"Pax Americana": America

President Trump

Might Washington, like Rome, fall victim to imperial overstretch?

Could military force abroad eventually have to be withdrawn because of bankruptcy at home?

Might the whole idea of America eventually be challenged and destroyed by some charismatic new faith: some fundamentalist variant on Christianity?

Or will nature disrupt America’s new world order?

Robert Harris, "Does Rome's fate await the US?," The Mail on Sunday, October 12, 2003 (1)

INTRODUCTION:  FOREIGN POLICY AND DOMESTIC POLITICS

This post will discuss American foreign policy, with an emphasis on economic aspects. It will focus on the structure of America's trade treaties and policies, and the interaction of America's foreign economic policies and domestic politics. The companion post, "Pax Americana": The World That America Made, the will discuss America's projection of global power and influence through military power, security arrangements, global economic institutions, and ideological influence.

During the Cold War (1940s - 1991) and until recently, Americans tended to separate foreign policy and domestic policy. This is no longer true.

For Americans, there was prosperity at home and security abroad. There was a foreign policy consensus around anti-Communism, that America should take the lead in containing the Soviet Union and China. This consensus made possible large military and national security expenditures. Fortunately, this was a prosperous time for America. There was economic growth, fueled by new technology and pent-up demand following World War II. America was by far the world’s largest economy and American companies did not have to worry about imports from other countries. There were some concerns - Vietnam in the 1960s, supply and price of imported oil in the 1970s, and Japanese competition in the 1980s - but they were peripheral to the core objective of defending western Europe and matching Soviet military forces. 

Americans no long see foreign policy and domestic policy as separate. Al-Qaeda’s attack on the World Trade Center came as a terrible shock. America’s subsequent attempt to contain Islamic fundamentalism has been inconclusive at best. China is now the main concern. Unlike Russia or Japan earlier, China is seen as a foreign rival and a threat to the domestic economy. America’s networks of military and economic alliances seem to be unraveling. The value of the most important military alliance, NATO, is being questioned. Multilateral agreements are attacked as constraints on national actions and concerns. 

America is no longer isolated from the global economy. Imports and exports as a percent of GDP are rising, although still lower than most industrialized economies. Industrial supply chains are global. The largest American corporations have become multinational, making investment decisions increasingly independent of America’s national economic interests and policies. 

President Trump believes in negotiating bilateral (country to country) economic agreements and ignores multilateral organizations. Multinational companies generally prefer global rules. They are opposed to President Trump’s nationalistic economic policies of increased tariffs and other barriers to trade.

TRADE TREATIES AND AMERICAN FOREIGN POLICY

What we might be seeing in the United States and globally is the end of the post-WWII era, the “American Century.” Why have a majority of Americans stopped supporting the global institutions that the United States created after World War II? Will America react creatively to guide the world to a new set of rules and regulations? Or will the United States revert to isolationism and protectionism, as it did after World War I, the last time America tried to impose a “New World Order”? 

America, through many rounds of multilateral and bilateral trade negotiations since World War II, has set the rules and regulations for the current global economy. These trade treaties had three aspects:

·      Reduce barriers to trade such as tariffs and quotas.

·      Economic and political integration of the non-Communist world.

·      Access to the huge American market in exchange for military alliances and bilateral security agreements, including American bases abroad.

With the collapse of the Soviet Union in 1991, it appeared that the economic and the national security aspects were separated. The global economy continued to expand. The combination of relatively free trade and new communications and transportation technology made it possible for large national corporations to evolve from exporters into multinational corporations. Technology, capital, management, finance and labor became mobile, creating complex financial structures and supply networks.

AMERICA AND THE GLOBAL ECONOMY

But there was growing opposition in America to the global economy. Presidential candidate Donald Trump tapped into and focused widespread discontent with free trade and the global economy.

89% of Americans think that the loss of US jobs to China is a somewhat or very serious issue, according to Pew Research statistics…Only 46% of Americans think NAFTA was good for the economy.

Business Insider, November 13, 2016.

