Life After NATO

For all intents and purposes, the North Atlantic Treaty Organization – the foundation for American security for the past seven decades – ceased existing on May 25, 2017.

While attending a highly anticipated (some might say dreaded) meeting with NATO heads of state and government in Brussels, U.S. President Donald Trump delivered a speech railing against member-states who have failed to meet economic obligations to the defense pact, going so far as to indirectly abrogate the alliance’s cornerstone: the provisions for collective defense under Article V of the treaty.

Article V is the backbone of the NATO alliance: that an attack against any individual member will be treated as an attack against all members, and will be met with a requisite response. Article V is perhaps the biggest piece of what incentivized the Europeans to resist Moscow throughout the nuclear-tinged threat of the Cold War era. But after the fall of the Soviet Union in 1991, the Europeans steadily gutted their militaries, redirecting funds to ballooning social programs and pensions.

I cannot emphasize enough that while the breach between the United States and the rest of NATO is happening on the Trump administration’s watch, this is not a position that will change once Trump is gone.

After the 9/11 attacks, the Bush administration made it clear to the NATO allies that future relations would be viewed through the prism of cooperation on anti-terror programs. In response the French and Germans partnered with the Russians to oppose the Iraq War. During the first Obama administration, the White House explicitly asked NATO to increase its troop commitments to the Afghan conflict to prevent the Taliban’s re-emergence. With a very few exceptions the European allies didn’t just fail to provide, they rejected Obama’s request with fanfare.

I’m not asserting the Americans’ wars were smart plays, or that the link between anti-terror programs and other aspects of strategic policy is what I would have done. I’m saying that the American complaint that the European allies are not carrying their weight – and that there is an explicit link in the American mind between anti-terror support and ongoing NATO security guarantees – is neither new, nor a surprise, nor merely the position of a political outsider like Trump. This is policy. This is bipartisan. This is done.

And holy crap does that throw a lot of things up in the air!

So what does life after NATO look like?

  • United States. Freed from needing to maintain static deployments throughout Europe or from preparing for mass Army deployments to the Continent, and freed from needing to be responsible for global security in general, the United States can revert to their pre-World War II strategic posture: one of permanent offense. Few troops manning front lines. Little need to rush to the aid of every country on the planet. Yet boasting a military capable of intervening anywhere, anywhen. For the roughly 4.5 billion people on this planet whose physical and economic security was dependent upon active, constructive American engagement, an America that is a persistent wild card is quite possibly the worst outcome of all. And what does the U.S. need to put into place to make this happen? Not a damn thing.
  • United Kingdom. Theresa May has already struck a deal with the Trump administration to more closely coordinate strategic policy. This wasn’t done because of NATO’s imminent end, but because of Brexit. The Brits leaving the EU means they need to massively increase the size of their diplomatic and intelligence operations. May offered to trade the information such operations generate for a closer alignment with the Americans. From the point of view of the London-Washington alliance, the hard work has already been done.
  • Russia. Moscow has been praying for a breach between the Americans and the Europeans for decades, and the day has finally arrived. Not a moment too soon either. The Russian demography is in terminal decline and the country will largely lose the ability to field a credible army in just a few years. Russia’s current borders are completely indefensible with its current military, much less a smaller one, so Moscow believes it must expand to something more closely resembling the old Soviet borders. This will bring it into conflict with eleven different countries, five of which are standing NATO members. The one country that could have stopped a Russian assault? The United States. Expect Russian operations within, against and beyond Ukraine to accelerate now that the Americans are no longer a major factor.
  • Poland and Romania. Warsaw and Bucharest are, well, screwed. Poland and Romania are two of the five countries that the Russians feel they must at least partially secure. Neither have a hope of fighting off the Russians without massive amounts of outside assistance, and with the Americans exiting stage west they will be forced to turn to local powers – powers with which both have less than ideal relations.
  • Germany. There is zero hope for Poland without tens of thousands of German troops fighting on Polish soil. Considering that currently Germany doesn’t have tens of thousands of deployable troops, and even if they did, historically German troops haven’t tended to leave Poland after being there, and Warsaw-Berlin relations are about to become dizzyingly complicated. Every time the Germans have armed, the result has been a broad-spectrum European war. It is far too soon to call that inevitable, but unless the Germans prove comfortable with Russian troops within a couple hundred miles of Berlin, the era of German pacifism is nearly over.

  • Turkey. The Turks have been de facto out of NATO for over a decade, following a breach in relations with the George W Bush administration in the run-up to the Iraq war. Now, how much progress the Russians make in the Balkans and Caucasus is largely up to politics in Ankara. Figuring out the specific path forward is an exercise in futility. Not only are the Turks only now waking up from a century long geopolitical coma and they have yet to figure out what about their neighborhood really matters to them, Prime Minister Erdogan is cut from the same nationalistic, populist cloth as the American, Polish and Russian presidents. But whatever happens, relations with the Germans will be key. Germany and Turkey are the only countries in Europe that have the potential manpower to hold off, much less roll back, a Russian advance…and the two are currently in a spat that is dangerously close to severing formal diplomatic relations.
  • Sweden. The final three NATO countries the Russians will target are the Baltic Trio of Estonia, Latvia and Lithuania. All three Baltic states count Sweden as their strongest and most enthusiastic sponsor. Sweden now has a choice to make. Continue with its policy of neutrality and watch its Baltic apprentices die, or act. Sweden has the military, economic and diplomatic strength to forge and lead a Scandinavian alliance to bulwark the Balts against the Russians. Now we’ll see if they have the will.
  • Japan. Shinzo Abe was the first foreign leader to visit Trump after his election (and then the second one, after May, to visit after inauguration), and he came with a big fat bribe. Abe knows that Japan is likely to find itself in a full-court conflict with China in the not-too-distant future and needs to be sure the Americans will at a minimum remain neutral. Assuming no American-Japanese hostilities (and the bribe seems to have done the trick), Japan is highly likely to give the Chinese a drumming. The Chinese are more dependent upon maritime supply lines for both merchandise exports and energy imports, while the Japanese navy has longer reach and less strategic exposure. And now that Japan’s second new carrier is fully operational, the Japanese are pretty much good to go.
  • China. For Beijing the Americans leaving NATO is quite possibly the worst outcome of all. If the Americans are not nailed down defending a long land border in Europe, American power becomes far more freeform. That hugely expands the role of the American Navy in American strategic planning, and the Navy is the branch most capable of containing Chinese power. Even if American relations with Japan were to significantly cool, China just became completely boxed in.

