took hold, Bubbles were bursting in synchronized fashion. Dislocating markets were swiftly pushing global finance to the precipice. The upshot: global stimulus measures were taken to a whole new level, including an additional $3.0 TN of support from the Federal Reserve.

It was 15 months between the piercing of the mortgage finance Bubble (June ’07 subprime blowup) and the Fed’s $1.0 TN crisis-fighting QE program. Stocks had been weakening for about a year. Importantly, speculative impulses and Bubble Dynamics had been in the process of deflating for months prior to the Fed unleashing (at the time) unprecedented liquidity support. The economy was already well on its way to long overdue restructuring and adjustment. QE1 didn’t stoke craziness.

For this cycle, the Fed had been applying aggressive stimulus measures months ahead of the crisis. When mayhem hit, it was only nine trading sessions between February 19th all-time stock market highs to the March 3rd emergency rate cut. Within 10 weeks of record stock highs, the Fed had ballooned its balance sheet by almost $2.5 TN.

Dangerous speculative dynamics hadn’t had time to dissipate. Indeed, the most problematic outcome in such a situation is to aggressively fuel the speculative excess and market distortions that had fomented underlying fragilities in the first place. Speculators were further emboldened. Dysfunctional Market Structure was further crystallized.

June 5 – Financial Times (Richard Henderson and Eric Platt): “Investors pumped a record $22.5bn into US bond funds in the week to Wednesday as they shifted out of haven money market accounts to riskier but higher paying investments. The cash infusion into US bond mutual and exchange traded funds was the most since 2007, when the data provider EPFR began tracking the figures.”

The impact of QE liquidity injections varies profoundly based on prevailing inflationary biases, speculative impulses and Market Structure. QE in ’08 was administered to help stabilize a system in a deflated post-Bubble backdrop. Much bigger QE was administered in March and April specifically to hold financial collapse at bay - speculative zeal restored in the process.

We don’t want to lose sight of today’s extraordinary global backdrop. It is a world of desperate trial-and-error monetary inflation, with momentous yet uncertain consequences.

The ECB Thursday “beat expectations” by almost doubling the size of its latest QE program, to $1.5 TN.

In combination with the EU’s recent proposed $825 billion stimulus plan, policymakers have altered European risk market dynamics. Amazingly, major equities indices posted double-digit percentage gains this week in Germany, France, Spain, Italy and Belgium.

Over two-weeks, stock market gains were nothing short of astonishing. Germany’s DAX and France’s CAC40 surged 16.0% and 17.0%. Major equities indices jumped 17.5% in Spain, 16.6% in Italy, 16.8% in Austria, 12.2% in Greece and 12.2% in Poland. European bank stocks (STOXX 600) surged 24.4% in 10 sessions.

It’s worth noting that in 10 sessions (May 25th to June 5th) the euro gained almost 4% versus the U.S. dollar (1.09 vs. 1.13). This was a major contributor to the Dollar Index’s drop from 100 to 97. It’s easy to attribute dollar weakness (and euro strength) to the reversal of more Crowded Trades in generally chaotic market conditions. Yet there might be more important fundamental factors to contemplate.

In the traditional sense, the U.S. dollar is a fundamentally weak currency.

Incredibly, the U.S. has run persistent Trade and Current Account Deficits going all the way back to the early eighties (small surplus during ’91 recession). The U.S. has essentially flooded the world with dollar balances, liquidity arguably at the root of Global Bubble Dynamics.

As the world’s dominant reserve currency, only the dollar could maintain international value in the face of such unrelenting supply. Currency values are all relative. And in a world of unsound currencies, the dollar has more than held its own.

March’s global crisis backdrop saw the reemergence of king dollar dynamics, as the dollar advanced against most currencies (dollar index approaching seven-year highs). Dollar bulls are always quick to extol the U.S. economy as “envy of the world.”

There’s an element of truth to this, of course. Let us not forget, however, that the flexibility afforded to the Federal Reserve is definitely envied round the globe – and has been a key attribute supporting king dollar.