As in Europe, nationalist, anti-immigration politicians have turned long-standing economic problems and rising discontent into a political agenda. Rather than dealing with them domestically, these politicians blame outside groups and institutions – international organizations, immigrants, “unfair” foreign competition. Strangely, they don’t blame the organizations that actually moved jobs and investment overseas – multinational corporations. Top managers and owners of multinationals with large overseas investments are well represented in the current administration – Rex Tillerson, Wilbur Ross and Donald Trump.

What is the source of this discontent? One source is the change in the global economy. From the 1940s to roughly the 1980s, American corporations owned the American economy and didn’t worry about foreign competition. The rest of the world was devastated by World War II. There was new technology to develop, pent-up demand, and wartime savings. The result was rising real wages and employment security.

By the 1980s, that began to change. The success of Japanese exports of autos and consumer electronics to the U.S. created a U.S. trade deficit with Japan, which became a political issue. American corporations found themselves competing with foreign companies at home and abroad. Capital (automation) continued to replace production and assembly labor even as industries such as autos and steel recovered. Real wages and real incomes stagnated for workers in the older industries. Job security and pensions disappeared.

REALITY CHECK:  THE GLOBAL ECONOMY

President Trump has a simple-minded view of global trade and the structure of the global economy that is at least two generations out of date. As a consequence, there is a disconnect between economic reality and political rhetoric.

In outline:

·      Countries don’t trade, corporations do. About 60% of "Chinese" exports are produced by foreign multinational corporations. 

·      The mental picture of a country’s companies producing at home and then exporting is obsolete.

• o   There are complicated global supply networks and an every-changing dynamic international division of labor.
• ·      Where goods are produced is less important than where value is added.
• o   Nike does not produce any shoes in the U.S. but most of the value-added occurs here. Same for Apple and many consumer electronics companies.
• ·      There are complicated relationships between American and foreign companies.
• ·      Over 25% of American manufacturing is owned by foreign corporations.
• o    Foreign car companies account for most of American production.
• ·      About 20% of America’s merchandise trade is intra-company.
• ·      About half the sales and profits of America’s 500 largest corporations are outside the United States. Overseas operations account for most of their growth in investment, sales, and profits.
• ·      A large part of American imports is of products and services created and marketed in the United States and produced by American companies abroad.
• ·      The fastest growing part of American exports is high value-added services. This creates high-paying jobs. The U.S. runs a large trade surplus in services.

·      As discussed later, consumers in the United States, not “Mexico” or “China,” pay increased tariffs (taxes) on imports.

The economic reality is that multinational corporations, made possible by the global economic order that America created, are crucial to American economic growth. A return to nationalism will increase conflict between domestic politics and the economic growth needed to address domestic problems.

As discussed below, attempting to reduce America’s trade deficits through increased tariffs and other trade restrictions will not work.

TARIFFS AND TRADE

What would happen if U.S. unilaterally renounced trade agreements and imposed tariffs? A tariff is a tax. The income from tariffs goes to the U.S. government. It is a tax mostly paid by American consumers. It would raise prices on imports, including imports of inputs like parts and subassemblies. It would also raise prices on some American-produced products that compete with imports. 

Other countries would retaliate. (2) The net result for America would be higher costs and prices (inflation), and lower standards of living. There would be few if any net new jobs in assembly or manufacturing.  Multinational corporations would direct new investment to countries that were not threatened, that didn’t retaliate or to countries that depreciated their currencies against the dollar since they would have relatively lower costs. Chinese and American companies in China are already moving labor-intensive production and assembly to countries like Vietnam, Bangladesh and Malaysia. Even hi-tech companies like Chinese solar panel producers have started doing this. (3)

American exports would suffer as other countries retaliate. Companies in the U.S. would accelerate research and investment in robotics and AI in the United States, substituting fully automated assembly lines for manufacturing workers.

America’s economic growth depends on innovating new products and services, keeping the high value-added part in the U.S., outsourcing the low value-added part to the global supply chain, and selling in the global market. Much of U.S. imports are raw materials such as crude oil and other inputs into processed or final assembled products with high labor, low wage content. Much of America’s exports are processed or manufactured goods with high capital and human capital content such as refined petroleum products and aircraft. We also run a trade surplus in services such as financial, consulting, and software. Any retaliation will damage American research and development, the source of economic growth. So will the proposed cutbacks in federal support for basic research, especially in the area of biotechnology.

