The International Economic Consequences of Mr. Trump
What has fundamentally changed with the Trump administration is not that it behaves more selfishly than its predecessors, but that it seems unconvinced that the global system serves US strategic interests. For the rest of the world, the key question is whether the global system is resilient enough to survive its creator’s withdrawal.
PARIS – This year’s World Economic Forum in Davos proved to be yet another opportunity for US President Donald Trump’s administration to display its customary verbal incontinence and send shockwaves through the global economy. This time, there were two sources.
The first shock came from US Treasury Secretary Steven Mnuchin, who broke with more than two decades of strict discipline by suggesting that a weaker dollar would be in America’s interest. The second came from Commerce Secretary Wilbur Ross, who seemed to rejoice at the prospect of waging and winning a trade war.
For once, it was Trump himself who restored calm by denying that the US was pursuing a beggar-thy-neighbor strategy. But he did so only after his cabinet secretaries’ statements had attracted sharp responses from international partners.
If Trump’s first year in power provides an indication of what is to come, there is little reason to look forward to more stable US economic leadership. A year after his inauguration, Davos provided a powerful reminder that he is far from being normalized.
To be fair, the Trump administration is certainly not the first to put “America first.” Owing to its inward-looking political system and the persistence of strong isolationist undercurrents, the US has been consistently more reluctant than European countries to enter into or to abide by international commitments. The 1948 rejection of the Havana Charter (an early attempt to create a global trade organization), congressional hostility to the Bretton Woods institutions, or the refusal by President George W. Bush to ratify the Kyoto Protocol on climate change are just a few examples.
Likewise, taking ruthless measures to defend US interests did not start with Trump. President Richard Nixon’s unilateral decision in 1971 to abandon the gold standard was a major blow to the international monetary system. The US Federal Reserve’s monetarist experiment in the late 1970s precipitated the Latin American debt crisis. Arm-twisting with Japan in the 1980s circumvented established trade rules. And in the aftermath of the 2008 global financial crisis, the Fed implemented quantitative easing despite protests that it was allowing the US to export deflation.
Yet there is something different this time. From the moment it inherited global leadership from the United Kingdom – symbolically with the signing of the Atlantic Charter in the summer of 1941 – until Trump was elected 75 years later, few could doubt that the US was the ultimate owner of the international economic regime. Depending on timing and political conditions, it could fudge the rules or help enforce them; it could behave more selfishly or more generously; and it could pursue narrow, short-term interests or broad, long-term goals. But whatever the US did, it remained the dominant shareholder of the global system. And the rest of the world knew that perfectly well.
There were strong geopolitical reasons for this stance. Until the Cold War’s end, the system of rules and organizations that formed the institutional infrastructure of international trade, investment, and finance was considered by the US establishment to be vital to the prosperity of the “free world” and the containment of Soviet influence. After the Soviet Union collapsed, the system served as a strategic means for integrating former communist countries into the international capitalist economy.
Eventually, in the early 2000s, the global economic system came to be regarded as providing the best platform to accommodate China’s rise. China was invited to join the club, with the implicit promise that after it had learned to play by the rules, it could contribute to amending them. It would have a chance to participate in steering the international system, and gradually gain in power and influence. China’s accession to the World Trade Organization in 2001 was an important milestone here.
What has fundamentally changed with the Trump administration is not that it behaves more selfishly than its predecessors. It is that it seems unconvinced that buttressing the global system serves US strategic interests. Critically, it seems unconvinced that integrating China into this system and offering it a place at the top table is the best way to accommodate its rising economic might.
For the rest of the world, the key question now is whether the global system is resilient enough to outlive its creator’s withdrawal.
Superficially, the international economic consequences of Trump seem remarkably benign. Concerns over currency wars have waned. The global economy has not descended into a protectionist spiral. Even the US withdrawal from the fragile Paris climate agreement has not resulted in its collapse. On the contrary, all other leaders – starting with China’s President Xi Jinping – have confirmed their commitment to it, and 174 countries have formally ratified it. Concerns in the security field look more serious, owing to disputes over the Iran nuclear agreement and uncertainty over the handling of North Korean missile launches.
But the view that the economy, at least, is on firm ground is dangerously misguided, as it assumes that global economic rules and institutions have created the equivalent of an economic and financial constitution. Indeed, the system remains too incomplete to self-regulate, and its functioning requires constant guidance and frequent discretionary initiatives. This is why informal groupings like the G7 and the G20 remain essential: they provide the necessary political impetus. But they, too, depend crucially on US backing and leadership.
For example, it was not the rules of the system that offered a response to the 2008 crisis; it was a series of ad hoc initiatives – a standstill on trade protectionism, coordinated bank rescues, a global stimulus, and the provision of dollar liquidity through swap lines, to name only the main ones – that owed much to the US. Absent its leadership and the initiatives of key players like the UK and France, the crisis would have been much worse.
True, the other major players – Europe, China, India, and Japan – may eventually be able to exercise global leadership. But, for the time being, they lack the will, the capacity, and the cohesion this would require. So the world should be under no illusion. To keep the boat on course after the pilot has left the wheel is one thing; to steer it in a storm is another matter. Let’s hope the next storm does not gather too soon.