In a crisis environment, the Federal Reserve enjoys near total freedom to slash rates, “print money,” aggressively intervene in markets and employ myriad financing programs. No central bank has the flexibility to directly support its nation’s securities markets and, through booming markets and resulting loose financial conditions, underpin the overall U.S. economy. This has been a key dynamic supporting “king dollar” financial flows (floods) to U.S. markets during periods of instability and crisis.

A key question today: Is the dollar in the process of losing some of its competitive advantage – now that the ECB and EU are resorting to such massive stimulus operations?

If the “whatever it takes” ECB is willing to bend the rules as it bolsters Italian (and periphery) bonds, while the EU rewrites the rule book for supporting Italy’s and others’ economies – does this not lower near-term odds of EU crisis and disintegration?

And, does this not lend support to European securities (and derivatives) markets and the euro – at the expense of “king dollar” dominance? Moreover, did resulting dollar weakness not come at a critical market juncture, with hedges and short positions already under acute pressure on every continent?

Over two weeks, the Brazilian real surged 11.5% (including “best week since 2008”), the Czech koruna 6.2%, the Indonesian rupiah 6.0%, the Colombian peso 5.8%, the Polish zloty 5.4%, the Hungarian forint 5.4%, the Mexican peso 5.3%, the Chilean peso 4.8%, the South African rand 4.4% and the Russian ruble 4.3%.

Stocks were up 8.3% this week in Brazil, 7.8% in Mexico, 7.5% in South Korea, 10.6% in Chile, 19.0% in Argentina, 5.7% in India, 4.9% in Indonesia, 10.7% in Philippines, 5.6% in Malaysia, 4.9% in Taiwan, 7.3% in Thailand, 7.0% in Poland, 7.0% in Hungary and 4.3% in Turkey.

The iShares MSCI Emerging Markets ETF (EEM) jumped 8.5% this week and 12.3% over the past two weeks.

We’re in the throes of an extraordinary upside global market dislocation. I do not recall such a ferocious globalized short squeeze – stocks, corporate Credit, currencies and EM sovereign debt. We can only imagine the behind the scenes fracas in derivatives trading. And I know it’s exciting to watch markets recover and to book some easy speculative trading profits. We all want to believe markets are signaling the worst of the pandemic and economic downturn is behind us. It’s comforting to imagine that Mr. Market is flashing that everything is in the process of returning to normal.

I just don’t believe markets these days function as discounting mechanisms. Speculative dynamics dictate markets like never before.

FOMO – fear of missing out. What stocks, sectors, indices and markets are vulnerable to short squeezes? Where are the Crowded Trades? Where are the over- and underweights? What stocks and sectors have large outstanding call option positioning, leaving them susceptible to melt-up dynamics? How are the big derivatives players positioned?

I have similar issues as I had during last fall’s QE program: Fed liquidity was fueling leveraged speculation, ensuring huge QE measures would inevitably be required to mitigate “risk off” de-risking/deleveraging dynamics. These days, global QE foments upside market dislocation that leaves the world acutely vulnerable to an even more problematic market deleveraging episode.

But with markets having turned conspicuously speculative and detached from economic realities, I’ll presume central banks will be somewhat more measured with QE during the next bout of market instability. Bottom line: Today’s melt-up creates great risk of another major global illiquidity event, yet central bankers may hesitate to immediately throw Trillions more at the problem.

It was only Crazier this week – at home and abroad. We’ve only begun to scratch the surface of Bubble Meets Pandemic Consequences. I’ve previously identified three global crisis Fault Lines – Europe, EM and China. Europe’s grandiose “money” printing and government spending may have bought them some time.

Resulting dollar weakness and the unwind of hedges and shorts might have temporarily suppressed EM Crisis Dynamics. So, how ironic would it be for panicked reflationary dynamics globally and a disorderly unwind of hedges and short positions to trigger the onset of a dollar bear market?

Ten-year Treasury yields surged a notable 24 bps this week to 0.90%, the high going back to March 19th. It could prove an interesting juncture for “safe haven” Treasuries. The Fed has been reducing purchases, while waves of issuance are approaching as far as the eye can see.

