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.

Meaning everyone.

At first sight, there appears to be no method whatsoever in Trump's madness, an impression reinforced by Trump’s frequent U-turn 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 place their trust in the United States and then deliberately exploit their trust.

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

Spurning those who trust the United States is myopic in the extreme. At first, Trump's policies confer shock and impart an immediate rush of power upon the president as allies and enemies recoil in surprise and horror. Of course, they also produce great media headlines.

However, Trump's policies also betray America's closest allies and undermine long-standing relationships. Trump is destroying US soft power, America's most formidable asset, which delivers political influence with truly global reach, control 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 almost anywhere, almost anytime, safe in the knowledge it will not lose the support of its allies.

Until Trump's rise to power, the world trusted the United States to manage its soft power in accordance with known rules, but as these rules have now been ditched the world has begun to look elsewhere for reliable leadership.

The European Union ought to be the replacement for the United States as global hegemon, but Europe is so deeply divided along tribal lines that it is completely incapable of decisive central leadership. In fact, 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 is the next-best alternative to US hegemony. Unlike Europe, China acts as a single cohesive entity in control of both its defence and its financial markets. The world is already pivoting towards China, albeit, so far, not so much for what China does, but rather for what it does NOT do.

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

Also, China does not threaten to annex Greenland, Canada, Panama, and other allies. China's territorial ambitions are strictly confined to Tibet, Hong Kong, a few small islands near the Philippines, and, possibly Taiwan. Unlike the United States and Europe, China does not harbour wider imperial ambitions and China never bombs or invades 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 short-termism that characterises Trump's America. Also, China's trade surplus and super-high domestic savings rate confer many advantages to the rest of the world; China's trading partners can, for example, access high quality goods at very competitive prices, such as electric cars, while enjoying elevated levels of consumption as China's high savings rates lead to financial inflows that drive down interest rates in Western economies.  

China is also 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.

Due to Trump's confrontational policies, China is developing important international ties even with countries that, until recently, would never have looked beyond the United States, such as Canada. 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.

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. Another point of dispute is China's economic and military support of Russia, but this support is actually 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? No brainer.

China pivot notwithstanding, China is not yet ready to take over from US hegemony. As the United States retreats from its erstwhile global leadership role, the world is therefore being thrust into a power-vacuum, which invariably leads to greater instability, abuse of power by stronger nations, and policy short-termism. The impact will be felt for decades to come.

When will China step up in earnest? Many economists criticise China for maintaining high savings rates and depressing 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. Only once the Yuan and Chinese government bonds have assumed some likeness to the status of the Dollar and US treasuries can China turn to consumption-led growth, as befits a global hegemon.

Meanwhile, China continues to do all it can. Change could come quick 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