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?

2019: The Year in Pre-view

Who died?  Who thrived? What happened? Who cares?  It was 2018.  It’s over!  So, let’s take a look at what happens next.

Foreign affairs: All eyes are on Syria and ISIS as we end 2018. But, the country to watch is Turkey. 

It is said that nature abhors a vacuum. Pundits adopted the phrase as an idiomatic description of President Obama’s strategy in the Middle East.  His “Pivot to Asia” intended to leave Middle East wars, terrorism and the refugee crisis for Europe to deal with while the US worked to develop beneficial trade relationships with the fast growing economies of Asia.  It seemed to make sense in the context of a shrinking defense budget and economic competition from China and the EU. President Trump’s decision to withdraw our troops from Syria is another step in this direction.

There’s one big problem with this strategy: the vacuum it creates will be filled by Russia.  It’s fair to say that Russia is not much of a military threat to the US.  Their economy is in shambles and, lacking economic power, they don’t have the military might to challenge our global interests.  But, to understand their motives, you must brush up on your geography because geography is destiny.  

To play a role in the global economy, you need access to the sea.  Russia’s access is limited.  Bounded by China to the East, Europe to the West, the Arctic to the North and the southern Asian countries from the Himalayas to the Mediterranean, they are choked off from global trade.  In that context, it’s easy to understand why they would annex the Crimea, support the Assad regime in Syria and create an alliance with Iran.  Ultimately, they hope to exploit cracks in the NATO alliance. So, I expect them to increase pressure on Turkey, a NATO member, by increasing their troop presence not only in Syria but also in Ukraine.  

Is it any wonder Russia wanted Trump in the White House?

Economics:Both the US and global economies have been pumped up by Central Bank interventions and extraordinary growth in government and corporate debt.  

Is the party over? Well, the US Federal Reserve took the punchbowl away when they stopped buying up bonds and started raising interest rates.  So, construction is slowing and the stock market is taking a hit.  Compound those troubles with the economic inefficiency of a trade war and you have the making of a recession. 

It’s fair to say the new Fed Chair is taking appropriate steps to restore interest rates to their natural level.  My greater concern is that they do so while allowing the Fed’s balance sheet to run off. In other words, they are playing with two independent variables simultaneously.  So, when the economy responds, how will we know the cause of that response?

As rates rise, many corporations will incur permanent damage from too much debt and a drop in consumer demand. Our recession may be brief but the deadly combination of overleveraged companies, shoppers rapidly moving from bricks to clicks, a trade war and the Fed’s actions will have a longer lasting effect. 

Going local:  As a nation, we have ceded too much control to a federal government ill suited to address our needs. Liberals have long argued for federal solutions to problems; and lately, conservatives, from the Tea Party to Trump, making bold promises of federal intervention, have joined them.  Yet, nearly everything we need is generated at a local level.  We need better healthcare, better schools, more new businesses, more innovation, more financing, more giving, more connectedness… In short, we need more local control over the institutions that affect our communities.  

It will begin with our schools. Federal and state mandates have imposed unfunded costs on the last important institution over which we have a modicum of local control.  Here in Rochester, our inner city schools have been rated worst in the nation.  Our progressive governor told our local editorial board that he would support reform if and only if it was initiated at a local level.  He was being politically crafty a la Pontius Pilate. He also created an opening for local initiatives to make a difference. 

I hope it will be the beginning of a trend.

Business: Low unemployment and a workforce lacking the skills demanded by highly technical work environments will accelerate the adaptation of artificial intelligence (AI) to practical uses.  It’s already showing up in marketing, warehousing and machine maintenance.  The next wave will likely affect selling. AI will identify cross-selling opportunities, optimize prices and forecast revenue.  It will improve itself by learning from the results.

Like all disruptive technology, the pioneers in this field will be big corporations that can afford the R&D expense.  And, like all disruptive technology, it will eventually become affordable to smaller businesses and trickle down.

Companies that succeed in this new environment will be those that can best capture data, analyze it and generate actionable insights.  

*********

Predictions are a tricky business.  Will these trends and events take root in 2019?  I’m not sure.  However, I am fairly confident we’ll see them soon enough. 

WHO WILL LEAD? 

What's Russia really up to?

With ISIS and the Syrian refugee crisis on the news so often, it’s hard for some Americans to relate to the comments of General Joseph Dunford, the new Chair of the Joint Chiefs of Staff.  Testifying before the U.S. Senate during his confirmation hearing in July, he identified Russia – not Iran, North Korea, China or ISIS – as the greatest threat to US national security.

Many analysts and journalists have speculated on the motives of Russian President Vladimir Putin.  Following the Russian incursion into Ukraine, the Los Angeles Times ran an op-ed piece titled ‘Is Vladimir Putin Insane?’  In it, German Chancellor Angela Merkel is quoted as saying that Putin lives in “another world’.  Other pieces have described him as a tyrant and compared him to Hitler.   Meanwhile, General Lloyd Austin, Commander of U.S. forces in the Middle East admitted to Congress that he was completely flummoxed by Russia’s military actions in Syria. 

Yet, I have seen very little said or written about Russia’s compelling national security interests as a key driver of their behavior.  As I see it, there are two geographic factors driving Putin’s and Russia’s behavior. 

Russia is a vast plain that is easy to attack from every angle, except the sea.  So, they have been attacked throughout their history from both the East and West.  Their compelling interest is to create buffers between themselves and potential attackers.