There are as well anomalous market concerns for U.S. social and political stability. And perhaps the Chinese are keen to reduce their Treasury trove. Moreover, what are Treasury market ramifications if this crazy period marks an inflection point for the world’s reserve currency?

The unfolding geopolitical backdrop may not be as conducive to “king” dollar as the speculator community has assumed. Prospective U.S. economic fundamentals may no longer prove the “envy of the world.” And as crazy as it sounds, perhaps fundamentals including trade and Current Account Deficits, economic structure, debt and deficits actually begin to matter.

In a world of “pain trade” proliferation, it doesn’t take a wild imagination to envisage the Crowded long dollar trade suffering a bout of discomfort.

Federal Reserve’s swaps intervention will preserve dollar’s reach

Japanese lenders especially likely to benefit from the new Covid-19 safety net

Gillian Tett

Businessmen walk past the offices of the Norinchukin Bank in Tokyo, Japan, on Friday, April 6, 2007. Norinchukin Bank Ltd., the country's largest holder of savings after Japan Post, is considering buying Nikko Principal Investments Japan Ltd. from Nikko Cordial Corp. Photographer: Robert Gilhooly/Bloomberg News
Japan's Norinchukin, the agricultural bank, is the world’s largest holder of dollar collateralised loan obligations © Bloomberg

When Jay Powell, US Federal Reserve chair, was grilled in Congress this week, the focus was on how the central bank has helped American companies and consumers during the pandemic. Senators should have also asked — but did not — what the Fed has done recently to help dollar markets outside US shores. That was a big oversight.

When future financial historians study the Covid-19 shock, they will conclude that the Fed’s intervention in offshore dollar markets via swaps deals with other central banks was one of its most significant policy moves. Not only has the Fed’s action calmed markets, it has shored up the hegemony of the dollar-based global financial system for years to come.

To understand all this, some history is required.

The concept of central bank swaps, in which two institutions exchange currencies, is not new.

Such central bank co-operation had a “sustained pre-history from 1962-1998”, according to a Bank for International Settlements paper. But their use faded in the early 21st century as the Fed focused on onshore dollar markets and the American economy.

That changed abruptly in the 2008 crisis.

Historian Adam Tooze notes that policymakers suddenly realised that non-US financial companies, particularly in the eurozone, had built up massive, unbalanced dollar exposures.

They owed dollars to investors but were unable to obtain enough of the currency in private markets, sparking panic.

Lacking a big stock of US currency, the European Central Bank could not help. So the Fed created swap lines that allowed the ECB and central banks in four other countries — Switzerland, the UK, Japan and Canada — to supply dollars to their local markets.

“The Fed effectively turned the other central banks into its branches to extend its reach into the offshore USD segment,” write economists Steffen Murau, Joe Rini and Armin Haas.

Since the crisis, there has been scant public discussion about whether the Fed should leave these “emergency” measures in place and about the vital question of the Fed’s responsibility to offshore dollar markets. The Covid-19 shock has unexpectedly clarified this. In mid-March, panic erupted again in offshore dollar markets.

The Fed responded and even doubled down. First, it reactivated swaps deals with the five original central banks. Then it added nine players, including Mexico and Brazil. Last, it offered a new “repurchase” facility allowing entities outside the 14-member club to swap assets such as Treasury bonds for dollars.

This expanded safety net is not comprehensive. Emerging market countries without big Treasury holdings, such as Turkey, are left in the cold. And using the repo programme is costly, so few have done so.

But 10 of the 14 members of the swaps club have grabbed $446bn dollars, at last count.

Moreover, “the programme has been incredibly successful” at calming markets, says Zoltan Pozsar, an analyst at Credit Suisse. In mid-March, euro and yen-based borrowers had to pay an additional 200 basis points and 250bp respectively to borrow in dollars; by late April, the gap was a mere 30bp and 50bp.

This is good news for non-US financial players. It also comes with a new and striking geographical twist.

Since 2008, the main imbalances in offshore dollar markets have migrated from the eurozone to Japan, as Japanese savers, banks and life assurance companies dived into dollar markets to chase higher yields.

