China pivot

(Source: here)

Under Trump, the United States launched trade wars against its closest neighbours and allies. It banned travel to the United States from dozens of countries based on their populations' religion, culture, or race. In January, the United States threatened to invade and annex part of my own country, Denmark. And just a few week ago, the United States attacked Iran, directly undermining the economic and military security of key allies in the Middle East and inflicting economic pain on every oil-consuming economy in the world.

Which means everyone.

At first sight, there appears to be no method in Trump's madness, an impression reinforced by Trump’s frequent U-turns as the true costs of his policies become clear.

Still, high failure rates do not equate to absence of logic. In fact, there is compelling logic behind Trump's policies both at home and abroad. His entire modus operandi is to identify those who have placed their trust in the United States and then deliberately set out to exploit that trust.

In terms of foreign policy, this means that countries, which have chosen to depend on the United States - usually spanning decades with close economic, military, and political ties, even actual alliances - now find themselves vulnerable to attacks from the United States.

Spurning those who trust the United States is myopic in the extreme. Trump's policies at first are shocking and therefore impart an immediate impression of power upon the president as allies and enemies recoil in surprise and horror. Of course, Trump’s policies also produce great media headlines.

However, Trump's policies betray America's closest allies and undermine long-standing relationships. They destroy US soft power, America's most formidable asset, which delivers political influence with global reach, dominance over the world's most powerful defensive alliances, and near-total financial and economic hegemony. Soft power means that the United States can pursue its national interest anywhere, anytime, safe in the knowledge it is unlikely to lose the support of its allies. The world trusted the United States to manage its enormous influence in accordance with known rules.

Under Trump, however, the rules have been ditched and the world has begun to look elsewhere for reliable leadership. The European Union ought to take over hegemony from America, but Europe is so deeply divided along tribal lines that it is completely incapable of decisive leadership. The European Union does not even have common fiscal policy, which is a prerequisite for any kind of centralised European defence and a European bond market to replace the US treasury market.

With Europe out of the picture, China offers the next-best alternative to US hegemony. Unlike Europe, China is capable of acting as a single cohesive entity in control of both its defence and its financial markets. The world is therefore already pivoting towards China, albeit, so far, not so much for what China does, but rather for what it does NOT do.

China does not start trade wars against its friends and allies. To the contrary, China invests its enormous trade surpluses all over the world, in rich and poor countries alike, winning China many friends and allies.

China does not threaten to annex Greenland, Canada, Panama, and other allies. China's territorial ambitions are confined to Tibet, Hong Kong, a few small islands near the Philippines, and, possibly Taiwan. Unlike the United States and Europe, China has never harboured wider territorial ambitions and China has never bombed or invaded countries in the Middle East.

China's great appeal is its incredible reliability. In economic terms, China sticks rigidly to its 5-year plans, which means that foreign partners can invest without worrying about the policy volatility that has come to characterise Trump's America. Besides, China's trade surplus and super-high domestic savings rate confer many advantages to the rest of the world, such as access to high quality goods at very competitive prices, including electric cars. The rest of the world also enjoys an elevated level of consumption as China's high savings rates lead to financial inflows that drive down interest rates in Western economies.  

China is committed to renewable technologies and halting global warming, which aligns very well with policies of almost every country on Earth other than the United States.

China is now developing important international ties even with countries that prior to Trump would never have looked beyond the United States, such as Canada.

That is not to say that relations between the West and China are entirely unproblematic. However, some of these problems are entirely self-inflicted by the West. For example, many Western politicians pre-maturely jumped on Trump's anti-China policies in his first term and now find it difficult to U-turn without egg on face. The West has also chosen to make human rights a big point of contention, though,, hypocritically, such concerns rarely emerge in the West’s relations with, say, the Middle East.

Another point of dispute is China's economic and military support of Russia, but this support can actually be easily reversed. Think about it - who do you think China would prefer to do business with? The European Union and its USD 20 trillion economy, or Russia's USD 2.0 trillion economy? It is a no brainer.

China appears to understand that the key to eventually replacing the United States as global hegemon is steadfastness, adherence to principles, and very long-term thinking, which, by the way, the world sorely needs right now. Having said that, China is not yet ready to take over global hegemony from the US. As the United States shrinks from its erstwhile all-dominant global leadership role, the world is therefore being thrust into a temporary power-vacuum, which invariably leads to greater instability, abuse of power by stronger nations, and policy short-termism. The impact will be felt for some time.

When will China be ready to step up in earnest? Many economists criticise China’s insistence on maintaining high savings rates and depressing domestic consumption, but they fail to realise that China pursues these policies because China's currency and bond markets are still not mature enough to replace the Dollar and US treasuries. In other words, China still cannot turn to all-out consumption-led growth as befits a true global hegemony until the Yuan and Chinese government bonds behave like the Dollar and US treasuries, which tend to rise in value during crises, so the crises rarely turn into truly grave crashes.

China continues to do all it can. Change could come quicker if the US continues on its current trajectory, so Europe would be well-advised to speed up its divorce from the United States and pivot closer to China.

The End