One final thought:

We have not had large-scale regional – much less global – competition outside of the American-Soviet rivalry for 70 years expressly because the Americans took care of pretty much everything. But the Americans have been moving slow-motion in the general direction of disengagement from their Cold War alliance system since 1989. Today’s developments are not the final word on that disengagement, this is simply the end of the interim where people didn’t really know where the Americans stood. We are only now starting to understand the degree to which the Americans just are not going to be there.

Remove the Americans and every country in the world – starting with the European nations – needs to figure out how to look after their own economic and physical security. Different countries will have different ideas of how to do that, and many of those ideas will be mutually exclusive. History is about to start moving again.

And history is bloody.

Should you find any of this interesting (or terrifying) you can read more at the link to the archive at the top of this email. And in a shameless plug, my newest book – The Absent Superpower – has a full chapter on the coming war between Russia and the Europeans.

Part X: Trump Finally Plays a Card

Trump finally played a card with the Syria strike and it was a doozy – whether the messages were intended or not.

The past week saw the rhetoric of President Trump’s campaign messages meet the reality of the office he now holds. Stepping back a little further, April has been a very revealing month — if not somewhat cruel to President Trump’s more isolationist-leaning backers — in terms of what an emerging “Trump Doctrine” looks like.

Attaching the term “doctrine” to various past presidents’ policies is always somewhat of a misnomer as their actions are constrained by a variety of factors, including the unfeeling realm of geopolitics, and are informed by a bevy of inputs most of us could never even imagine.

Voters across the political spectrum were either terrified of, or enraged by, or ecstatic over the idea of a President Trump who would sharply reduce the United States’ global footprint and upend decades of long-standing formal and de facto relationships that have come to define the post-WWII era.

But any ideas of what a Trump foreign policy would or wouldn’t look like blew up earlier this month when nearly five dozen Tomahawk missiles struck the Syrian regime’s Shayrat airbase. So much for all the times candidate Trump decried foolish U.S. military intervention in the Middle East, amirite?Well, not so fast. The missile strike against regime forces in Syria was the very least President Trump could do and still reasonably claim he had done something. And there are zero signals that Washington is preparing to send U.S. ground troops en masse into Syria to fight against both the regime and various jihadi forces.

The reality is that the strike is important because it was the first tangible international action by the new President who has yet to clearly define his strategy and the world is taking notice. Here’s where we stand now:

  • The Syrian regime in Damascus has been warned that any use of nerve agents or chemical warfare in the future risks triggering a U.S. strike. The actual impact the last strike had within Syria is still being debated as details from both the Syrian and US government are fuzzy, but the immediate diplomatic kerfuffle it caused with the Assad regime’s Russian backers was relatively short lived. The U.S.-Russian “deconfliction” line – meant to prevent conflicts from escalating – that the Russians suspended was restored a few days later, with none of the tension so lovingly built up during the previous administration any worse for the wear.
  • On the last point, the Russians suddenly see a cost to their direct actions in Syria that has been palpably absent in recent years. But before you start bursting into renditions of “America, F#%$ yeah!” try and see this from the Russian perspective: your aging, limited military resources are now stretched incredibly thin from Ukraine to the heart of the Levant, and you have a tendency to see enemies across all borders. With the Americans again willing to fling ordinance about, things could get ugly fast.
RIMPAC Exercises
  • Trump’s ordering of the strike in Syria has implications outside of the Middle East as well. For China, the timing could not have been more awkward. As 59 Tomahawk missiles were being launched from U.S. ships in the Mediterranean, Trump was entertaining Chinese President Xi Jinping at his Mar-a-Lago estate in Florida. Following intimate conversations over a “big, beautiful” piece of chocolate cake, President Trump has decided that he will not label the Chinese as currency manipulators after all, but the Chinese delegation is said to have left Mar-a-Lago agreeing to help eliminate the U.S. trade deficit and the North Korean nuclear threat.
  • With all the explosions as of late (including the crater the Americans blew into Afghanistan’s Spin Ghar mountains last week via MOAB), the North Koreans are nervous that they’re next. Pyongyang’s decision to not test a suspected planned nuclear device over the weekend to coincide with the 105th anniversary of founder Kim Il-Sung’s birth could be seen in response to the U.S. Navy moving the USS Carl Vinson Carrier Strike Group to the region. But back a desperate, anxious neurotic into a corner and you might not like what happens next…
  • With all this ordinance on display, the U.S. has outlined, highlighted, and made bold what sort of capabilities will not be on the side of its NATO allies should they continue to fail to meet their funding obligations to the alliance. Trump has changed his tune recently regarding how NATO is no longer “obsolete,” but the new administration has made it crystal clear to both NATO and EU leadership that members can no longer expect US protection essentially for “free.”
Whether or not President Trump or members of his administration intended for all of these things to fall into place following the strike in Syria is of course another topic, but the adults in the room (especially Defense Secretary Jim Mattis and National Security Adviser H.R. McMaster) certainly understand how many opportunities the April 6 strike against Syrian forces have opened up. And given the deference Trump has for “his” generals and an increasing tendency to delegate decision-making during these first 100 days, it’s safe to say that the emerging Trump foreign policy is going to be anything but boring.

Part IX: The First International Challenge

Trump has big foreign policy choices to make this week and they both have world changing consequences.

It’s already been a big week for Trump. He just got his first pair of foreign policy crises.

First, the one that he picked.

Chinese President Xi Jinping will arrive tomorrow at Mar-a-Lago for direct talks with President Trump. We will know within a few days just how hostile the Trump administration will be toward all things Chinese. In these talks, The United States — and by extension, Trump — holds most of the cards: a functional anti-Chinse military alliance, absolute naval mastery of the Pacific, a Japan chomping at the bit for a more aggressive anti-Chinese stance, full command over the security of the global trading system upon which China depends, etc.

It isn’t that China cannot cause the Americans pain, just that any method of doing so obviously invites the Americans to counter in-kind at a higher order of magnitude. Xi is flatly coming seeking a “deal” and the talks are in Florida — rather than Washington or Beijing — so that Xi need not worry about American journalists or Chinese politicos hearing the discussions and potentially casting Xi as being as weak in the talks as he fully realizes he is. So either we’ll get a deal or this is the beginning of the end of the Chinese system in its current form. Personally, I’m popping some corn.