Thus Norinchukin, the agricultural bank, became the world’s largest holder of dollar collateralised loan obligations. Smaller banks, such as Shizuoka, have jumped in too.

Meanwhile, Mr Pozsar says that Japanese “life insurers’ US dollar needs in the FX swap market exceed $1tn”.

Before the pandemic, these imbalances were starting to make some Japanese regulators uneasy.

The Fed’s intervention has calmed fears. At last count, the Bank of Japan had taken $224bn from the Fed, a lot more than the ECB’s $143bn, and presumably passed it on to dollar-hungry Japanese entities. In plain English, a safety net is now in place.

Will this be retained after Covid-19?

Almost certainly: Fed and Treasury officials increasingly believe that preventing excess dramas in the offshore dollar markets is necessary to avoid shocks to the onshore dollar markets and the all-important Treasuries sector.

Call this a new manifestation of American self-interest; or just the inevitable consequence of financial globalisation. Either way, the crucial point is this: even if US global leadership is faltering in many areas, the Fed’s support for dollar hegemony is not.

This could entrench dollar usage still further after the Covid-19 shock, even if countries such as China hate that.

Why the Jobs Report Isn’t Quite as Good as It Seems

By Randall W. Forsyth

While the jobs report suggests that a recovery is beginning, it should be seen in the context of the unprecedented plunge in the previous two months. / Photograph by Spencer Platt/Getty Images

I’ve been at this for roughly only four decades, but I can’t recall an economic report that was so wide of what everybody expected as the 2.5 million jump in nonfarm payrolls for May reported on Friday.

That compared with the 7.5 million decline the worthies on Wall Street had predicted.

The headline unemployment rate fell to 13.3% from 14.7% in April, in contrast to forecasts of a rise to 19.1%.

So, are you going to believe the government’s numbers or your lyin’ eyes?

As was noted in this space a week ago, new-wave high-frequency data were showing an improvement, or at least less deterioration, in the economy as states began to reopen.

While suggesting that a recovery is beginning, the jobs report should be seen in the context of the unprecedented plunge in the previous two months.

Moreover, the apparent job gains might reflect the admirably forceful government response to the worst economic contraction in U.S. history, rather than a fundamental improvement.

May’s jump recoups a bit more than a tenth of the 22 million jobs lost in the two preceding months—669,000 more than had been tallied in the previous estimate. In addition, some workers’ employment status was improperly classified.

The Bureau of Labor Statistics says that proper classification could have made May’s jobless rate 16.3%—still lower than April’s on the same basis.

And the “underemployment” rate (U6 for stats fans) was 21.2%, down from 22.8% in April but still three times the rate in February, TLR on the Economy notes.

More than half of last month’s rise, some 1.3 million jobs, was among restaurant workers. With eateries in many states shuttered except for takeout orders, there seems to be a disconnect—except that the Payroll Protection Program might have kept some workers on the job, even without sit-down diners.

Last week, President Donald Trump signed legislation that extends the period employers can use PPP loans to 24 weeks from eight weeks, and permits them to use 60% of loan proceeds for payrolls, down from 75% previously. Bottom line, there are fewer constraints to qualify for PPP loans that keep workers on the job.

In contrast, the public sector continued to cut payrolls, by 585,000 in May after 980,000 in the preceding two months, as state and local governments remain under extreme budget pressure.

Shutdowns to slow Covid-19 cases have slashed tax revenue, while spending has been forced higher.

States and localities already suffered greater job losses through April than in the wake of the 2007-09 recession, writes Tom Kozlik, head of municipal strategy and credit at Hilltop Securities.

In the prior recession, he notes, states that made the deepest reductions in public-sector payrolls had the biggest job losses and slower recoveries, according to the Economic Policy Institute, a liberal think tank.

Trump said on Friday that he is favorably disposed to another stimulus bill, which would provide some support for beleaguered state and local governments. The $3 trillion Heroes bill, passed by the Democratic-controlled House of Representatives, would aid states and localities but is dead on arrival in the Republican Senate.

That body probably will take up a stimulus measure in July, and the president wants it to include infrastructure spending.

That has been talked about by both parties since the 2016 election campaign.

