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Stage 1 – reduce the US trade deficit. Stage 2 – reduce the China trade surplus
This week, we turn our attention from the cyclical macroeconomic outlook and raise our vision to the longer term geopolitical outlook. Our focus is centred around the Trump Administration’s release of The National Security Strategy of the United States (NSS), superseding the Biden Administration’s 2022 NSS.
The document is important as it outlines a vision of the future centred around political and economic blocs with a central power dictating the interests of their bloc, with minor bloc players acquiescing to policies of the central power in return for economic and military security.
To this end Trump’s NSS foreshadows a return to the bloc structure of the global political landscape reminiscent of the Cold War era from 1945 to 1991. The difference is that the Cold War era was centred around two blocs, whereas the NSS seems to envisage three blocs.
During the Cold War, the world was divided into two blocs: the liberal democratic/capitalist bloc headed by the US and the authoritarian/communist bloc headed by the Soviet Union. The bloc structure envisaged in the NSS has Orwellian overtones, with the world seen through the prism of three blocs: The US heads a Western Hemisphere/Pacific bloc, an East Asia bloc is headed by China and a European/Russian bloc is controlled by right-leaning European governments, presumably in collaboration with, rather than opposition to, Russia.
We have written extensively about the shift of the global economy to trading blocs in previous Briefs (see Liberation-Day: the start of a new world order and 2025: a year that will go down in history) and the NSS simply codified what the Trump Administration policies and behaviours were already telling us. So, what, if anything new, does the NSS tell us?
On face value, the document advances the primacy of America First expressed by a retreat in a foreign policy focus on the Western Hemisphere and the Trump Corollary of the Monroe Doctrine. In other words, the central aim of US foreign policy is to guarantee US hegemony over the Americas.
Foreign policy concerns over other geopolitical regions are secondary and, to some extent, portrayed as transactional. For example, in the three opening sections (pages 1 to 8), the threat China poses to the post-Cold War US-led liberal democratic/capitalist world order is reduced to the following statement “We (the US) want to halt and reverse the ongoing damage that foreign actors inflict on the American economy while keeping the Indo-Pacific free and open, preserving freedom of navigation in all crucial sea lanes, and maintaining secure and reliable supply chains and access to critical materials”.
Herein, lies the internal contradiction within the NSS. China’s threat to US economic dominance leads to the remainder of the NSS, in its largest section The Strategy (pages 8 to 29), articulating an extensive global foreign policy, in stark contrast to the isolationist “Monroe Doctrine” tone of the opening sections.
Among the prescriptions for security arrangements with the US, the subsection on Asia: Win the Economic Future, Prevent Military Confrontation (pages 19 to 24) points to the next likely development in trade relations. In this section, the NSS exhorts Europe, Japan, Korea, Australia, Canada and Mexico, to adopt “…trade policies that help rebalance China’s economy toward household consumption”. In other words, for these countries to import less Chinese goods and services.
The NSS also states, “The exporting nations of Europe and Asia can also look to middle-income countries as a limited but growing market for their exports”. In other words, export less to China.
What is the interpretation of the NSS? If Stage 1 of the US’ new order was a rebalancing of the US’ trade deficit, using tariffs as the method of execution, then stage two is a rebalancing of China’s trade surplus using security arrangements with the US as the method of execution. For Australia, time is ticking on our window to diversify away from our trade reliance on China.