Then there’s the crisis that Trump most certainly did not pick.

Earlier this week the Syrians broke out some of their chemical weapons stocks again and used them on one of the more stubborn rebel positions in the country’s northern Idlib province. Russia quickly provided a modicum of diplomatic cover for its Syrian ally, asserting that a Syrian airstrike merely struck a rebel chemical weapons factory, and so scattered someone else’s chemical weapons.

For those of you who like to obsess about technicalities, chemical weapons depend upon being aerosolized for dispersion. It isn’t that the liquid material isn’t toxic — it’s totally toxic! — but a pint of liquid chemical weapon will kill everyone in a room while the same aerosolized amount can kill everyone in several city blocks. Hit a chemical weapons depot with a conventional bomb and you’ll incinerate far more of the material than you’ll disperse, much less aerosolize. The Russians of course know this and fully realize that the statement isn’t just a lie, but a particularly asinine one.

There’s a method to the madness.

The Russian challenge is the same one they used when invading eastern Ukraine: say something so beyond the pale that you are daring the international community to do something. It leaves everyone — Trump included — with needing to follow one of three paths. First, suck it up and do nothing. Second, deploy tens of thousands of troops to engage in a broad scale war against a country backed by a nuclear power that already has combat troops in-theater and risk thermonuclear escalation. Third, start a drone/airstrike campaign with the express purpose of decapitating the Syrian government, up to and including the assassination of Assad himself.

Option 1 makes you look like a wuss, emboldening Russia (not to mention Syria) to use similar tactics in other theaters. Option 2 bogs you down in a winless, bottomless war that makes the Iraq conflict look simple (and that’s assuming that nothing goes horribly wrong). Option 3 gives up on a stable future for Syria and the surrounding region. It would also be public acceptance of assassination, opening up a Pandora’s box of strikes and counter-strikes all over the world by a panoply of powers.

Say what you will about the Russians, they are very good about presenting their rivals with unwinnable choices.

I never expected the alleged Trump-Putin love-fest to amount to anything. Russia’s geopolitical and demographic position is precarious, but Russia’s tool-box is fairly full. Trump has yet to fully familiarize himself with the awesome raft of tools the U.S. president has in foreign affairs, and his demeanor is somewhat… inconsistent. It’s a combustible mix, not to mention that I personally find the idea that the world is big enough for the Trump and Putin egos to co-exist (darkly) amusing.

What really gets my attention is that these two developments happened in the same week. Xi’s trip has been on the docket for awhile now, and timing the use of a chemical munition wouldn’t be all that hard. While I have zero proof, the timing does appear to be trademark Russian: force the White House to pick a crisis — a buffet of unpalatable choices in the Middle East, or a major politico-economic conflict with another power. Either way, it potentially keeps the Trump administration obsessed with conflicts far from Russia’s borders.

Just don’t forget that no matter what Trump picks, the outcomes are going to be far worse for others. An America engaged in a Syrian conflict is one that generates building disasters for Turkey, Israel, Egypt, Saudi Arabia, Iran and Europe. An America engaged in a head-of-state assassination campaign destabilizes entire continents. An America pursuing a Chinese competition wrecks the entire global supply chain system from raw crude to iPhones.

The only way this doesn’t lead to Disorder is if Trump chooses to look like a whimp.

Part VIII: Keystone and the Method to Trump’s Madness

Trump is turning the government his own personal shade of orange and it may take decades to get the dye out.

President Donald Trump formally signed off on the Keystone XL pipeline on March 24.

While there will undoubtedly be ongoing legal and environmental wrangling (that’s just the nature of pipeline politics these days), the presidential waiver was the final formal step of the approval process. Construction will begin in short order, with completion likely in about two years.

Three things come to mind:

1) The economics of Canadian crude in a world of U.S. shale is questionable, but at least now they aren’t so ridiculous.

U.S. shale is very low in contaminants. In a normal system it would sell for a massive premium, but the speed at which shale crude has come on-line has overwhelmed not just American infrastructure, but global energy trends. From-scratch, shale wells can now begin production in less time than OPEC states take to bring pre-existing spare production back online. The result is that despite its sky-high quality, U.S. shale actually sells for a slight discount to international norms.

Canadian oil sands is more traditional from a pricing point of view. It is thick and gooey and packed with sulfur; it’s one of the lowest quality crudes in the world and as such sells at a steep discount. It also gets sold almost exclusively into the U.S. Midwest, the same area that is awash with U.S. shale crude. The result is that Canadian crudes typically sell at a $10 a barrel discount to U.S. shale at least, and more than that to global norms.

The real problem (for Canadian crude) is production costs. U.S. shale oil full-cycle costs are now below $40 a barrel. Canadian heavy is about double that… and that’s before you consider that Canadian heavy often needs to be railed because there isn’t sufficient pipe transport capacity. The transport difference alone adds $5-10 a barrel more to Canadian heavy’s cost. Keystone XL will reduce that shipping cost to the $2-3 range, in theory making Canadian heavy more competitive over the long term. The production cost differential is still wide enough to likely dissuade any new volumes of Canadian heavy coming online anytime soon, but at least the economics of production will be a bit less out of whack vis-à-vis shale.

2) U.S. industry needs to formally adjust for new crude mixes.

Ten years ago everyone knew that crudes like Canadian heavy were the future, and so everyone retooled their refineries to run on heavy, sour crudes. Then shale popped up and wrecked everyone’s well-laid and expensively-funded plans. Now in some ways U.S. refiners faces the best and worst of all worlds. Best in that the two major input streams — Canadian heavy and shale — can be purchased at discounts to the global norm. Worst in that the two crude streams are about as far apart as concerns quality as is possible and so cannot be run in the same facility.

The solution is blending facilities that mix the two along with a few other inputs to make something a bit more regularized, preferably with enough flexibility that refineries can custom-order a blend that matches their technical requirements as well as the market needs of the day. The problem isn’t just tank farms and dedicated pipelines, but those “other inputs” that help the blend remain blended. Otherwise the mixed crude tends to separate like salad dressing. Spoiler alert: Keystone XL guarantees that such blending facilities are going to be a big growth industry for the next decade.

3) Trump is not a normal president, and he’s becoming less so by the day.