The stated goal of reducing the U.S. trade deficit might not happen. A reduced trade deficit could lead to an appreciation of the dollar against other currencies. This would increase the cost of American exports and reduce the cost of all imports, offsetting the economic effects of increased tariffs.

Jobs leave the U.S. for other reasons besides lower wages. In the Carrier example, the president of the parent company, United Technologies, said the Mexican workforce is not only cheaper but also more productive, easier to train, and has lower rates of absenteeism than the American workforce.

REDUCING DOMESTIC AND GLOBAL ECONOMIC GROWTH

President Trump can reduce global growth through his trade and tariff policies. A president can raise tariffs or label a country a “currency manipulator” through executive privilege, without Congress’ approval.

Candidate Trump promised to put a 45% tariff on Chinese exports, brand China a currency manipulator, tax Mexican imports, increase tariffs on German and Japanese cars, “rip up” existing trade agreements and kill the Trans-Pacific Partnership (TPP), which he called “a rape of our country.” If he did all this, he would ignite a global trade war, which the chief economist of Citi said “could easily trigger a global recession.” Other bank economists have said that even modest increases in tariffs on Chinese and Mexican imports could reduce real GDP growth by 0.5 – 1.0%. (Business Insider, November 13, 2016)

Summarizing his analysis, Citi’s chief economist, Willem Buiter, concluded:

The U.S. has been the champion of free trade and open borders for decades. A retreat from globalization by the US would likely lead to reciprocal actions from other countries, and reinforce the latest shift towards deglobalization and could be another nail in the coffin of the liberal global economic world that has supported prosperity since 1948. (Business Insider, November 13, 2016) 

DOMESTIC AMERICAN POLITICS AND FOREIGN POLICY

Imperial overstretch, also known as imperial overreach, is a hypothesis which suggests that an empire or world power can extend itself beyond its ability to maintain or expand its military and economic commitments. The idea was popularized by Yale University historian Paul Kennedy in his 1987 book The Rise and Fall of the Great Powers.

America has financed its global military and economic commitments through borrowing, much of it in recent years from foreign governments and institutions. The Federal budget deficits over the last 16 years have been roughly equal to Defense Department spending. (Total spending on national security is higher.) The Chinese government is the largest foreign holder of U.S. government debt.

A great power like the United States can also retreat into isolationism and protectionism if its people lose the will or ability to pay the costs or believe they are not benefiting from foreign commitments. A sense of frustration sets in. Foreign economic ties may be seen as a source of domestic economic and social problems. The American president and foreign policy strategists stop talking about the primacy of democratic governments and American ideals in foreign affairs.

During the Cold War with the Soviet Union, Americans were willing to accept the idea of prolonged conflict without certain victory. Since the collapse of the Soviet Union, domestic support for prolonged wars and political conflicts to contain enemies rather than defeat them has been seriously eroded.

There is irony when the country that built the greatest wall in history is now talking about open trade while the country that has led the post-war campaign to expand trade is talking about extending a wall. As Chinese emperors knew, walls are as much psychological as physical.

Domestic problems may take precedence and divert resources. The combination of the rapidly rising cost of health care and social security for an aging population, large military and national defense expenditures, a rising backlog of public investment, proposed tax cuts, larger fiscal deficits, and large trade deficits is not sustainable. The proposed programs of the Trump administration will make the problem worse and probably accelerate the crisis.

Decades of fiscal deficits and trade deficits, financed increasingly by foreign borrowing, have led to high and rising levels of the national debt-to-GDP ratio. Borrowing at low interest rates has made this possible. If the Federal government had to borrow at the post-war average, it would add over $250 billion to annual deficits.

