China is eating our lunch and is ready for dinner

Even among those who think President Trump is wrong, oh so wrong, about nearly everything, there is a grudging admission that some of his observations about China are correct. “China is eating our lunch!”  They have subsidized their own industries while creating obstacles to US companies wishing to enter their markets and they steal our intellectual property.   If Trump can make progress on those issues, he will have served us well.  

But it’s China’s long game that troubles me.  They are likely to make concessions to Trump because the global trade paradigm feeds their coffers. In spite of the capital flight of recent years, China still has over $1 Trillion in US Treasuries on deposit in the Bank of China.  They are using that capital to fund a long-term strategy to build a China centric supply chain with outposts in developing nations hungering for foreign investment. In addition, they are investing in military technology to bypass the US as our military budget has declined precipitously since 2010. 

Americans tend to take our global hegemony for granted.  The US long game from its founding was Manifest Destiny, expanding the nation from one coast to the other and extending our buffer zones across two oceans. It took about 150 years to achieve this position and the commitment of Cold Warriors to maintain it.  We’ve been so secure for so long that we can’t imagine it might change nor can we imagine impact when it does. Now, that hegemony is in jeopardy as a defense strategy based upon aircraft carriers and foreign military bases is undermined by American withdrawal, reduced military budgets and foreign powers investing in asymmetric capabilities like cruise missiles and cyberwarfare. 

Enter Senator Marco Rubio (R-FL) who now proposes a China style national industrial policy for the US. He would protect American manufacturing, restrict capital flows and change the tax code to incentivize technology companies to invest in R&D.  Senator Rubio might be looking at how Japan used its industrial policy to become the world’s second largest economy over 40 years following WWII (they are third behind China now).  But it’s noteworthy that policies that worked well during their rise from the ashes have not served them well since.  The senator should also brush up on economics.  Comparative advantage still works. Competing with China in manufacturing may sound nice to American labor unions; however, our real advantage is in technology and innovation. And the best way to support innovation is for government to get out of the way.  

A better (non-Trumpian) approach would be to create economic alliances with China’s other competitors, such as India, South Korea and Japan and to invest in military technology to counter China’s cyberwarfare military expansion.  We should also expand our economic development initiatives in Africa, the continent most likely to grow economically in this century.  Initiatives of this nature won’t fit into the brevity of an American electoral cycle. For the U.S. to play a long game to counter China, a president will have to clearly define our strategy (Manifest Destiny 2100?) and work to gain bi-partisan support.  Such a plan must include strategies for economic development in the U.S. that will rebuild communities through investment in infrastructure, education and workforce development. Failing to do so will undermine political support for such an initiative in the long term.

Unfortunately, I don’t expect such long term thinking or leadership to emanate from the current resident of the White House. 

WHO WILL LEAD? 

What I’m reading…

… "A Brief History of Time by Stephen Hawking”:  I was inspired to read it in the wake of the author’s death.  Now, I’m not sure I’ll make it to the end.  I haven’t studied physics and math since college and wonder why I should start again… “Reimagining Mobility: A CEO’s Guide”:  a report from global consulting company, McKinsey & Co., describes how autonomy and electrification will affect automotive transportation over the next decade or two… “Is the Campus Free Speech Crisis Overblown?”: an opinion piece in the Wall Street Journal featuring comments from college students on the topic. 

The Poll

Well, the poll favors the short form of essay that I’ve experimented with since the beginning of the year.  (It’s still open if you’d like to vote.) However, the vote was close, and my wife voted for the short form. Maybe we should disallow her vote since she’d just like me to shut up.  What do you think?

Is the Iran deal a "Nixon goes to China" event?

Nixon and Mao

When Nixon went to China, I was on a “Med cruise”, Navy short hand for a ship’s 6-month deployment to the Mediterranean Sea.  In those days, we got our news from the Radio Room printed on a yellow roll of paper, cut to length and attached to a clipboard available for all who wished to read it.  I can only imagine that today’s naval officers are as plugged in as we are here at home. 

But, plugged in or not, U.S. moves to form a new relationship with Iran might seem as confounding as the Nixon/China foray did in the early 70’s.  Our allies in the Middle East – Israel and Saudi Arabia – are objecting loudly to recent developments.  Iran supports the Assad regime and terrorist organizations like Hezbollah and Hamas.  How can we form an alliance with them?

Let’s remember that when Nixon forged a new alliance with Mao’s China, the U.S. was still fighting in Vietnam, facing a foe that was armed by the Chinese. 

Foreign affairs are not about winning or losing wars.  Wars are costly and should be avoided.  Foreign affairs are about maintaining or disrupting the balance of power.  By winning the war in Iraq, the U.S. disrupted the balance of power in the Middle East and southern Asia.  Iran, bordered by two countries occupied by U.S. troops, moved to counter our presence by forming an alliance with the new government of Iraq and through its support of the Assad regime in Syria.  The national initiative to develop nuclear weapons capability was a way for them to establish legitimacy.  It has forced the U.S. and its allies to deal with them.

Iran has a long history of mercantilism that has yielded a well-educated middle class.  Their economy is migrating toward capitalism and is able to compete in international commerce.  They have joined the international patent system and are viewed by exporting economies in the EU as a potential market.  Ideology aside, they are a natural trading partner for the West. 

I don’t mean to take ideology lightly.  But, in the end, national economic and security interests nearly always trump ideology.  That’s why Iran will pursue these discussions with the West constructively.

Our traditional Middle East allies all have interests that are contrary to ours.  Saudi Arabia, Iraq and our NATO ally Turkey support Sunni extremists in Syria.  Nothing is cut and dry in the Middle East but Sunni extremism represents a clear threat to U.S. interests and security.  And, while Iran’s support of Syria’s Assad is seen as contrary to our interests, the stalemate there neutralizes the benefits of their alliance. 

And let’s not forget that Saudi Arabia was home to Osama bin Laden and most of the 9/11 terrorists. 

In the end, it may be that having Iran as a strategic economic competitor will be preferable to having them as a strategic nuclear competitor.  Indeed, it’s not clear that Iran ever wanted to develop nuclear weaponry.  Ever notice how they are always a few months away? 

Kerry with Iran's Foreign Minister Zarif

Of course, our most reliable ally in the region has been Israel, a country that Iran has sworn to obliterate.  But, Israel’s options are limited.  As I have written (Let Israel Do It...), Israel can’t attack Iran without the participation of the U.S. military, which is not forthcoming.  It may be that the assertions of Secretary of State Kerry are correct.  A non-nuclear Iran represents little threat to Israel.  Indeed, a strong commercial relationship with the West will make it less attractive for them to support international terrorism.

Naïve?  Perhaps.  But, many had the same view of China 40 years ago.  Is China still problematic?  Yes.  But, not nearly as much as they would have been if we were not their largest market.

It will be interesting to observe the U.S. politics over the proposed sanctions relief.  Presidents do better when they oppose the traditional politics of their political party.  Reagan signed a treaty with the Soviets to reduce nuclear arms.  Clinton reformed welfare.  But, Obama faces a more hawkish constituency among Republicans than his own party.  And, any American over the age of 40 remembers the Iran hostage crisis well. 

LEADERSHIP is about common cause. Kerry is well qualified to pursue this new balance of power but he is inarticulate.  It will be up to the President to sell this to the American public and up to his political operation to make it work in Congress.

WHO WILL LEAD?