Signs of recovery could diminish the urgency to provide additional stimulus to hard-pressed state and local governments.

It doesn’t seem a stretch, however, to think that politicians running for re-election won’t want to see our police, firefighters, teachers, and health-care heroes getting laid off, while government aid is provided to industries such as airlines.

The Future of Global Power

Although the Sino-American rivalry was escalating long before the COVID-19 crisis erupted, it has since been thrown into overdrive. But while both countries are pursuing a zero-sum vision of the future, only one is doing so with a long-term strategy.

Joschka Fischer

fischer169_JASON LEEAFP via Getty Images_us china talks

BERLIN – The COVID-19 pandemic is arguably the first truly global crisis of the twenty-first century. The only modern historical parallels to the economic disruption triggered by a microscopic pathogen are to the last century’s world wars.

The start of World War I, in August 1914, not only ended a long period of peace, but also suspended an earlier epoch of economic integration and globalization. As governments around the world pursued new protectionist agendas, economic growth collapsed across the board. A generation later, another world war followed, after which the Cold War began immediately.

The world, and global politics, looked very different at the end of this period of constant conflict and power politics, from 1914 until 1989, than it did at the beginning. Prior to World War I, the British Empire was the dominant economic and military power. After World War II, it was supplanted by the United States, whose hegemonic position was further strengthened following the collapse of the Soviet Union.

The question, then, is how the distribution of global power will change as a result of the COVID-19 crisis. Whether the pandemic’s impact will be comparable to that of either world war remains to be seen. Clearly, a global economic crisis on this scale will bring serious geopolitical shocks. America, the incumbent superpower, may well cling to its position at the top of the global pecking order. But most signs suggest that China, the emerging superpower, will prevail, inaugurating an East Asian century.

The Sino-American rivalry was shaping up to be the twenty-first century’s defining hegemonic conflict long before the COVID-19 crisis. Nonetheless, the pandemic, along with election-year politics in the US, seems to be amplifying and accelerating the confrontation. For US President Donald Trump, everything is at stake in November’s election. Having mismanaged the pandemic and presided over an unprecedented domestic economic crisis, he needs a scapegoat, and China is the obvious choice.

After all, while most of Trump’s policies have, as a general rule, divided American society, his approach to China is a major exception. In going on the offensive against China, he can count on broad bipartisan support. Even deep into liberal Democratic ranks, American attitudes toward China have soured substantially in recent years.

Many US objections are hard to dismiss. The People’s Republic is indeed an authoritarian – even totalitarian – state under the exclusive control of a Leninist party. It has engaged in economic and technological espionage against the US on a grand scale, resorted to unfair trade practices, and violently asserted territorial claims vis-à-vis India, Taiwan, and in the South China Sea. From its persecution of ethnic and religious minorities in Xinjiang and recent move to consolidate control over Hong Kong to its initial mishandling of the COVID-19 outbreak in Wuhan, China’s government has done little to inspire trust.

Nonetheless, the Trump administration persistent efforts to repudiate America’s global leadership role raises a fundamental question about its approach: what does the US under Trump want? To lead without taking responsibility?

That is unlikely to work. While the US remains mired in short-term thinking, China is establishing itself as an alternative source of global leadership and investment, patiently pursuing a long-term strategy to exploit the geopolitical vacuum created by America’s inward turn.

In any case, the blow to America’s international image, especially following the Trump administration’s disastrous failure in the face of COVID-19, will be hard to repair. The pandemic is reinforcing the general impression that the US is a decadent superpower, soon to be supplanted by a strategically deft and economically dynamic China. The age-old story of the rise and fall of great powers is now being written by a virus. We can only hope that this chapter plays out peacefully.

Against the backdrop of the Sino-American confrontation, Europe finds itself caught uncomfortably between two opposing geopolitical forces – and left in the dark about America’s true intentions toward China. Does the US want to pursue containment or all-out confrontation – up to and including military conflict – to block or even reverse China’s ascent? The second strategy, reprising the West’s approach to China during the late nineteenth century, would be extremely dangerous, to say the least.