That Trump moved quickly on Keystone XL doesn’t surprise me. What surprises me is that the announcement today came without Trump’s Elon-Musk-style leadup and fanfare. While many media like to lampoon him as, well, eminently lampoonable, the fact is that he is a shifting target who shows no sign of establishing a normal order of business. In the meantime, he is forcing the government to work the way he wants them to.

My contacts in the refining world have already detected a 180-degree shift in the way the Environmental Protection Agency operates. Under Obama, EPA inspectors would drop in unannounced and demand to see everything. Now they are giving weeks of notice for information requests and volunteering that even these looser reporting deadlines are more like squishy guidelines…and that’s before Trump’s 30%+ funding cut to the Agency kicks in.

The State Department has had minimal contact with its own Secretary, Rex Tillerson, who has emphasized personal diplomacy over institutional diplomacy. Both styles have pluses and minuses, but the Trump team is very clearly laying the groundwork for a broad-scale elimination of many of the levers of government power. People criticize Trump for seeming to still be floundering after two months on the job, but I see the greatest civil deconstruction in the history of the Republic. At the speed Trump is moving, it would take a generation of effort to rebuild the bureaucracy should future presidents attempt to turn back the clock. Trump may well have the greatest impact of any president on the structure of government since the New Deal.

And Trump’s efforts are hardly limited to the executive; Congress is firmly in his sights. After some rough back-and-forth with the Republican caucus on the Obamacare replace/repeal, Trump threw up his hands last night and directed Congress to vote up or down on the bill as it stands. His message to conservative and moderate Republicans opposing the reform bill in its current form is a stark one: you campaigned on repealing Obamacare, but now you’re all bitching about the details. So either do it and let’s move on to other things, or break your pledge and reap the whirlwind from your constituents. It’s a stark reminder that Trump isn’t just not really a Republican, but that he ran against the Republican Party.

Trump is merging the Obama’s strategy of direct executive orders that can only be challenged via multi-year lawsuits with the Reagan strategy of building and abandoning Congressional alliances issue-by-issue with a Clintonesque predilection for going direct to the people in order to force everyone’s hands. Yet Trump is governing without a support infrastructure, so he’s both difficult to influence or to hold to account.

It is far too soon to say that Trump will be successful, but considering the enervated nature of the U.S. parties, betting against the new president would be most unwise. Love him or hate him, President Trump doesn’t just have his own style, he is going to rule.

Part VII: Ms Merkel Goes to Washington

How Merkel and Trump get along (or don’t get along) will determine the world’s path for at least the next three decades.

Here it comes.

German Chancellor Angela Merkel will meet with U.S. President Donald Trump tomorrow (March 15). These are the leaders of the two branches of the free world, and how they get along (or don’t get along) will determine the world’s path for at least the next three decades. I’m not hopeful. Two weeks ago the Trump administration issued its new trade guidance, which calls for nothing less than the unravelling of the global trade order.

The key institution is the World Trade Organization, a grouping formed by the United States expressly to manage global trade, most notably by adjudicating trade disputes. The WTO isn’t just some gathering like the G20, but instead a Senate-ratified treaty at the heart of U.S. economic law. In Trump’s new policy outline, which at a few hundred pages is by far the most detailed anything I’ve seen out of the Trump White House so far, Trump asserts that U.S. citizens are subject to U.S. law, not WTO rulings. When the two clash, U.S. law takes precedence. More than the travel ban or the Dakota Access Pipeline or Russians having conversations with the Attorney General, it is the implementation of this decision that will determine how our world will (d)evolve in the months and years to come. The WTO — indeed, the entire trade order — cannot function without the world’s largest market being open, and without the world’s largest navy making imports and exports of everything from iPods to Toyotas to French cheese to Kuwaiti oil safe for everyone.

I warned in the Accidental Superpower that it didn’t really matter to the United States how things unraveled, but that for everyone else “it truly matters whether the American shift from Bretton Woods occurs slowly over a decade of neglect or deliberately in a single [moment] of panicked fury” after the Americans have a really bad hair day. We are very clearly seeing the latter—no Trump jokes intended.

There are few countries with more to lose than Germany, and Merkel must be preparing for her summit with palpable dread.

Germany is not a normal country. Its territories are cobbled-together statelets that historically have had stronger local and regional, rather than national, identities. But whenever those statelets do start to act as one, their sheer heft tends to scare the bejeezus out of everyone else. A fractured Germany is one that falls prey to its neighbors; a unified Germany is one that its neighbors feel forced to tear down. Most of German (which is to say, European) history has obsessed with how to manage the German Question, and the answer has always been either grueling war or equally grueling occupation.

Except when the Americans were in control, that is. The whole point of the Bretton Woods system of free trade was to unify the world’s once-warring countries under a single rubric in order to contain, beat back, and destroy the Soviet Union. In this order Germany was no longer isolated target, but instead an integrated bulwark. With Germany and France and Spain and Italy and Britain and Sweden and Turkey and more all on the same side, the Germans could for the first and only time in their history expand economically without risk of invasion (except from the Soviets, of course). The time since the Bretton Woods era kicked off has not “simply” been the greatest period of peace and prosperity in human history, but it has been the only period of peace and prosperity in German history.

I say this without hyperbole: without Americans underwriting Bretton Woods, there is no free trade. No free trade, no EU and NATO. No EU and NATO, and suddenly Germany is once again exposed to the broad-spectrum competition that is Europe — a competition that Germany is by default the most powerful player, but equally by default cannot possibly win.

Merkel faces the impossible task of somehow convincing Trump that everything that he knows and believes spells disaster for Germany, Europe, and the global system. And that somehow that makes it bad for the everyday Americans, US strategic goals, and Trump himself as well. And to do so without triggering something worse. After all, it isn’t like it is Trump’s goal to deliberately and explicitly tear Germany down. He just doesn’t care.

I do not envy her that conversation.

The timing for Merkel couldn’t be worse. The entire European fabric is shredding, even before the Americans set sail in the other direction.

  • The United Kingdom is leaving the EU, giving fact to the fear that the EU is not Europe’s inevitable future. As London has already launched free-trade talks with the Americans, Canadians, Turks, Indians, Australians, Kiwis and the European Free Trade Association, there is a building horror that the Brits might not be destroyed by Brexit, and should that happen, then what is stopping other rich members from leaving?
  • Relations within the EU have turned acrimonious. A Polish internal spat is throwing a veritable troop of monkeys (and their wrenches) into EU workings, with Warsaw threatening to upset the entire EU order. At issue is the EU’s decision to override a Polish objection to a change of the EU president (the sitting Polish government is angry that the EU’s titular head is a former Polish prime minister from their domestic political opponents). The last time something like this happened, it was Margaret Thatcher using her anger at EU budgeting to stall all things EU for the better part of a decade.
  • The Dutch government — by far the most effective party at patching together EU unity in trying times — is likely not just to fall in elections this Wednesday, but might actually get replaced by the strongly Euro-skeptic party of Geert Wilders, a man who makes Donald Trump look positively calm and inclusive. Similar firebrands have already taken power in Hungary and Poland, seem posed to assert command in Italy, and that doesn’t even broach the topic of Marine Le Pen’s likely first round victory in France’s upcoming presidential elections.
  • Turkey is on the warpath, both figuratively and literally. First, figuratively: A big topic in current European politics is to prevent Turkish politicians from holding political rallies across Europe (typically with anti-European themes). It has gotten so bad that the Dutch government denied the Turkish foreign minister the ability to land his plane last week. As such, the notoriously prickly Turkish government is screaming it will cancel or subvert every single deal the Europeans have made with the Turks in the past decade—President Erdogan has even accused the Dutch of behaving like “Nazi remnants”. Now for the literally: Anti-ISIS efforts in Syria and Iraq are coming to a head outside of ISIS’ capital of Raqqa, Syria and its largest city of Mosul, Iraq. In both cases the U.S. and Europeans have become deeply involved in alliances that involve Kurds, something that so infuriates the Turks that it cannot help but impact Western-Turkish relations more broadly — and Turkey controls how many Syrian refugees can swarm up from Europe’s southeast.
  • Russia is reinforcing its positions not just in the Ukraine border region, but in Ukraine itself. A serious military effort may well be imminent. Putin sees a government in Washington that is testing the NATO alliance even more than he does, and Putin likes what he sees. Others have noticed. In late February the Swedes formally abandoned their post-Cold War optimism, reinstituting the draft.

And while normally I prefer to leave aside personality issues, they are depressingly relevant here. Merkel has a (well-earned) reputation for being methodical, slow to commit, pensive and in general reserved. Trump has an (equally well-earned) reputation for being the exact opposite. If ever there was a time that personal styles would be needed to help make impossible talks possible, it would be now. Instead, we have the opposite.

About the only thing Merkel (and Europe, and the world writ large) have going for them is the slim reed of hope that Trump’s anti-trade policies might not be finalized. Leaks out of the White House point to a “civil war” within the core Trump team between nationalist/isolationist/anti-trade personalities like Steve Bannon and Peter Navarro and more nuanced pro-business personalities such as Gary Cohn of the National Economic Council.

But the emphasis is definitely on the “slim”. The complete absence of strategists such as National Security Advisor HR McMaster or Defense Secretary James Mattis from the conversation, much less the broader debate, is crushingly telling. The United States is the least integrated major economy into the global system. For Washington the creation of the trade order was a strategic gambit with understood economic costs meant to underpin the Cold War alliance, not a plan perceived to generate economic gains. If Trump’s military advisors don’t see themselves as having a role in this trade debate, then that slim reed of hope is just the proverbial last flash before light vanishes from the sky.

Part VI: Working for Alliance

 

So I was sitting having dinner on the Queenstown wharf last night, minding my own business, when New Zealand Prime Minister Bill English and Australian Prime Minister Malcom Turnbull walked by. Like literally right by. No more than six fee-, er, two meters from where I was sitting.

What is it with the world not leaving me alone on holiday??

Anywho, rugby rivalry aside, there are no two countries in the world that are closer politically, economically and culturally. New Zealand and Oz are brother countries who face many of the same challenges and so typically choose to face them together. The two primes were having their countries’ annual coordination powwow.

From what I can gather from local press, while their agenda dealt with a fair number of local issues, their top foreign policy concern was dealing with the Trump Effect. Specifically, both New Zealand and Australia were founding members of the consortium of countries that negotiated the TransPacific Partnership trade deal (TPP). As the United States was about half of the TPP’s economic heft, both Australasian states were more than a bit disappointed when President Trump nullified American participation in the process. While in Queenstown, English and Turnbull apparently explored ways to proceed with “TPP minus one”, although English himself noted that it wasn’t likely feasible and his efforts could probably just be chalked up to “naïve Kiwi optimism”.

Whether you are like me and you think that China’s days are numbered, or you’re more with the conventional wisdom and so you fear that we will all be bowing to our Chinese masters before long, you probably think it makes sense to diversify your trade portfolio away from all things Chinese. TPP would certainly help do that, and so it isn’t a surprise that the Kiwis and Aussies are groping for a way forward without the United States’ participation.

But this all brings me to a broader point.

Take a look at the map below; it’s broadly is how Washington saw the world at the height of the Cold War. The deep blue countries are the Americans’ back yard — places they were willing to fling nukes over. The medium blue were the core allies in the Bretton Woods system. The orange was the competition, and the light-blues the field of battle. The Cold War was global in scope, so everything was in play. Everything mattered.

Not anymore.

This next map shows how I anticipate the Americans viewing the world in 2020. U.S. perceptions of the world have been evolving slowly away from global engagement since 1992. It’s a process that picked up speed with the 2007 financial crisis, and is now rocketing into fast-forward under Trump. (Note: I put this map together in in 2015 — before the Trump Effect — so this might all come to pass earlier than I initially expected.)

There’s a lot of grey on this map; places the U.S. just doesn’t have a stake in. Those blue shades are countries that IMO it would behoove the Americans to have a constructive relationship, but that’s not the same as saying that the U.S. must have one. U.S. alignments are shifting, and since the stability that the United States imposed upon the world from 1945 to the present was designed to fight the Cold War, there aren’t all that many pieces of it that are going to hold without deliberate efforts from both the Americans and partners on the other side of the table.

So far Continental Europe has demonstrated vividly its obliviousness in this dawning era, while Britain very clearly understands where its bread is buttered. Japan has showcased it comprehends fully the new era’s more transactional nature.

The Kiwis and Aussies are somewhere in the middle. Australian Prime Minister Turnbull had a disastrous first call with Trump which apparently went something like this:

TURNBULL: So, Australia had this deal with Obama where you’ll take some illegal immigrants from us.
TRUMP: What sort of a dumb deal is that? I hate illegals.
TURNBULL: But you’re still going to take them, right?
TRUMP: *insert TrumpTantrumTM*
TURNBULL: Is that a yes?

Not the right topic to use to break the ice with the Donald.

Anywho, the Australian government has long been a very savvy operator because they have to be. Australia has but 24 million people. Its closest neighbor — Indonesia — has ten times that, and once you look at the teeming masses of South, Southeast and East Asia it is easy for an Australian to feel a bit overwhelmed. Canberra’s only option is excellent relations with the United States. I fully expect Australian-American relations to bounce back from what was reportedly a quite nasty diplomatic snafu, but the botched Turnbull-Trump call serves to underline the point.

NO relationship, NO alliance, NO trade deal, and NO relationship is safe. When the Americans rejigger things, there are no sacred cows. The United States wasn’t involved in the first three years of World War II, and they ended up leading Normandy and nuking Japan. The United States didn’t care about Korea, and then a year later had over 300,000 troops on the peninsula fighting Chinese human waves. The U.S. treated the Middle East like a backwater until 9/11, then it fought two hot wars and intervened unconventionally in over 20 countries.

The U.S. doesn’t care until it does. And the U.S. cares until it doesn’t. Its geographic position and military reach enable it to intervene and/or stop intervening in issues that are of core importance to every other country in the world in a matter of days, and right now everything is up for re-evaluation. Even the American alliance with Australia — probably the most worry-free, strategically-simple, culturally-easy alliance the Americans have — can see change.

Well, that’s my morning rant. I’m off to brunch in Wanaka where who knows who I’ll bump into. (Apparently Oprah is in town!)

Part V: Watch Mattis, Not Flynn

While the news focuses on the Flynn scandal, Mattis puts NATO – and the global system – on notice.

So apparently whenever I go on vacation the rest of the world has a busy week.

Let’s focus on the United States.

While I was kayaking in Milford Sound, National Security Advisor Lt. General Michael Flynn was excused from his 24-day-old job. Flynn has a reputation for being a bit…volatile and monochromatic, so his departure from what I consider to be the job in the U.S. government that requires the most calm, far-reaching and level-headed thinking isn’t something I consider to be all that bad.

The political issue surrounding Flynn’s dismissal is that he allegedly discussed national security matters with the Russian ambassador, and then lied to now-Vice President Mike Pence about it. If Flynn indeed told the Russians that a Trump administration would take a softer line on all things Russian over the course of a series of conversations, then this may indeed have altered the Kremlin’s response to the Obama administration’s sanctions. Among Democrats in general and more national-security-minded Republicans, this is certainly the biggest foreign policy issue of the new President’s term.

Under normal circumstances I’d agree wholeheartedly, but as I’m sure everyone with a pulse has noticed, we’re not exactly in normal circumstances these days. Instead, a far more critical evolution is taking place.

A personality I take much more seriously than Flynn is the Defense Secretary, General James Mattis. At a NATO defense minister’s summit the day after Flynn’s dismissal (when I was hiking the Kepler Track near Te Anau), the good general put the entire alliance on notice. He flatly warned the allies that they must raise their defense spending – quickly and sharply – or face the Americans backing away from their alliance commitments. Specifically he noted with a degree of subtlety that only a Marine general could muster: “No longer can the American taxpayer carry a disproportionate share of the defense of Western values. Americans cannot care more for your children’s future security than you do.”

In my opinion, Mattis is deadly serious – hell, in my opinion Flynn was deadly serious – and both were/are executing policy not only with the full knowledge of President Trump, but are doing so because it is policy, not because of some quid pro quo with the Kremlin. The Americans are getting out of the global management business, and a rationalization of its alliance commitments – Europe included – is simply par for the course. All that remains is to see how quick and how deep the changes will be.

We might not have to wait long.

It was also reported in the past days that the Russians have deployed the SSC-8 medium-range missiles in violation of the landmark Intermediate-Range Nuclear Forces Treaty (or INF) signed between President Ronald Reagan and Soviet leader Mikhail Gorbachev. The creatively-named treaty bans all short-to-intermediate range (500-1000 km, or roughly 300-600 miles) nuclear and conventional missiles by either party. The agreement served as a stepping stone to more aggressive nuclear arms reductions, and in no way is it an understatement to say that the INF remains the lynchpin of all post-Cold War U.S.-Russian relations.

Looking at a map, it’s easy to see why. The primary beneficiary is Russia (and its predecessor state, the USSR). After the agreement, U.S. military bases sprinkled throughout NATO countries can not serve as launching pads for missiles designed, essentially, to reach Russia; similarly, the removal of such missiles from Russia’s arsenal directly impacts the security of the United States’ European allies. But these missiles simply cannot reach the continental U.S.

While slight mention was made within American media about the Russian’s violation of the INF, the message is being heard loud and clear by NATO. But for all of the prodding and threats by Mattis and the White House, the reality is clear: as the United States remains determined to reduce its global military footprint, Europe faces a Russia already well into its operational mobilization while most of Europe remains functionally disarmed to respond to such a threat.

This weekend is the Munich security conference. The Munich conference involves leading defense and foreign policy thinkers from both the NATO and greater European communities. It has no direct, formal impact – it’s  just a talk shop – but it has a reputation for not only candid discussions, but being a place where top government leaderships announce fairly startling policy changes. In the past German, American and Russian leaders have indicate shifts that fairly dramatically adjusted the regional centers of power.

And this weekend Vice President Mike Pence will be in attendance.

Part IV: Bribes, Trade and the European Union

Some countries are adapting to Trump and some don’t know the rules of the global system have changed. 

The Japanese government leaked a provisional policy document to Reuters late Jan 31 titled “U.S.-Japan Growth and Employment Initiative,” which noodles over how Japan can invest more heavily into the United States in a variety of economic sectors. The policy was supposedly read out loud to Reuters staff, and it is very clearly in the under-development stage with a great many gaps.It is expressly meant to pave the way for Japanese Prime Minister Shinzo Abe’s upcoming summit with Donald Trump on Feb. 10. Among the document’s noodling includes possible investments into various infrastructure projects and the shale sector. The leaker indicated that the investment would be on a scale that could generate “hundreds of thousands” of American jobs.

(Before you discount that “figure” as ludicrous, keep in mind that the Japanese economy has been so moribund for so long thatthe Japanese regularly force the near-entirety of their pension system — with a huge dose of flat-out printed money — to invest in Japanese government debt, an asset with a zero percent return. It is well within the BOJ’s purview to instead purchase foreign assets if that serves Tokyo’s purposes, and to do so in a volume that quite literally reaches the high hundreds of billions of dollars.)

