Treason Talk

Donald Trump’s past week has been eventful, travelling to Brussels for a NATO summit, London for a meeting with the Queen and the UK prime minister, and Helsinki for a much-ballyhooed summit with his Russian counterpart, Vladimir Putin.

Trump was his usual self, denigrating allies and organizations that the United States itself created and runs. A friend of mine in the foreign policy community referred to Trump’s actions at the NATO summit and in the United Kingdom as the equivalent of taking a huge, steaming s**t on the entire Western world. And then in Finland, Trump indicated he believed Putin’s word over the American intelligence community and the Justice Department when it came to accusations of Russian meddling in the 2016 presidential election. Trump has since clarified that’s not quite what he meant, but it was clear from his tone and caveats that his “clarification” was written by someone else. Best guess on the author: White House Chief of Staff John Kelly (who reportedly went all Marine General on his boss upon his return from Helsinki.)

Back in the States, pushback to Trump’s statements – particularly to the Helsinki summit were… thorough. I have yet to see anyone in the world of American media that was not at least partially pissed off. Even Fox and Friends, by far the U.S. president’s favorite news show, was less than complementary.

I was particularly taken aback by the sudden explosion in the use of a word that doesn’t often crop up in American political discussions: treason. First used by former CIA Director John Brennon, the word’s use quickly spread across the internet to permeate the American political conversation.

It is not, in my opinion, very useful.

Treason is the crime of betraying one’s country, in particular by attempting to overthrow the government, attempting to kill the sovereign, providing assistance to a foreign power against the United States in war time, or providing aid and comfort to a foreign government. Considering that Trump is the head of the American government and the United States and Russia are not at war, making a legal case for the first three of these conditions is impossible. That just leaves “aid and comfort” – and if the full power of the United States government cannot manage a treason conviction against someone like Walker Lindh, it is difficult to envision someone making charges stick against the dude in charge of the U.S. government.

The people using the “t” word cover a disturbingly wide spectrum. The first are those who believed they could and should impeach Trump before he even got into office. These are the people who do not analyze, but instead – much like Trump – react by instinct. Trump’s particular… style… amplifies this visceral reaction. No matter what happens, their scripts are written until the day Trump is no longer president. I don’t pay too much attention to this crowd.

The second are the more reasoned critics, on both the Left and Right, reacting to Trump’s statements and actions. Some of these critics have been vocal from the beginning – like the Never Trump crowd – while others have tried to avoid the fray. Their ranks are growing – and getting louder.

These two groups combined cover a growing swath of the American public and policy establishment. The primary implication of the growth of these groups is that their size and volume make it more difficult for the American president to manage domestic affairs. That by default forces the president into the realm of presidential power over which Congress and the public play little role: foreign affairs. That’s right folks. Trump is going to do morestuff like this recent Europe trip because it may soon be all he can do.

It’s the third group openly discussing treason that really gets my attention: those who have made it their lives to serve and defend the United States during the Cold War and beyond, for whom the Russians have always been public enemy number one. The idea that an American of any stripe – especially the Commander and Chief – would actively seek a friendly relationship with a foreign leader and country who has proven so consistently, pathologically, and above all recently hostile to American interests to them is a world turned upside down.

But therein lies the problem. We are in a world turned upside down. This groups’ reaction is more a reaction to that altered reality than it is to Trump.

The global Order is out of date to the point that it was going to break apart no matter who won the 2016 elections. We can argue back and forth over the details of how a President Clinton would have been different – and there are many – but the core issue is the American people have lost interest in managing the global system. Without ongoing American involvement, that system was doomed.

The real problem here is that the generally calm, reasoned national security community – the soldiers, diplomats, and intelligence teams that keep us all safe, the people who represent the vast bulk of American expertise on all issues foreign policy – are working from a playbook that dates back four presidential administrations. Trump is hardly the only American president guilty of abdicating America’s global vision – it was a failing of the Clinton, W Bush and Obama administrations as well. What is different about Trump is that he is not even giving the old playbook lip service. Instead he is leading by instinct, and demonstrating that instinct can still reveal truths… truths that have been apparent for 29 years.

