Thinking

Can the Liberal International Order Survive President Donald J. Trump?

screen-shot-2017-01-31-at-2-18-54-pm

Weeks into his first term, President Donald J. Trump has already insulted Prime Minister Turnbull of Australia—a longstanding US ally; humiliated President Nieto—going as far as to suggest that he would to send troops to Mexico; issued a thinly-veiled military threat against Iran; banned nationals from seven Muslim-majority countries from stepping foot on US soil; and berated the EU and Nato enough to prompt the President of the European Council to issue a public letter warning against the threat posed by the new American president to the stability of Europe. He is, of course, just getting started.

In what follows I will argue that President Trump has turned the United States into a rogue state that poses an existential threat to the liberal international order. We begin by making these terms more precise.

Liberal international order

The liberal international order is the superstructure of global cooperation, integration and rules-based arbitration that sits atop the substructure of US hegemony. The foundation of this substructure is US military primacy. But just as the substructure contains more than the foundation, hegemony is more than primacy.

Whereas primacy is a statement about the asymmetry of global military power, hegemony is a statement about the foreign policy orientation of other powers. Primacy describes the fact that no state can expect to prevail against the dominant state in a war or an extended rivalry, whereas hegemony describes the willingness of other states to follow the lead of the dominant state. In other words, hegemony describes the politics of a near-unipolar world when relations between major powers are largely cooperative.

A liberal international order need not be based on a near-unipolar configuration of hard power. Indeed, the liberal international order of the late-nineteenth century was based on a stable balance of power. But underlying the contemporary liberal international order is a near-unipolar distribution of military strength. The important thing to keep in mind is that the politics of a near-unipolar world looks very different in the absence of hegemony.

US hegemony

US hegemony manifests itself first and foremost in the stability of the transatlantic and transpacific alliances. The Europeans and Japanese follow the US lead not only because they need US protection—if that were the case, these military alliances would’ve disbanded in 1991—but also because US preeminence is congruent with their core interests. The United States acts as a guarantor not only of US capitalism but also of global capitalism—this has been the job of the “excess capacity” of US power since the second world war. The United States has allowed its major power protectorates full access to the US market. And the US has largely refrained from leveraging its hard power advantage to secure its parochial geoeconomic interests. It is these accommodations by the United States that have held the transatlantic and transpacific alliances together even after the capitulation of the Soviet Union.

Japan and Europe are not the only protectorates of the United States. US security guarantees cover most of maritime Asia including South Korea, Taiwan, the Philippines, Singapore, Thailand, Australia and New Zealand. All the oil monarchies of the gulf are likewise US protectorates; as are Israel and Turkey.

The US allows these states to pursue their national interests unless they conflict with vital interests of the United States. In particular, the US allows them to compete against US firms in global markets. In return, US protectorates largely follow the US lead on major politico-military issues.

Maritime primacy allows the United States to secure the world’s sea lanes. The US has generally allowed all states in the international system to have unimpeded commercial access to the maritime commons. Minor powers can, of course, do little about this dependence. But the cooperation of other major powers is contingent on the continued provision of unimpeded access to the maritime commons.

Open Door

The most important feature of the liberal international order is the openness of national markets to foreign penetration. The core of the world economy—US, Europe and Japan—was largely open to trade in the early postwar period. In the course of the late twentieth century, other nations were persuaded—by the US above all—to open up their economies. The process culminated with the accession of China to the World Trade Organization at the turn of the century. Tariffs have never been lower, and more generally, the global trading system has never been more open.

Global trade integration over the past twenty years has gone considerably beyond the opening of national product markets to global competition. What we have witnessed has been described as the ‘second unbundling’ of global production characterized by ‘vertical trade’ in intermediate goods and services. Multinational firms have supply chains which spill over vast cross-border regional networks. More generally, global value chains—including both intra-firm supply chains and arms-length, subcontracting vertical chains—criss-cross borders largely within the three main networks of global production: Factory North America, Factory Europe and Factory Asia.

These vast regional value chains look like hub-and-spoke networks connecting headquarter economies—US, Germany and Japan—to factory economies within a day’s travel distance around them. (Headquarter economies reimport—i.e., offshore processes—a lot more than they reexport while factory economies reexport a lot more than they reimport. Also, headquarter economies have a large number of partners while factory economies are heavily dependent on their nearest advanced technology manufacturing giant.) Among the four giant manufacturers, only the United States and China are important suppliers globally. China’s export pattern is the most globalized of the G4.

Deep integration—the harmonization of commercial rules, standards, taxes, intellectual property rights and policies between states—and global value chains are mutually reinforcing. The main purpose and result of the so-called regional trade agreements such as Nafta has been to enhance deep integration. A roll-back of deep integration would undermine global value chains.

Another pillar of the liberal international order is the highly-integrated global banking and financial system. International finance is critical for the provision of working capital for international trade. The global periphery relies on FDI from the center countries for access to technology and know-how and on core funding markets for hard currency credit. Global banks are the key conduits through which hard currency credit is transmitted internationally. Global banks fund themselves largely in dollar-denominated wholesale funding markets and intermediate these funds to regional banks, who in turn lend to local firms. Global and regional nonfinancial firms also tap capital markets directly. The entire architecture of international finance depends on a high degree of cooperation on unimpeded capital flows and investor rights.

International cooperation

The liberal international order extends to global and regional cooperation on a slew of issues beyond security, economics and finance: law enforcement, aid, health, food safety, science, education, conservation, arms control, fishing, nuclear energy, climate change, civil aviation and so on and so forth.

Much has been gained by institutionalized international cooperation since the second world war. The thing to keep in mind is that it took a great deal of time and effort to persuade countries to sign up for these institutional mechanisms of international cooperation, as anyone who followed the WTO negotiations can recall. Even though most nations had little leverage, many could and did bargain, resist and drag their feet. Most countries may not be truly sovereign, but they do have autonomy—this is especially true of other major powers. The United States did try to bully other states many times and generally failed in the endeavor. Military power proved to be no substitute for persuasion.

Notice that I have not included liberal democracy in pinning down the liberal international order. This is a conscious departure from contemporary usage on my part. I would like to focus on concrete issues rather than ideological agendas or fall prey to liberal triumphalism.

Regular readers may be surprised to see a realist like the Policy Tensor waxing lyrical about the liberal international order. The incongruity is only apparent. The realist claim is not that liberal international orders don’t exist or that they are not beneficial. It is that they cannot override the underlying logic of geopolitical competition. Whereas liberal internationalists believe that liberal international orders can secure great power peace, realists have no such illusions. International orders are epiphenomena—they can and do fall prey to harsher logics underneath; logics that they cannot alter.

The Trump shock

President Donald J. Trump is a hard realist. He sees international relations as fundamentally a zero-sum game. As opposed to hard realist scholars, Trump’s worldview is decentered: He has strong views on the US national interest which he firmly believes that the president should try his mightiest to secure, but he is only dimly aware that there are other states in the international system with their own interests and agendas. Moreover, he believes that in order to secure the US national interest, all he has to do is intimidate everyone else into submission. In other words, he overestimates the efficacy of US hard power and seems to be entirely unaware of the value of speaking softly. In short, Trump is a bully.

Laderman and Simms’ timely Donald Trump: The Making of a Worldview documents the core beliefs of the President. He has consistently believed since the 1980s that the world is “laughing at us”; that the US doesn’t get the “respect” that it deserves; that adversaries and allies alike are “ripping us off”; that the US is “losing” because its leaders are “idiots.” Trump is an unabashed economic nationalist. His main beef against the liberal international order is that China and other economic rivals steal American jobs by outcompeting US firms by unfair means—currency manipulation and “sharp practice” (presumably dumping and export subsidies). If you became president, asked O’Reilly on Fox News in 2011, whose butt would you kick? Trump answered:

I would say China “number one.”

… We have all of the power. All of the chips are on our side. The trillion, it’s actually $1.1 trillion that they have, forget it, that’s peanuts compared to the overall economy. Now, what I would say very strongly, you don’t start behaving, 25 percent tax on every item you sell in this country. Twenty-five percent right now. By the way, based on what you are doing, it should be 41 percent….

It will put China out of business. We have all the cards and chips. If that ever happened, they would have a depression the likes of which you have never seen. They cannot play the game. We can. 

Laderman and Simms show that this is not a theme Trump picked up recently. He has repeatedly emphasized it since the 1980s. This is a bedrock belief of the man. There is no reason to believe that in his moment of vindication he would suddenly change his core beliefs. The upshot is that Trump is likely to fire the first shot in a trade war against China.

A potential trade war between the world’s two largest and most globally-integrated economies is the most significant threat to the liberal international order posed by President Trump. Not only because of China’s systemic importance—it is practically everyone’s largest trade partner—but also because the potential for geopolitical, and indeed, military confrontation. In extant military power the world may be near-unipolar but in potential warmaking capabilities the world is already near-bipolar.

Trump’s bullying is particularly unsuitable for dealing with Chinese leaders who cannot allow domestic audiences to watch China’s national honor trampled on by the US President. In other words, China is near-certain to respond aggressively both to Trump’s bullying and to US policies that harm its national economic interest.

More generally, all statesman face a ‘double security dilemma.’ In order to maintain themselves in power at home, they must keep domestic audiences in mind when dealing with the statesman of other nations. Put another way, statesman face domestic political constraints on their ability to conduct diplomacy and strike deals with foreign powers—something that Trump seems entirely unaware of. Indeed, the leaders of Britain, Australia and Mexico have already had to bear a backlash at home for their interactions with Trump.

Trump has declared his intention to slap a 20 per cent tariff on imports from Mexico. Because the bulk of Mexican exports to the United States are essentially reexports, this will hurt a substantial number of US manufacturing firms, especially in the auto industry. Deep integration in Factory North America is dead in the water.

An important point to note is that tariffs are much more disruptive for global value chains than for trade in final goods because the former often involve crossing multiple borders and even the same border multiple times. Beyond the disruption induced by the snapping of value chains, the protectionist measures would make US manufacturers less competitive in tradable product markets. The net effect on American jobs could possibly be negative. What is certain is that US consumers would end up paying higher prices for tradable goods.

Most macroeconomists understand that global imbalances are the result of differential rates of savings and investment among nations. In other words, the US current account deficit (which is mathematically equal to the capital account surplus) is the result of Asian and European underconsumption not the natural or artificial competitiveness of their firms against their US rivals. According to the proponents of the savings glut hypothesis, the main culprit for the US current account deficit is not Mexico but Germany. I used to subscribe to the savings glut hypothesis but since then I have come to realize its limitations. An alternate explanation of the US current account deficit is the shortage of safe assets hypothesis, which also explains the asset mix on both sides of the US balance sheet. US external liabilities are mostly low yield safe instruments such as Tbills while US external assets are high-yield risk assets such as FDI and equity. This means that the United States provides insurance to the rest of the world while earning greater returns on its external assets than it pays on its liabilities. Does that sound like “losing”?

It is entirely conceivable that Trump will try to bully the Europeans on their trade surplus as well. That’s not going to go down particularly well in Berlin. The Europeans do have as many “cards and chips” as the United States when it come to trade. The European market is after all a bigger prize than the US market. Contentious transatlantic trade relations will also interact with the Brexit negotiations. So one way for the EU to get back against the Anglo-Americans is for it to undermine the City of London’s position as the dominant financial center in Europe. More generally, it is not difficult to see the Europeans push the euro as the hard currency of choice for global investors—especially in light of Trump’s threat to the independence of the Fed.

Such measures are especially likely if Trump keeps encouraging the breakup of the European Union. Vocal support by the US President of eurosceptics such as France’s Le Pen will further undermine the transatlantic alliance. In fact, a breakup of the Western alliance is no longer beyond the realm of possibility. The EU could very well respond to the breakdown of the transatlantic security alliance by finally pulling together and emerging as unitary security actor—which would automatically make it a peer of the United States. Before we get to that point however, transatlantic relations will have to deteriorate significantly.

More immediately, if Trump tries to intimidate the Europeans into reneging on the nuclear deal with Iran, the Europeans will not simply submit.  Meaningful sanctions against Iran can be ruled out without European participation. If the United States goes to war against Iran—which is not hard to envision in light of the sharp worsening of relations between the two republics—the Europeans are likely to be loudly against the adventure. In turn, that may very well prompt the Trump White House to take a harsher line against the EU. There are very many ways in which things can go south for the Western alliance.

An even bigger threat to the liberal international order is a potential breakup of the eurozone. The most direct route to such a scenario is the rise to power of Marine Le Pen in France. The breakup of the eurozone would create significant instability and increase Russian influence on the continent. It may very well herald the return of history to Europe and with it an immediate end of the liberal international order.

The core of my argument is that even in a near-unipolar world, there are other powers who have their own interests and agendas. Trump’s unrestrained pursuit of his geoeconomic agenda directly undermines the implicit agreement between the United States and its major power allies whereby the other powers accept US preeminence and follow the US lead in exchange for accommodation of their core interests and US restraint on using its preponderance of military power as leverage against them. The unrestrained pursuit of economic nationalism by the United States will therefore undermine US hegemony. Dominance without hegemony in turn poses an existential risk to the Open Door and international cooperation, that is, to the liberal international order.

It is possible to imagine others taking up the baton of the Open Door and international cooperation. Indeed, in an astonishing speech at the World Economic Forum, President Xi Jinping effectively suggested that China is ready to take up the baton of the open global economy. One cannot rule out a joint EU-China bid to sustain the Open Door while the United States goes though this unprecedented bout of insanity—a more proactive version of hunkering down so to speak. However, this rosy scenario is mighty hard to entertain for long since such a bid would be a direct challenge to US preeminence. President Trump is likely to respond by lashing out in unpredictable ways.

A near-unipolar world where the dominant power is a rogue state is a highly unpredictable world. In such a world, all bets are off.

Advertisements
Standard

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s