The next round of tax cuts for upper-income households and corporations will lead to larger structural deficits even in years of economic growth. The United States will find it increasing expensive (higher interest rates) to finance national defense and global commitments. This will reinforce President Trump’s call for reduced American involvement abroad. (4)

Donald Trump blamed job loss and stagnant incomes on imports, particularly from China. While economic studies show that over 80% of job loss is due to technological change, and some of the rest to domestic trends like leveraged buyouts and corporate cost cutting, blaming “unfair” trade rules and other countries had more political appeal. As president, Donald Trump has said he will oppose the trade agreement with Pacific Rim countries (TPP), intends to unilaterally change some of the tariffs and trade rules of NAFTA, and has no intention to continuing trade negotiations with the European Union (this may change). Candidate Trump also singled out Japanese and German auto companies as targets for increased tariffs, despite the fact their investment in the United States revitalized the American auto industry.

The related campaign theme was the emotional issue of immigration, both legal and illegal. Donald Trump demonized Mexicans and Muslims, blaming them for job loss of Americans, crime and domestic terrorism. Travel bans on Muslim countries, revoking of visas, and mass deportations were begun as soon as he became president. Combined with rhetoric that was racist and xenophobic, this will not endear the United States to its Latin American and Muslim allies, and fuels anti-American feeling. 

President Trump has encouraged similar rhetoric in European and South American countries. He has antagonized and isolated America’s strongest ally on the European continent, Germany.

Immigrants are vital to American economic growth and development. Graduates of elite foreign universities often came to the United States; “over 75 percent of the graduates of the Indian Institutes of Technology in the 1980s emigrated to America.” (5) Over half of the science and math graduate students in American universities are foreign. Keeping them in the U.S. with H1-B visas is vital. Immigrants and their children are entrepreneurial, accounting for a disproportionate share of new businesses. Managers from all over the world are necessary if American multinationals are to remain competitive.

Mr. Trump’s call for economic nationalism and isolationism reverses 70 years of American foreign economic policy. Global economic integration will continue but without the United States setting the rules. The United States has pulled out of global organizations attempting to reduce global warming and intends to loosen domestic environmental regulations. China, on the other hand, is taking up leadership to combat climate change.

Exports, including tourism, will suffer, thus reducing a major driver of American economic growth and job creation. Tariff and trade wars will hurt U.S. economic growth and development. They will increase the insecurity and frustration of more Americans. 

Blaming the social costs of technological and economic change on foreign scapegoats will make it more difficult to deal with these ongoing problems. This will continue to fuel domestic anger and support for isolationist and protectionist policies.

President Trump does not believe that government is responsible for dealing with the “negative externalities” or social costs of industrialization and rapid economic and social change. The Trump administration is not concerned with pollution and climate change. This reduces American influence in dealing with these important global problems. This makes the transition to non-fossil fuel energy more difficult. It also means that new energy technologies such as solar panels and wind turbines cannot expect any government support, ceding these high-tech, growth industries to corporations in other countries.

The issue of global warming illustrates the loss of American leadership in international attempts to solve global problems. The American denial of global warming will have consequences to American influence. Candidate Trump denounced global warming as a “hoax.” As president, he has quickly supported of fossil fuel companies by relaxing environmental rules on the production of oil, natural gas and coal, particularly on the release of methane and carbon into the atmosphere. His first proposed budget slashes support for climate research, solar and wind turbine power, and electric cars. President Trump has also announced that he does not support the latest global agreement setting targets to reduce carbon emissions. Appointing the CEO of Exxon/Mobil as Secretary of State, in charge of America’s foreign policy, is a clear message.

POSSIBLE SHIFTS IN FOREIGN POLICY

President Trump is pessimistic about the global order and America as a global power. If he believes America can influence global events from behind “Fortress America,” he is deluding himself and the American people. If he thinks he can be isolationist, protectionist, and xenophobic without damaging American power and influence, he is deluding himself.  If he thinks he can praise Putin and support right-wing, anti-EU parties in Europe without damaging American influence, he is deluding himself. If he thinks he can insult the governments of Germany, England and other allies without consequences, he is deluding himself. If he thinks he can denounce, repeal or unilaterally change trade treaties without consequences to the U.S. economy, the global economy and American leadership, he is deluding himself. If he thinks he can reduce America’s commitment to NATO without reducing American power and influence in Europe, he is deluding himself. And us.

The damage has already been done.  Even if President Trump backtracks on some of his threats, no one can trust that what he says at any moment will not change. For domestic political reasons, he will probably return to the nationalist, anti-global themes that got him elected, and could get him reelected. America has become an unreliable ally. Allies will reevaluate their national interests and foreign policies in light of uncertain American support.