The alternative for the West is to pursue long-term containment on the basis of strategic rivalry. Europe would be well advised to choose this option. In a Chinese-led world order, Europe, situated at the western end of the Eurasian supercontinent, would be the loser. As a totalitarian one-party state, China can never be a genuine partner to Europe in normative terms. Even after three years of Trump, Europe’s relationship with the US remains much closer than the relationship it could ever expect with China.

But China is already too big, too successful, and too important to ignore. The facts on the ground call for cooperation. The key is to distinguish between strategic engagement with China and submission to it. And maintaining that crucial distinction will require Europe to avoid becoming economically or technologically dependent on the West’s rival.

Joschka Fischer was German Foreign Minister and Vice Chancellor from 1998-2005, a term marked by Germany's strong support for NATO's intervention in Kosovo in 1999, followed by its opposition to the war in Iraq. Fischer entered electoral politics after participating in the anti-establishment protests of the 1960s and 1970s, and played a key role in founding Germany's Green Party, which he led for almost two decades.

Trump’s China Trade Deal Is as Dead as Can Be

His much-touted trade victory has crashed and burned with the coronavirus pandemic.

By Jason Bordoff

U.S. President Donald Trump and Chinese Vice Premier Liu He at the signing ceremony for the U.S.-Chinese trade agreement at the White House in Washington on Jan. 15.
U.S. President Donald Trump and Chinese Vice Premier Liu He at the signing ceremony for the U.S.-Chinese trade agreement at the White House in Washington on Jan. 15. Mark Wilson/Getty Images

When U.S. President Donald Trump is asked to point to the signature achievements of his first four years in power as he seeks reelection this fall, among those he trumpets will surely be his trade deal with Beijing. The January pact committed China to buying vast quantities of U.S. products, leading to a lower trade deficit and jobs for American workers. And a crucial component of Trump’s deal was massive Chinese purchases of U.S. oil and gas, which were supposed to boost the U.S. energy sector in the process.

Trump’s much-touted trade victory has crashed and burned with the coronavirus pandemic, and nothing more dramatically signals that than the energy part of the deal. Amid the collapse in oil demand and prices unleashed by the pandemic, it is now all but certain that China will fail to meet its targets for energy purchases and expose the folly of Trump’s trade strategy. While Trump was right to address China’s problematic trade practices, the administration’s approach made little sense before the pandemic—and makes even less sense now.

To recap: The two countries ended more than 18 months of heated trade war, including Chinese tariffs on U.S. energy exports, when they signed the first phase of Trump’s deal. The centerpiece was an agreement that China would buy goods and services from the United States in 2020 and 2021 worth a combined $200 billion above 2017 levels, a figure that would mean roughly doubling U.S. exports to China by 2021 in four key sectors.

By far, energy was the sector with the largest promised growth, with the Chinese pledging to raise purchases of U.S. energy by $19 billion in 2020 and $34 billion in 2021—a staggering 240 percent and 440 percent increase, respectively, over 2017 levels.

The targets were unrealistic even before the ink was dry in January. That may not have mattered to Trump and his advisors, because the deal was structured so that China’s actual purchases would not have been counted until after the November election. COVID-19, however, has brought forward the moment of reckoning: Trump’s deal is certifiably dead, because there is no way for China to come anywhere near reaching its commitments.

Let’s do the math. For energy, the trade agreement targets Chinese imports at an average monthly rate of $2.2 billion during 2020. In reality, China imported almost nothing in January, again almost nothing in February, and a mere $320 million worth in March, according to ClearView Energy Partners, a consultancy. That’s a more than 90 percent shortfall from Beijing’s target for the first quarter.

This dramatic shortfall is not surprising, of course. Chinese energy use collapsed in the first quarter of 2020 as a result of lockdown measures and the economic collapse resulting from COVID-19. Shrinking global demand has also meant a collapse in the price of oil, which would require an even bigger increase in the volume of energy China must buy to hit the spending target. The trade deal also did not formally take effect until Feb. 14, and China did not remove its own tariffs on U.S. oil and gas until March 2.

Trump’s deal is certifiably dead, because there is no way for China to come anywhere near reaching its commitments.