As regards Russia, I’m not a fan. Never have been. I tend to not like countries that have pointed nuclear weapons at me my entire life. But Russia is no longer the United States’ primary enemy and hasn’t been since 1989. That’s not because Moscow has started acting like Minnesota, but because the Soviet collapse and Russia’s relative weakness means that containing Moscow with a globe-spanning alliance is no longer the lens through which the Americans view everything. America needs to update its strategic policy, and pick and choose friends and foes as guided by that updated policy. And with that update, who knows, Russia may well be something other than a foe. You don’t have to delve too deeply into history to find examples of the Americans partnering with unsavory elements in order to defeat more unsavory elements: Mao against Stalin, Stalin against Hitler.

Putin against al Qaeda.

That doesn’t mean Trump’s actions are wise or productive. That doesn’t mean Trump has a plan. Of course there are better ways to do this. There are aspects of the NATO alliance – in particular members of the NATO alliance – that are worth maintaining. Even cutting NATO into bait would be more productive than the path Trump has chosen. But the bottom line is the Order is gone, and so far the only person who seems willing to admit it, however frustratingly, is the man at the top.

I get why the American foreign policy class feels overwhelmed, offended. Betrayed. After a quarter-century of American leadership largely ignoring them or sending them on wild goose chases through the Middle Eastern Sandbox, they now have a leader who has torn up the script they’ve been following their entire adult lives. It isn’t that they are wrong about the risk to the international order, per se, but instead that they are late to the party. What comes next for the world is scary, particularly after decades of relative stability and prosperity. The American policy establishment (much less the public) is panicking and stampeding for the door. It hasn’t yet realized that there is no going out the way we came in. Until that sinks in (and probably well beyond), Trump will be blamed as the cause. There is plenty of criticism for the quick, ugly, instinct-driven way Trump is severing America’s ties to the world, but there are far greater forces at work than a real estate mogul from Queens.

Instead of panicking through the saddest party of the century, the Americans need to find a new way forward. That’s impossible without a national conversation on what America wants out of the world, and it is certainly impossible without a president who actually engages with his own people. Until the United States figures out that new strategic policy, we will be living in a world in which the Americans are not a force for Order, but instead the greatest wild card in history.

Of China and Oil

The economic conflict between the United States and China continues to ramp up. Earlier this week the Trump administration announced plans for tariffs on another $200 billion in Chinese exports to the United States. Barring (substantial) Chinese concessions the new tariffs will likely come into effect around the end of August. This is now the third volley in what has become a tit-for-tat trade war. I’m starting to think up snazzy names. “Pacific Pong” doesn’t have quite the right je ne sais quoi, but I’m working on it. Suggestions welcome.

The Americans’ imports from China are triple China’s imports from the United States (quadruple if you factor out services). The simple fact is the Chinese are already running out of American imports to penalize. Any effort to shift the dispute to something beyond goods trade will similarly end in colossal failure. The Americans control global trade routes, global energy, global security, and global finance — everything that makes the Chinese system possible. The Chinese simply can’t bring the fight to other fields without suffering immeasurably. (Which isn’t the same thing as me saying I’d like to be an American company operating in China right now.) Chinese holdings of American government debt don’t even give Beijing leverage as such “investments” in reality are capital flight from the Chinese system.

While Chinese state media continues to put on a brave face, the days of tone-deaf chest-beating are gone. Government censorship guidelines now regularly bar terms like “Trump tantrum” and “trade war” and in general discourage the discussing of any angle of the issue whatsoever. One of the problems with stoking nationalism is that it can be hard to turn off. With the Politburo realizing they have little ammo for this sort of fight, political consolidation at home is far more important than scoring points in a media firestorm.

But that’s not what I want to talk about today. I want to talk about one of the funniest things I’ve seen in months. On July 11 the Chinese floated the possibility of a 25% tariff on U.S. oil exports. Several media commentators immediately pounced on the trial balloon as evidence of something that would get Trump’s attention because of his stated interest in “achieving American energy dominance.” Maybe it will. The criteria for what attracts or doesn’t attract the American president’s attention continues to elude me.

But that doesn’t mean a tariff on American oil isn’t a fabulously stupid idea. It has to do with the nature of the oil market, and in particular the role of American crude within it.

First, demand for oil is inelastic. What you need, you need. If it takes ten gallons of gasoline to get your delivery truck from A to B and you only have nine gallons, you cannot make the run. You must have ten. So regardless of what the price of the gasoline is, you’re going to buy it. Applied to this situation, were the Chinese to levy the tariff they will simply have to buy oil from somewhere else, and America’s oil will (easily) fill that gap in that third market. Net effect on U.S. energy exporters: zero.