CONCLUSION

The last presidential election shows that many Americans, probably most, are no longer willing to pay the cost of maintaining American power and influence in the world. Domestic problems are blamed on “unfair” global competition, global institutions, immigrants and foreign governments.

It matters little if President Trump does not follow through with his threats. The damage has been done. Increased tariffs and trade restrictions will hurt the American economy and make it more difficult to deal with domestic political issues. Scapegoating foreign governments, minority groups and corporations will fuel anger and discontent, making it less likely America will react creatively to its economic challenges. The coming massive disruptions of robotics and artificial intelligence will increase domestic tensions.

More Americans are against global institutions and against the United States bearing the cost of being the world’s global power. Pew Research polls showed that this trend started well before Donald Trump ran for president. Mr. Trump has tapped into these feelings, making them the driving force of a successful presidential campaign. His continued focus on these themes will probably continue to erode American support for the post-war economic institutions and rules America established.

America’s commitment to promoting democracy and free trade around the world is waning. America’s current president seems comfortable with authoritarian rulers and anti-democratic far-right political leaders in Europe. Many of these leaders want to dismantle the European Union and return to national currencies and national economic policies. Some, like Marine Le Pen of France, want out of NATO.

China has replaced Japan as the cause of America’s economic problems. America’s relationship with China is moving from détente to confrontation. America’s allies in Europe and Asia are recalibrating their relations with Russia and China as the American president talks of isolationism. America is becoming an unreliable ally.

America’s resolve to bear the costs of being a global power is waning. America’s domestic social and economic change has generated a politically powerful backlash. Most white Americans do not want their government to support or promote social change, do not support the open global economic order America created, do not want to bear the cost of being a global superpower. These are related. Continued presidential rhetoric, despite his policies, will encourage and broaden these beliefs. Trump’s dark, pessimistic picture of America’s isolationist, protectionist future may be a self-fulfilling prophecy.

America’s “New World Order” is coming apart. The last election and opinion polls indicate that most Americans do not believe in it. America’s allies in Europe are under attack from nationalist groups that want to dismantle it and appease the Russian autocrat. These groups are given vocal support and encouragement by the American president.

President Trump, by renouncing TPP, has signaled America’s abdication of influence in East Asia; allies now have to look to a combination of nationalism and accommodating China. New national security and economic arrangements among Asian countries will be considered. For example, South Korea has taken the first steps to signal easing tensions with North Korea, over the objections of the United States. The TPP countries intend to continue with the treaty without the United States.  China has started an ambitious economic and strategic program called "One Belt, One Road" to circumvent American military and strategic containment. Economic growth for East Asian countries will be increasingly tied to economic alliances and trade agreements with China.

All of the political and economic institutions that the United States created or supported after World War II, mostly in response to the Communist challenges of the Soviet Union and China, are now under domestic attack. One group believes the post-war framework has outlived its usefulness, that it no longer deals with changed geopolitical and economic circumstances and is need of drastic reform. Probably a larger group no longer supports the foundations of the American world order.

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1. For suggestive analogies between America and the Rome, see “Pax Americana:  America and the Roman Empire,” June 19, 2011. http://bennettgreenberg.blogspot.com/2011/06/pax-americana-i-washington-imperial.html

2. Reuters, “China prepares to counter any U.S. trade penalties:  sources,” March 20, 2017

http://finance.yahoo.com/news/china-prepares-counter-u-trade-093343375.html

3. The New York Times, “When Solar Panels Became Job Killers,” April 9, 2017, page 1 of the Sunday Business section.

4. “The Economy After the 2016 Elections,” November 26, 2016

http://bennettgreenberg.blogspot.com/2016/11/the-economy-after-2016-election.html

5. Fareed Zakaria, The Post-American World, 129.

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See the companion post:  “Pax Americana”:  The World That America Made.”  http://bennettgreenberg.blogspot.com/2017/03/the-beginning-of-end-of-pax-americana.html

For a list of all posts and economic tutorials in Pages, see Guide to Posts and Pages.