At the same time, the COVID-19 shutdown does not entirely explain China’s almost complete lack of progress on meeting its energy purchase commitments. Despite the pandemic, imports of crude oil from Saudi Arabia and Russia actually rose during the first quarter as China took advantage of cheap prices to fill up its strategic stocks. Moreover, even as China’s economy reopens and gasoline use rebounds—in part driven by commuters eschewing crowded mass transit—preliminary data from oil tanker movements suggests Chinese imports of U.S. crude oil will actually fall in April compared to March, not just in terms of value but total volume, too.

Even if China’s imports of U.S. energy rise in the months ahead, the trade deal commitments will be impossible to reach. Again, it’s simple math: Fulfilling the energy part of the deal would require China to spend an average of $2.9 billion per month from April through December to buy U.S. energy—at $30 per barrel (the U.S. government’s projected average price for 2020), that’s equivalent to about 3 million barrels of oil per day, or the total of all U.S. daily crude exports in 2019.

That China would buy every last drop of exported U.S. oil is unrealistic enough—but today, that oil is not even available, as U.S. oil exports are projected to fall this year along with the collapse in U.S. shale output, which is projected to drop by roughly one-third over the next year.

Moreover, China could not take 3 million barrels per day of U.S. crude oil even if it were available. Even if China were to replace all of its oil imports from Saudi Arabia, currently its largest supplier, with U.S. oil, that would only be 1.8 million barrels per day. Beijing could meet its targets by buying other fuels as well, but other types of energy such as liquefied natural gas, liquefied petroleum gas, and coal represent only a fraction of the value of crude oil exports.

China would need to dramatically shift its entire energy import portfolio from its current suppliers to the United States. Even then, the math does not add up.

The limits of the Trump administration’s trade strategy have been especially evident in recent weeks as it scoured for ways to provide relief to hard-hit U.S. oil producers and their workers.

In response to the oil price crash, U.S. output is down at least 1.5 million barrels per day since the end of February. A survey by the Kansas City Federal Reserve projects 40 percent of U.S. oil firms will go bankrupt if prices remain at low levels. Rystad, an energy consultancy, projected 220,000 oil workers would lose their jobs.

In response to the carnage, the Trump administration suggested a vast array of possible measures to support oil and gas firms—including paying producers not to produce, expanding lending through the Federal Reserve, filling up the U.S. strategic petroleum reserve, and imposing tariffs on imported oil. In the end, however, the only action available to the administration that made much difference was to coax Saudi Arabia and Russia to come back together and organize a historically large production cut by OPEC and other oil-producing nations.

Strangely—or perhaps revealingly—diplomatic pressure on China to live up to its trade obligations was never even mentioned by administration officials despite pleas from industry. While the oil industry was divided on most proposals to raise oil prices and support companies, they could all agree that China buying more U.S. energy would be a good thing.
COVID-19 has revealed China’s promises to buy U.S. energy to be hollow, and Trump’s trade strategy to have failed.

Had China actually made meaningful progress on its commitments to buy U.S. oil and gas in recent months, that would have provided some relief to U.S. producers at a time when they were running out of tanks to store their oil, which for a brief moment sent U.S. oil prices into negative territory for the first time in history.

If Trump either can’t or won’t push China on oil, the energy industry is now proposing that the administration at least boost liquefied natural gas export projects by allowing China to count new purchase agreements immediately instead of spread out over the duration of the project.

The oil price crash may explain part of China’s lack of progress toward meeting its energy targets. But it also exposes the limits of Trump’s strategy of managed trade based on deals promising specific purchases, rather than doing the hard and systematic work of removing trade barriers, resolving concerns around Chinese industrial policy, and dealing with topics such as intellectual property, exchange rates, and subsidies.

China’s record on these issues has been problematic for years, and bullying China into buying more American stuff was never a coherent response to it. COVID-19 has revealed China’s promises to buy U.S. energy to be hollow, and the Trump administration’s trade strategy to have failed.

Jason Bordoff, a former senior director on the staff of the U.S. National Security Council and special assistant to President Barack Obama, is a professor of professional practice in international and public affairs and the founding director of the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs.