1 – EUROPE IN A NEW WORLD ORDER
The United States is the European Union’s most important trade and bilateral investment partner, which has, until now, supported a multilateral trade system and European integration and has provided a security guarantee to the countries of the EU. But like other advanced economies, the US’s relative weight in the global economy has declined. The new US administration seems intent on replacing multilateralism with bilateral deals. In trade, it aims to secure new trade deals in order to reduce bilateral trade deficits and to protect, in particular, the US manufacturing sector. In climate policy, the US commitment to the Paris Agreement is being questioned. In defence, the security umbrella appears less certain than previously. The overall promise behind this change of direction is to put ‘America first’ and deliver better results for US citizens.
From Europe’s perspective, the world in 2017 looks very different to how it looked just one year ago. But despite significant upsets resulting from elections and/or referendums, not all of the changes that are taking place are breaks
from previously-trodden paths. Some are continuations of previous trends that have now become more visible or more entrenched.
One major trend, which started some 20 years ago, is the diminishing relative economic importance of advanced countries. This trend became evident around 2010, when advanced countries started to account for less than half of global GDP in purchasing power terms. This reduction in economic importance is associated with so-called diminished giant syndrome, otherwise known as the curse of declinism. Previous world hegemons pursue “myopic and self-indulgent … ‘what’s in it for us’ economic policies in the world arena”, which end up undermining their roles as world leaders¹.
In the case of the United States this trend emerged during the Clinton administration (1993-2001), when the question of “what’s in it for us?” first arose in terms of “regaining competitiveness”. Donald Trump’s victory in November 2016 seems to have made this principle into the underpinning of all the new administration’s policies. Other advanced economies have also seen their shares in global trade and income decline, leading to calls for protectionism. The European Union remains unsure about its role in the world, not least in terms of its security and its ability to do new trade deals.
Brexit will diminish the EU’s size and possibly its trade and security influence. By contrast, China’s position in the world has strengthened during the last 20-25 years. President Xi Jinping’s speech in Davos in January 2017² was more like that of a ‘growing giant’ and reminiscent of presidents’ speeches calling for an open global economic system during the heyday of US hegemony.
However, Trump’s election also marks a break from trends in terms of the US’s world role in defence, trade and
spreading of cultural values. Importantly, the current administration does not only aim to reduce the US’s role as an
anchor of the global multilateral system, it may be on course to openly challenge it, either by threatening to withdraw
from it unilaterally or by imposing protectionist measures, such as high tariffs.
Culturally, the US may draw back from liberal values. Meanwhile, the US’s military commitment to NATO is being
questioned. The underlying rationale of “what’s in it for us?” is well captured by President Trump’s ‘America first’ rhetoric. In this paper, we consider what the EU’s strategic reaction should be to US diminishing giant policies, and the EU’s role in a world of declining hegemons and shifting balances. We start by exploring the geopolitical reasons for the
new US administration’s ‘America first’ orientation.
We then discuss the central elements of the emerging US policies and possible consequences for Europe. Lastly, we discuss how Europe should respond, how it could sustain a multilateral system and what partnerships it could build. Our focus is on the economic aspects but cultural and security aspects also play central roles in the broader picture.
WHAT LAYS BEHIND TRUMP’S ‘AMERICA FIRST’ APPROACH?
Since the second world war, the US has played a clear leadership role in building, supporting and policing the global system. This sense of responsibility for maintaining the world order was supported by a view that it was beneficial to the US. This view is not shared by the newly elected US president.
On the contrary, President Trump argues that the rules-based multilateral system has not benefitted US citizens, and in fact has hurt them. While this view was not necessarily shared by the majority
of Americans in the election, it was shared by a sufficient number to make a difference.
There are two versions of this argument.
- The first is that the multilateral system has benefitted foreign countries at America’s expense.
- The second is that the possible benefits that the US might have enjoyed, deriving for instance from the dollar’s exorbitant privilege, accrue to Wall Street at the expense of Main Street – the multilateral system is seen as having favoured the financial sector at the expense of the manufacturing jobs that ‘ordinary’ folk lost.