 That said, Putin knows he doesn’t possess the military strength stand up the US.  So, he exploits the vacuum we created in the Middle East to his advantage by becoming the enabler of Iran’s compelling interest.  The consolidation of Shia power from Iran through Iraq to Syria serves them as well as it does Russia, which gains a buffer zone to its south.  It also threatens both Turkey (a NATO member) and Saudi Arabia, an American ally and, like Saddam’s Iraq, an Arab nation ruled by a Sunni minority.  

As for Ukraine, Russia’s actions — from annexing Crimea to carving out a swath of land that gives them access to it — are driven by another compelling interest, access to the sea.  Like all nations, access to sea routes is essential to commerce.  Securing Crimea provides them with access to the Mediterranean.  

There was a bit of coverage about the Arctic Ocean when President Obama visited Alaska a few months ago.  Our Coast Guard has only one icebreaker to Russia’s 27 securing their access to the sea routes that open up as the ice floes melt.  

Americans tend to take our security for granted.  We are geographically too far from Europe and Asia to have suffered from the ravages of war in the last century.  Very few are aware that the US Navy has secured 100% of the world’s waterways since WW II.  We ensure peaceful commercial sea traffic for every nation in the world.

Now, we are reducing our military presence throughout the world and downsizing our navy.  Is it any wonder that Russia sees an advantage and takes it?  Their incursion into Ukraine tests NATO’s resolve while their support of Syria’s Assad advances a refugee crisis that tests the EU’s economic resilience. 

The Obama administration has been criticized in the press for lacking a cohesive foreign policy. Yet, there may be long-term benefit to the U.S. letting the Middle East and Russia be Europe’s problem.  Our so-called ‘pivot to Asia’ will have greater economic benefit through stronger trading and security relationships that challenge China.  Our Asian allies seem to care about that.  

Does Europe care?  Will they stand up for themselves?  They are already sounding like Chamberlain. 

WHO WILL LEAD?

The New World Disorder: What's Next?

As a young naval officer, we (my fellow officers and I) spent a lot of time sitting around the Wardroom table talking about world affairs.  It was the height of the Cold War and we all had strong opinions about the Defense Budget, weapon systems, the Soviet threat and the direction of our military and civilian leadership. 

These days, you don’t have to be a military officer to have world affairs on your mind.  Our world has become more complex since the Cold War ended. The rise of ISIS, the Russian incursion into Ukraine and Chinese expansionism in the S. China Sea have heightened our awareness.

So, what should we do now?  What should America’s foreign policy be?

Ian Bremmer has some ideas.  A geopolitical consultant and a Stanford Ph.D., Bremmer has just published a new book titled “Superpower: Three Choices for America’s Role in the World”. In it, he asserts that America is not in decline, as some would tell us.  Rather, our markets, employment levels and economic model are still the envy of the world. 

On the other hand, Bremmer says, “our foreign policy is in decline.”  Americans are war weary following a decade of “ill-conceived wars” and we now face an identity crisis.  We are clear that we don’t want to “play global policeman” or rebuild the Middle East.  But, we do we want?

Bremmer offers three distinct ideas.  The first is “Indispensable America”.  We can no longer afford to ignore threats in faraway places.  So, in this scenario, America must lead.  It is based on the premise that if we don’t, no one else will. America must promote its values – personal freedom, economic freedom and equal opportunity. In our interconnected world, the U.S. should provide a positive alternative to alliances with China, Russia and Iran.

“Moneyball America” suggests that we focus our attention and resources on Asia with a view toward establishing a firm alternative to Chinese influence in the “world’s most dynamic region”.  Spend no time, energy or financial capital on fruitless efforts like the so-called peace process between Israel and Palestine.  Develop a more pragmatic relationship with Iran, “a country that offers future opportunities that others in the region cannot”. 

The payoff to playing Moneyball is more robust economic growth by pursuing strategic alliances and trading relationships across the Pacific.

Bremmer’s last alternative may appeal to many voters who are sick and tired of our involvement on the other side of the world.  “Independent America” would provide a policy framework that would let the Middle East, Europe, Russia, China and China’s neighbors figure things out for themselves.  Terrorism is more a threat to them than to us.  We should invest our capital in infrastructure and our energy in taking advantage of our geographic position and our thriving economy. 

 

Samuel Huntington

Samuel Huntington was the director of Harvard’s Center for International Affairs and served on the National Security Council during the Carter administration. In 1993, he published a seminal white paper, “The Clash of Civilizations”, predicting how the post-Cold War battle lines would be drawn. According to Huntington, friction would develop along “the cultural faults lines separating … civilizations from one another”.  He identifies “Western, Confucian, Japanese, Islamic, Hindu, Slavic, Latin American and possibly African” as distinct civilizations and suggests that nation states would no longer be the principal actors in global affairs.

Certainly, we have seen Huntington’s predictions borne out in the disintegration of the former Yugoslavia, the continuing India/Pakistan conflict, Islamic terrorist attacks on Western targets and the crisis in the Ukraine.  However, even he failed to predict that most wars would be fought within civilizations.  Sunni vs. Shia, civil war in the Sudan and the ongoing Boko Haram attacks in Nigeria and Kenya come to mind. 

Predicting the future is difficult if not impossible.  It’s difficult to know what new direction America should set for itself.

World affairs and our role in it are likely to be a major issue in next year’s selection of a president.  Candidates will have to outline policy choices.  However, few presidents have the opportunity to govern according to their campaign promises.  Bush didn’t anticipate 9/11 and Obama didn’t expect the financial crisis to be the preeminent issue of his first term. 

In a prior post (Reagan, Thatcher, Gorbachev, Machiavelli… Where are they now?), I wrote “it was not the policies on which Bush and Obama campaigned that mattered.  It was their character and their ability to make a decision in moments of crisis and stick with them…. character is more important than policies.”

WHO WILL LEAD?