If this feels like a bribe, you’re thinking about things the right way.

The United States is backing away from the world writ large, a development that spells utter disaster for the many countries that designed their economic, political and military systems around the central concept of American engagement. Every bi- and multi-lateral relationship that the Americans have is in the process of being obviated. That includes everything from the UN to the WTO to NATO … to the Japanese alliance.

In Accidental Superpower I noted that in the coming Disorder there would only be a very short list of countries with which the Americans would choose to remain entangled, largely because the Americans perceive unmitigated benefits. If your country isn’t on that list, and you want to retain American engagement, you have to come to Washington and plead your case. And if you come empty handed the answer will almost certainly be “no”.

Abe apparently intends to try and flat out purchase American involvement. A bit crass for my tastes, but that doesn’t mean it won’t work.

The Japanese understand what’s happening. They know full well that their exposure to global energy markets and the fragility of their manufacturing supply chains makes them vulnerable. The Brits get it as well. The Canadians are desperately hoping that they are on the “unmitigated benefits” list (they probably are). The Mexicans are twisting in the wind, unsure if what’s coming out of the White House is rhetoric, policy or a negotiating strategy (it’s probably the latter). The Chinese are having problems coming to grips with just how bad things are about to get for them.

And the mainland Europeans are in flat-out denial.

American security involvement and American trade access are what ended the European civil war of roughly 1800 thru 1945, and generated the past 70 yoears of peace and prosperity. Europe is only able to import raw materials and export finished products because of American global overwatch, to say nothing for Europe’s (in)ability to defend itself (or in general get along with itself). In fact, without swap lines and loans from the Federal Reserve, it isn’t much of a stretch to assert that the Euro would have failed already. Without express U.S. involvement and strategic sponsorship, there is no European Union.

Rather than start tweaking themselves towards a system that might be sustainable without American overwatch and largess, most European politicians right up to the German and French premiers are engaging in a (not entirely) diplomatic back-and-forth with the Trump administration. It isn’t that I’m taking Trump’s side on any particular ethical, legal, constitutional, economic, strategic or practical issue, but instead that continental Europeans are acting as if the old rules still applied.

And unlike a week ago when the issues at stake didn’t hold immediate implications for the EU, now they do.

Apparently I was wrong. National Trade Council chair Peter Navarro is indeed aware of the existence of countries that are not China. Specifically, he knows where Germany is. On the same day the Japanese were testing the waters with their…consulting fee suggestion, Navarro laid into German trade policy. Specifically, he noted that the euro in essence functions as means of depressing the cost of German exports, constituting an unfair trade advantage.

Navarro is both wrong and right. Wrong in that the German intent for the euro isn’t to facilitate exports outside of the eurozone, but instead to induce economic convergence among the eurozone’s members and thus bulwark all of them against international volatility, and strengthen all of them as an internal trade bloc

But that’s not what has happened. The Europeans have proven completely incapable of grinding down financial, fiscal and political barriers within the bloc, so instead of helping everyone converge, the euro has instead established a dependency system in which Germany is the indisputable center of gravity. Since this is done in the context of a currency union, the weaker members have the effect of dragging the currency’s value down. And here’s where Navarro is dead-on correct: the failure of Europe to federalized has devolved the euro into an “implicit deutschemark that is grossly undervalued”. That was never the Germans’ intent, but it is most definitely the outcome — and will remain so until Portugal and Greece look more like the Frankfurt (which isn’t going to happen in our lifetimes).

It is highly unlikely that the Trump administration will be impressed with a “U.S.-Germany Growth and Employment Initiative”, even if Berlin had the political and economic bandwidth to fashion one. The accruing nature of everything threatening Europe is simply so multi-vectored, entrenched and damning that the Continent is now exactly the sort of commitment that the Americans are not interested in.

Yet if anything, that understates the challenge that Europe now faces.

The primary responsibility of the National Trade Council that Navarro leads is to prosecute trade wars. Which means it isn’t just that the European Union cannot exist without express U.S. support, but now also that the United States seems about to actively kick out the Union’s scaffolding.

Part III: Corporate Tax Reform and Global Trade

The simple tariff being discussed in D.C. might spell the end for global trade and security as we know it.

The Trump administration has requested that Congress focus on two major policies during the next few months. One is Obamacare, as excising Barack Obama’s legacy remains a core issue for Trump’s diehard supporters. The second is tax policy reform, specifically corporate tax reform. Trump has indicated that he wants the process to be more or less revenue-neutral, but he also wants the corporate tax rate to shift from today’s 35 percent (among the world’s highest) to 20 percent (among the world’s lowest). While undoubtedly such a cut would massively expand corporate activity and thus tax receipts, such a lower rate would still require replacement income to come from a new source.

From what I’ve heard from DC of late, it seems that Democrats and Republicans alike (not to mention the Trump team) are zeroing in on a common approach — a tariff system.

Administrating a tariff system can be somewhat tricky. The easiest way to manage one is to simply slap on a “border” tax and tax absolutely everything a set percentage as it comes across. The problem with this, however, is that if you have any manufacturing supply chains that cross the border more than once — like, say, everything Ford and Chevy do — things can get taxed multiple times. Such a turnover tax drastically increases the cost — and diminishes the competitiveness — of goods and smashes any supply chains the U.S. has that rely upon the NAFTA partners. That would — at a minimum — trigger an economic depression in places like Michigan and Texas.

A less disruptive option is to implement some sort of content-origin rule, so only the percentage of value of the product that isn’t American gets taxed, and that only once. This requires a more involved detection and labelling system and requires a degree of trust with your close trading partners, but within the NAFTA system something more or less like this already exists. You’d just need to layer in a new bureaucracy atop what’s already there.

This method has some interesting advantages.

In addition to very strongly encouraging American firms to keep their businesses within the U.S., this sort of tariff system is also fairly modular. Since you are already collecting product origin data you can adjust the tariff country-by-country and product-by-product, for example having tariff levels that favor trade with Honduras but disfavor trade with South Africa. Tariffs and trade access very quickly become a tool of state power. As the U.S. has the world’s largest consumer market, that’s no small factor. The biggest losers from such systems would be countries and industries whose supply chains are almost wholly non-North American in nature. China Inc’s gangly East Asian industries would wither, as would Germany’s fully Central European ones. From the Trump White House’s point of view, these are probably viewed more as features than bugs.

There are, however, two far-from-insignificant problems. First, such a system is flat out illegal under the rules of the World Trade Organization. The whole concept of tariffs are one that the U.S. has been browbeating out of the international system since 1944 as part of the move to globalized free trade. Going the tariff route by definition means either facing a fleet of international lawsuits (which the U.S. would almost certainly lose), or simply walking out of the WTO completely. The ability of the U.S. to export to anyone that it didn’t have a side deal with would almost certainly collapse.

The second major problem is that anything that has such a crushing effect on globalized trade will gut the export-led industries of every country that happens to have an export-led economy. Roughly two-thirds of the world’s population almost certainly would face economic depression.

The United States would definitely feel the pain of this, but it would be manageable. Only 8 percent of U.S. GDP is from merchandise exports, and one-third of that is to Canada and Mexico. Only the United States has a demography that’s full of consuming 20- and 30-somethings, and so only the U.S. has the necessary end-market that makes export-led economies around the world work. If Washington and Mexico City and Ottawa can find a way to forge a non-WTO way forward (three guesses what my next topic will be), then the U.S. would likely only suffer a mild recession.

 

For everyone outside of North America, however, the near-future would hold economic disaster.

The U.S. may be the least involved country in international trade from a trading perspective, but it is the most involved country from a trade-management perspective. Without unfettered access to America’s consumer market, the global market shrinks by about one-third. Without the only global navy providing freedom of access and freedom of the seas, maritime trade — the way four-fifths of global trade moves — is endangered if not outright impossible. That isn’t just a problem for computers and furniture, but for iron ore and, oh yeah, oil too. Like it or not, the U.S. is the indispensable country for the global order in its current form.

Remove the U.S. and we don’t get a new global order, we get disorder because there is no country or coalition of countries that can replace the United States in financial, consumptive or military terms. The world’s rising powers — most notably China — see trade as a plank of security policy that is most definitely a zero-sum game. Any attempt by them to impose their own global (or even regional) preferences would quickly lead to conflict with other powers that would lose out under Chinese management. In China’s case that’s a lengthy list that would involve everyone from Japan to Taiwan to Indonesia to India to Saudi Arabia to the United Kingdom.

The reason the U.S.-based system works is that U.S. has global reach but no global needs. It has been willing to sublimate its economic needs in order to build and preserve a global system. China is the opposite. It has global needs but no global reach. It wouldn’t be willing to sublimate anything for its economic goals, and so no one has any interest in deferring to Beijing.

This tax shift under discussion in Washington very well might be how the whole global structure comes crashing down.

Part II: The End of Europe

EU’s institutions are rearranging the Titanic’s deck chairs during a Godzilla attack with a tsunami on the horizon.

President Donald Trump entertained his first foreign dignitary Friday, January 27: UK Prime Minister Theresa May. The primary outcome of their trip? The two pledged to work towards the formalization of a “quick trade deal.”

This takes us all kinds of interesting places.

First, from a strategic point of view anything that binds the United Kingdom closer to the United States is phenomenal for U.S. power. Britain maintains the world’s third-most powerful navy, and soon will float the only functional supercarriers in the world not in the U.S. fleets. London is the world’s second-largest financial hub, and the chief route out for capital fleeing Continental Europe. London has centuries of bred-in experience manipulating political and economic systems the world over. Add in a wealth of preexisting bilateral political, economic and cultural ties, and if there is one country that is a natural complement to American power projection, it is Britain.

Second, the EU is spotlighting the path to its own end with a bizarre sort of enthusiasm. Technically, the May-Trump summit is illegal; under EU law only the European Commission — the EU’s executive — can engage in trade talks on behalf of its members, and the UK’s exit negotiations haven’t yet begun. Just to be sure that the Europeans know that this isn’t an accidental oversight, May has also announced the commencement of trade talks with Canada, Australia, New Zealand, Turkey and India.

 

 

The Commission and EU Parliament are bubbling with fury about how this won’t be allowed to stand, will poison the UK’s pending Brexit talks with the EU, and that Britain will be punished for it. But considering May has indicated that she prefers simply walking away from the EU to any sort of divorce deal that doesn’t serve London’s interest, the EU is absolutely bereft of leverage.

If there was an issue that could prove that the EU had some flexibility, a flat-out Brexit negotiation was it. It will be a negotiation that is predominantly economic in which the EU has lots of leverage and for which the EU has lots of options to choose from. This should be easy.

Guess not.

Such obstinacy pretty much dooms the EU in its grappling with its far larger problems: the EU faces a demographic implosion, a sovereign debt crisis that only increases by the year, anemic-at-best economic growth, a rising banking crisis, an aggressive Russia, an increasingly belligerent Turkey, waves of refugees as Mideast countries crumble, and so on. Rather that start reimagining the Union or getting on with the very real work ahead, the EU’s institutions are doing the equivalent of rearranging the Titanic’s deck chairs during a Godzilla attack with a tsunami on the horizon. Britain is already moving on, yet it looks like Brexit will consume all the EU’s emotional bandwidth for months (years?). Such ossification makes it scarily easy to predict how this will all go: everything that happens in the EU is now an institutional crisis.

Third, after decades of Continental military downsizing, the UK and U.S. are Europe’s security policy. May still went through the motions of pledging her support for NATO, which literally earned no more than a curt nod from the new American president — a man that, since his election, has made no secret of his belief that the alliance is already over. So long as Europe cannot come to terms with Brexit, it is a mighty reach to assume that the UK will continue going to bat with Trump for the sake of the Continent. Expect American drawdowns of its warfighting capabilities in Europe to begin in the not-too-distant future. The only question now is whether this is done in league with evolutions in U.S.-Russian relations or not.

 

 

Where does this leave Europe? Trump probably put it best by calling the EU a “vehicle for Germany.” That may sound harsh. After all, the EU is nothing if not a constant multi-lateral tug of war among all the EU’s 28 members. But consider what’s happened in the past year: The Brits are leaving. NATO is all-but-gone. There’s political stall — if not outright breakdown — in Italy, Spain, Austria, Belgium and the Netherlands. Poland and Hungary are wallowing in their moves away from democracy. Like it or not, planned or not, Germany is the center that holds.

And a quick glance through history indicates that a German center to Europe never holds for long.