Second, American oil is different from the rest. Conventional crude percolates through rock formations over time, picking up impurities as it goes (sulfur being the most common). A big part of refining crude oil into finished product is removing those impurities. But American oil exports are not conventional. They come from shale formations. Shale isn’t as porous as most rock, so the oil never percolates. It is trapped. Shale technologies are all about cracking out these pure bits of petroleum out. Shale oil’s lack of exposure to impurities makes it the lightest, purest oil produced in the world, as well as the most valuable and easiest to refine. China likes shale oil because they can blend it with thicker, dirtier crude to make a cocktail that their refineries can use. American exporters will have zero problems finding alternative buyers, but since the United States produces more of this ultralight/ultrasweet crude than the rest of the world combined. China will find alternate supplies difficult to scrounge up.

So either China isn’t going to put this tariff on, or if it does it won’t have any meaningful impact on the American side of the equation. What the tariff trial balloon might do – what discussion of the topic is probably already doing – is pump up oil prices a touch. Markets – especially oil markets – hate anything that might even momentarily restrict oil’s availability. And this little China discussion is only one of four oil-related bits of news that oil markets are stressing about right now.

The second and third issues involve general civilizational breakdown in two major oil exporters: Libya and Venezuela. Ever since Colonel/President/Wacko Muammar Gaddafi was deposed and killed in 2011, Libya has not existed as a state. It is now a shifting series of warlord-run fiefdoms. Unfortunately for the oil markets, not only is Libya’s crude production not in the same area as the oil export facilities, oftentimes the connecting pipeline infrastructure is under a third party’s control. Libya’s larger oil export ports have switched hands twice already this month, with the expected impact upon export volumes – and global prices.

If anything, Venezuela is even worse. Government ineptitude combined with a slow slide towards one-man dictatorship cum anarchy has transformed what was once South America’s richest state to one of its poorest and condemned much of the population of this once-food exporter to famine. The government’s ability to perform basic maintenance on its oil industry is now collapsing. Venezuela’s oil output is already down to a 30-year low and will likely dip below 1.0 million bpd by year’s end… assuming the country doesn’t completely implode.

Needless to say, such civilizational breakdowns can only exert upward pressure on oil prices.

Permian Basin, Texas, US

The fourth hit to the oil markets hasn’t quite landed yet: Iran. The Trump administration is pressuring, well, everyone, to eliminate their imports of Iranian crude by November. The expectation is for a two-thirds reduction in total exports. Countries that resist American pressure will find themselves subject to secondary sanctions that would bar their access to anything that touches the U.S. banking system. Since that is in essence anything that involves nouns it is sort of a big deal. The Indians and Japanese have already signaled they’re going to play ball, and the Europeans are rapidly coming around. That just leaves China.

While the pot-stirrer in me would love to see what would happen to a trade-dependent internationally-wired oil-importing economy like China’s under full financial embargo, I’m fairly sure the Chinese will blink on this one. Financial sanctions of the type the White House is preparing would hit China at least an order of magnitude harder than the tariffs they are staring down, and the Chinese are not suicidal. And while I firmly stand by my claim that no one can really claim to know what Trump is thinking I have to admit things are starting to look more than coincidental: a last-minute cave by the Chinese on Iran just as the third round of tit-for-tat tariffs really start to bite? I see some serious negotiating leverage there, useful in many theaters.

This – all of this – is quite possibly the best-case environment for U.S. shale oil producers. Chronic export outages in multiple countries for multiple reasons, a trade war that is both widening and deepening. All this pushes oil prices up. That helps whichever oil producers can bring new output online fastest. And with today’s shale tech American shale operators can bring on new oil output in half the time the Saudis can bring on their pre-existing spare capacity.

In the first half of 2018, before all this noise erupted, U.S. shale operators were already on course for increasing total U.S. oil output by the largest volume ever – in excess of a fresh 1.5 million bpd. Courtesy of China and Trump and Venezuela and Libya and Iran, that is now the low case estimate.

The concentration of power in the global system continues to gather in the Americans’ favor. Trump is demonstrating he doesn’t need to build an alliance to fight and win a trade war with multiple countries simultaneously. Trump is showing he can wield financial tools simultaneously with trade tools to crushing effect. Trump is showing an enthusiasm for standing up to the business community, something that resonates not just with his base, but also Bernie Sanders’. And in case you missed it, last week the United States became the world’s largest oil producer courtesy of shale, granting Trump even more leverage and autonomy in international relations.