Supporting and protecting the multilateral system was politically easy for the US when it was considerably richer than the rest. However, as the level of income in the rest of the world increased,
the US began to see other countries as competitors. China’s economic advance is a case in point. Chinese growth and its emergence as a major trading partner for the US have led to the belief that it is now a competitor and threatens US economic interests.
The Trump administration’s view of Mexico and even Europe also fits this narrative³. The United States has experienced a long period during which real wages for most American citizens have not increased. The sense of unfairness has been reinforced by a welfare system in which healthcare expenditure has risen rapidly, leaving many citizens without protection. Trump’s central argument
to address these woes and to “make America great again” is to turn away from globalisation, while rejecting the notion of building a welfare state.
Trade, in particular in manufactured goods, is very much at the heart of Trump’s zero-sum view of international relations, and contrasts with the typical view of economists of trade as a positivesum
game. Trump blames trade for the real wage stagnation observed primarily in manufacturing and intends to bring manufacturing jobs back to the US because they are supposedly highly paid. A major theme of the presidential campaign was therefore about introducing protectionist measures to correct a system, which in the view of many Trump supporters led to the US trade deficit.
But high manufacturing employment shares do not necessarily correlate with trade surpluses. Japan, Germany (countries with persistent trade surpluses) and Italy (broadly in trade balance over time) currently have similar manufacturing shares in employment. Employment share differences rather suggest differences in specialisation.
Moreover, there is little difference in wage levels in manufacturing and services in the US. Nevertheless, it is correct that the trade balance at the margin can matter for the relative size of the manufacturing sector.
If an economy is at full employment and increases its net exports, its tradable sector (or manufacturing sector) would increase. Manufacturing therefore has a zero-sum dimension, but this operates at the margin and cannot explain the long-term decline in employment in manufacturing.
CONSEQUENCES OF ‘AMERICA FIRST’ FOR GLOBAL TRADE AND INVESTMENT
The new US administration’s attempts to back-pedal on multilateral trade arrangements will have profound implications for global trade and investment because of interlinkages between the US and its partners (see Tables 1 to 3).
As far as goods trade is concerned, the top five sources of US imports are, in descending order, China, the EU27 (the EU without the UK), Canada, Mexico and Japan. On the export side, the top five destinations are Canada, the EU27, Mexico, China and Japan. For the EU27, the US is the number one destination for exports, just before China, and the number two source of imports, just behind China.
The close relationship between the EU27 and the US is even more intense for trade in services, where the EU27 and the US are each other’s largest export destination and import source. The close interconnectedness between the EU27 and the US is even more important as far as foreign direct investment stocks are concerned. Table 3 shows that 44 percent of US’s FDI comes from the EU27, and 31 percent of the EU27 FDI comes from the US.
The EU reaction to possible US trade measures will depend on the size of the measures and their effects on the EU economy (as well as on geostrategic considerations to which we will return later). There are preliminary attempts to measure the effects of such actions¹² but the real effects will not be understood before US plans become clearer and the rest of world decides how to react.
EUROSCEPTICISM Nations Conflicts Crisis Army Person Economy Youtube
*Youtube — The Eurozone’s Coming Storm.Stratfor pinpoints the political and economic developments that could lead to the collapse of the currency area.
*Youtube — George Friedman: Eastern Europe Is Trapped Between Russia and the West. George Friedman writes the free weekly column “This Week in Geopolitics” (http://www.mauldineconomics.com/subsc…) for Mauldin Economics. Subscribe now and get an in-depth view of the forces that will drive events and investors in the next year, decade, or even a century from now.
The European Union’s eastern bloc finds the ongoing refugee crisis annoying but is far more worried about Russia. Geopolitics expert George Friedman says the formerly Soviet-dominated nations see Russia gaining strength but don’t know if NATO will defend them in a crisis.
*Youtube — Geopolitics, Identity and the National Interest with Tim Marshall .