ANYONE who enjoyed a tremendous World Cup tournament in Russia and Wimbledon tennis last weekend could not have been disappointed by Trump’s stunning journey east to call on Nato, President Vladimir Putin in Helsinki and the Queen of England.
The moment that the leader of the largest of the Western powers called Europe a foe and seemed to prefer Russia to his Nato allies and his own staff has to be a historical turning point in America’s 100 year-old foreign policy as the world’s unipolar leader.
Suddenly, the White House appears to view the whole of Eurasia (Europe, Russia, Middle East and the Asian continent) as foes that treated America “unfairly” under the old multilateral order that America itself led.
What is truly going on?
The answer lies in unravelling the common thread between Brexit, Europe’s own fractal points and the launch of the tariffs against US trading partners.
At the end of the Second World War, when America emerged as the dominant military and economic winner, it undertook a Marshall Plan to rebuild Europe, helping at the same time to dismantle colonialism and created the Bretton Wood institutions to promote trade, growth and development.
This generous effort to create a rule-based multilateral order was also in America’s interest. The global supply chain actually comprised two major manufacturing chains centered around Germany and Japan to serve American consumerism, financed through the US dollar. But after US pivoted to China to counterbalance the Soviet Union in the early 1970s, China emerged under the multilateral trade regime as the world’s largest trading nation.
With the US bogged down by continuous wars to defend its unipolar position, from South Korea, Vietnam and then Iraq and Afghanistan, US defence expenditure remains one of the highest in the world, at over 3% of GDP.
The 2007 global financial crisis exposed all the flaws of the post-war multilateral order. When the North Atlantic (US plus Europe) economies slowed dramatically, while the rest of the world powered ahead, the power balance shifted. With 4%-6% annual growth in the rest of the world, more than double that of the old powers, it was a matter of time that the unipolar economic power declined in relative terms.
This power shift was recognised by the creation of G-20, moving the centre of decision making away from G-7. But the European debt crisis created a schism between the Southern debtors and Northern creditors (notably Germany). Since Europe was deeply divided on whether or not it should mutualise all euro-debt (namely risk-share all losses), Britain realised that she did not want to live under a bureaucratic Brussels, with no controls on immigration and filed for divorce (Brexit).
The Brexit solution devised last week was a soft Brexit for goods and hard Brexit for services. Britain, like the US, is in trade deficit for manufactured goods, but strong in the services area. So Britain wants to broadly remain in the European common market for goods, but negotiate toughly on services.
But the US has taken the opposite tack on being tough on goods deficits with China and other trading partners. The Washington trade hawks think this way because the US runs large goods deficits with both the European and Asian supply chains. It is no coincidence that the US current account and merchandise trade deficits of 2.5% and 4.4% of GDP respectively in 2017 closely mirror the federal fiscal deficit of 3.5% of GDP. Indeed, the US Congressional Budget Office projects that at current rates of growth and expenditure, the US public debt would rise from 78% of GDP at end 2018 to 96% of GDP by 2028.
This would be the highest level of debt since 1946. This comes about because of growing mandatory expenditure on healthcare and welfare as the population ages, higher interest costs, and assumed controls on discretionary expenditure (manly defence) at current levels.
The IMF has already projected that the US net international investment position (net debt to foreigners) will rise from 44.8% of GDP in 2016 to 50.3% of GDP by 2022, which was the crisis level reached by deficit countries in the Asian financial crisis (well exceeded in the European debt crisis countries). The IMF diplomatically warned that the US position is only sustainable because of “the dominant status of the US dollar as a reserve currency”.
In simple language, the US can no longer afford to maintain fiscal and trade deficits at this rate. She cannot longer afford the burden of being the unipolar power. This partly explains why Trump asked the Nato allies to increase their defence expenditure to 4% of GDP, which would imply that buying of US arms would not only cut the US fiscal burden but also its trade deficit.
Who will be increasingly holding the growing US debt?
With the Chinese FX reserves being flat and oil producers running in deficit, the global trade surplus has shifted to Europe. Thanks to German penchant for fiscal prudence, the eurozone current account surplus has reached US$450bil or 3.5% of GDP in 2017. The IMF has forecast that this surplus will continue to 2.7% of GDP by 2022.
At this rate of surpluses, the eurozone net foreign asset position will swing from a net deficit of €150bil or 1.5% of GDP in 2017 towards larger and larger net foreign assets. Germany’s net international investment position alone stood at €1.7 trillion at the end of 2016, or 54% of her GDP.
In other words, going forward, will Europe, rather than Asia, be holding more US debt. No debtor would be wise to call its largest creditor a foe.
If the US is disengaging from global leadership, who will provide the global public goods to maintain global growth and prosperity with stability? The answer is that no single power can do this alone.
Clearly, East and South/South-East Asia remain the fastest growth zone, with growth exceeding 5% per year. But if trade wars disrupt both the European and Asian supply chains, then the world will be plunged into a global recession in which there are no winners.
All these means that Trump has unleashed the unravelling of the old order, in which the West used to lead. Now that even Europe has joined the Rest of the World as foes, America First truly means everyone for themselves.
What we witnessed last weekend was not a Pivot to the East, but a world unhinged.
Tan Sri Andrew Sheng writes on global issues from an Asian perspective.