As a guy who makes it his business to integrate context and data in to everything, I find Trump’s brash, details-be-damned approach to… everything a bit annoying. But that doesn’t mean he can’t get results.

Brexit Blunder?

It looks like the Brits are in trouble. In the past 48 hours two major UK government ministers resigned: Brexit Secretary David Davis, and Foreign Minister Boris Johnson. It’s not hard to see why they’re gone. Brexit is really the only foreign policy issue that matters to most Brits, and the Davis-Johnson duo have been at it for nearly two years with zero results.

First, the least important outcome. The government of Prime Minister Theresa May is probably fine. It is no secret that May brought major Brexit supporters such as Davis and Johnson into the government to deal with the Brexit issue in part to discredit them. That has now – thoroughly – been done. While May still may face a backbencher rebellion (she leads a minority government so that’s always a concern), breaking the Brexit leadership’s back should give her more room to maneuver (domestically at least).

Second, this does not mean that the Brits are going back on Brexit. General sentiment among the sort of people who supported Brexit during the referendum two years ago has, if anything, hardened. Moreover, Labor leader Jeremy Corbyn is a semi-stealth Brexit supporter, so even if there were new elections and even if Corbyn became prime minister, Brexit would still be on the menu… albeit likely with a less impressive negotiating team.

Third, with the Brexiteers on the outside of London’s negotiating team, they are guaranteed to vote against any version of Brexit that they don’t care for. A hard Brexit is now the only reality.

A “hard” Brexit is one where the UK crashes out of the EU with no deal whatsoever. Any deal the UK has struck with the EU – for health and sanitation, tariff reduction, capital repatriation, or any of a thousand other topics – will be affected or restricted. Any UK supply chain that begins, ends or passes through any other country will become sticky, with many of them simply breaking. That impacts – conservatively – two-thirds of the UK’s external trade which itself accounts for roughly one-sixth of the UK’s GDP.

In every instance for every good and every transaction, the UK will need to decide whether to unilaterally retain EU rules or unilaterally adopt the rules of the target market in the hopes that the other side – also on a case-by-case basis – decides to allow the trade to flow without a legal understanding in place. The bureaucratic drag alone may well double the cost of doing business in the Kingdom before the political issues are even considered. London will try to establish trade deals with other players to make up for lost EU trade, but the EU is close and big and trade deals take months to years to negotiate.

Financial flows will be hit most of all. The Brit’s proclivity to let capital ebb and flow to wherever it wants to go have made London one of the world’s three largest financial centers. That is now over. Financial centers need a low-regulatory environment and access to a large market and political and market certainty. There will be no deal with the EU on finance, meaning there will be no unrestricted access to the EU, and with the uncertainty of a no-deal scenario, London’s financial industry will now decamp en masse.

Maybe one-quarter to one-third will relocate across the EU with Frankfurt and Paris doing fairly well. After all, at least some of the relocating bankers and financiers will need access to the EU from within. But most will go to New York which has a larger labor pool, similar regulatory format and global reach.

The EU will attempt to claim that financial clearing for euro-denominated transactions must be done from within the eurozone to prevent the Americans from gobbling up the lion’s share of the business. The Americans will disabuse the Europeans of that notion by threatening to force all dollar clearing to occur within the United States’ borders. Since Europe’s external trade is dollar-driven and not euro-driven it will be a fun conversation to watch but it’ll be pretty short. Regardless, London will not be a participant in the discussions. Regardless, London will hollow out.

All in all, the UK faces the greatest economic disruption since World War II. The Brits are looking down the maw of a minimum of a three-year depression where GDP falls by at least a fifth.

But all that was baked in before Davis and Johnson left. All that has been baked in since the Brexit vote. As the Greeks discovered at the beginning of their crisis, you cannot vote yourself rich… but you can totally vote yourself poor. There was zero chance the EU was ever going to grant the Brits the benefits of membership without the costs. Brexiteers like Davis and Johnson who claimed otherwise were either lying, stupid, or suffering from head injuries. The only options before the Brits now are reneging on Brexit (not politically possible), and a hard Brexit. And so a hard Brexit is the only road forward.

This is not a condemnation of the Brexit vote. I see the entire global system crashing down in the next one to four years. The Bretton Woods Order – the basis for that system – is an artificial construct the Americans designed, created, maintained and subsidized to fight the Cold War. They’ve been backing away from the Order for three decades, and they are now abandoning it wholesale. It would have happened without Trump, although probably a bit more slowly and without the…flair.

That means that everything in the global system that was predicated upon the Order will need to find a new basis for existence. Europe has two big Order-dependent things. NATO – which may well formally collapse at this week’s summit – and the European Union. There is no way that an export-based union of mutually antagonistic countries whose security is guaranteed by an outside power can survive in an environment in which those exports are impossible and the security guarantor leaves. The EU was going down anyway which means the Brits had to figure out their way in the world anyway. Brexit means they get a head start on the rest of Europe. Recent developments haven’t brought disaster, they’ve brought clarity.

Yes folks, a hard Brexit is the best-case scenario for the United Kingdom because it forces the Brits to move on now. So yes folks, a three-year depression that knocks a country’s GDP down by one-fifth is probably the best-case scenario for anyone dependent upon the Order as the world slides into Disorder.

I expect the Brits to come out of this better than nearly everyone. For two centuries they ran a globe-spanning empire that was the largest economic entity ever (at least until the Americans came of age). If there is one country that knows how to operate in a disorderly world, without continent-spanning trade pacts, where military and economic power are often fused, that has already stitched together a strategic security plan, it is the United Kingdom.

But that doesn’t mean the road from here to there won’t royally suck.

And Now For a Real Problem

With a very strong showing Andrés Manuel López Obrador won Mexico’s presidential elections July 1. The best description of López Obrador would be to combine the worst traits of Donald Trump, Hillary Clinton, Bernie Sanders, Elizabeth Warren, Ted Cruz, Jeremy Corbin, Vladimir Putin and Kim Kardashian. But perhaps without their impeccable manners.

Sorry folks, I don’t have a lot of guidance on this one. There are too many unknowns, with the biggest one being López Obrador himself. While he has been part of the Mexican political landscape for decades, this will be his first real position in national politics. He could be like another nationalist-populist – Brazil’s Luiz Inácio Lula da Silva – who dialed back the rhetoric shortly after his election, and whose policies never went as far into the wilderness as many feared during the campaign. Or he could be like Trump and the rhetoric is real. We just don’t know. And we won’t know for a bit yet. Mexico has the longest lame-duck political window in the world. López Obrador won’t actually take the reins until December.

But I can issue a few words of warning:

Both Mexico and the United States now have nationalist, populist, inexperienced leaders who believe current political alignments within their own countries as well as the broader geopolitical context are designed to cheat their people. Both regularly make political hay by demonizing those on the other side of the border.

With the entire global Order breaking down, and me – repeatedly – noting that the U.S. will not simply emerge broadly ok, but will be able to dictate the shape of the future, it is tempting to say the same will be the case with degraded American-Mexican relations. But this isn’t like American-French relations where the bickering is good fun. This really matters.

Spanish is America’s second-most common language; English is in the second slot in Mexico. Family connections across the border are the most robust in the hemisphere. Based on how you run the numbers, Mexico is either America’s top or second-largest economic relationship – a position that will hold regardless of what happens with the global Order or NAFTA. This economic relationship isn’t simply trade – this is integrated supply chains with products crossing the border multiple times. Retooling to adjust could be done, but it would take at least three years. Most important, Mexico borders the United States. Trouble in bilateral relations are not a world away, but right next door.

NAFTA may have its faults, but its economic success in Mexico has made net Mexican migration to the U.S. negative for a decade because it gives Mexicans jobs. Smash the agreements that employ Mexicans, and two results among many will be vast increases in drug flows and illegal migration as Mexicans find it harder to find a 9-to-5. A wall would only encourage such behavior.

Hostility between the United States and Mexico impacts immigration, trade, financial stability, supply chains, manufacturing attractiveness, wealth levels, drug policy, water rights, agricultural markets, the works. If there is one country the Americans need to have a productive relationship with, it is Mexico. Texas is particularly vulnerable to everything that could potentially go wrong.

I’ve no doubt that the United States – under any president – can “handle” Mexico. But Mexico isn’t Paraguay. Mexico has 130 million people and is a $1 trillion economy. Whatever shape this and future administrations beat relations into will take time and effort. Time and effort that would be better spent on locations where partnership is not the best (and easiest) option.

Yet, unfortunately, for now all we can do is wait and watch. Both Trump and López Obrador are famous for their unwillingness to take advice from anyone. And for the next five months López Obrador has a lot of free time on his hands to play on Twitter with his American counterpart.