China is testing the global system, “and it will be for the U.S. to ensure that [the system] survives” (Walter Russell Mead, Wall Street Journal, 8 Jan 2018)

Alastair Crooke, Comment, 5 January 2018

A few commentators detect a new orientation in US foreign policy forming (see here, for example). Trump, they suggest, is off-loading America’s global commitments by deliberately taking extreme foreign policy positions, even to the point of strategic frivolity, in order to induce – or provoke – other states (driven to desperation), to intervene in the incipient chaos, and thus lift the burden from the US of finding a solution. It implies that Trump is more of a Machiavelli than has been generally allowed - until now – and these perceptions come at a time when Michael Wolff’s recently published book, Fire and Fury, presents the White House as essentially inept, ignorant and whimsical.  So, from these two polar perspectives, and in the wake of the US recently issued National Security Strategy (NSS), what might be the policy outlook for 2018?

The NSS really is not much help, essentially putting an America First gloss on to the principles that underpinned the 2002 NSS: i.e. that no ‘rival’ states should be permitted to challenge America’s political or financial global primacy. It asserts that that America can be made ‘Great’ again by regaining its earlier industrial prosperity, re-building its military and “ensuring that regions of the world are not dominated by one power” (again a longstanding US grand strategy goal).  But how this is to be done is not addressed. It is thus, less a ‘strategy’, and more a wish list.

The NSS, at its essence, is a demand that America simply “start winning” again.  And here lies the crux to today’s US foreign policy: It is rooted in Trump’s conviction that America has “fallen behind” because the US élites did not know how to negotiate shrewdly; they gave away vital negotiating assets such as America’s defence umbrella for ‘nix’ to rich allies who could easily have afforded to pay; and they allowed trade rivals to steal America’s intellectual property, and to manipulate their currencies to America’s evident detriment – thus leaving the US with a hollowed-out manufacturing base, and a dearth of jobs in the Mid-West.

The lacuna in the NSS then becomes obvious: the riposte to America’s ‘falling behind’ is not the lack of some policy wonk setting out a grand conceptual foreign policy for the Middle East (there is none in the NSS), but rather as one Washington insider puts it:

“What was needed to make America Great Again (MAGA), therefore, was a Washington-erected moat to hold back the tide of bad people and unfair foreign economic assaults; and a new sheriff in the Oval Office with the "smarts" (with which he believed himself amply endowed) to start "winning" again.” 

President Trump is the epitome ‘alpha male’.  That is his nature, and he will not change. He understands the Art of the Deal. And the ‘new sheriff’ will do things his way: He will conceal his hand, throw his adversary off-balance, cultivate unpredictability, lay false trails. He will threaten, flatter, and seek to destroy any advantage his adversary may have. He does not need (in his view) policy wonks, position papers or intelligence briefs.  He is ‘the alpha boss’, and the staff are … well just ‘staff’.  ‘Outcome’ for Trump, is what he calls “winning” (which in his view can be a PR ‘victory’, as much as clear national interest advantage accrued). 

I suppose it is possible to call this skill set ‘Machiavellian’, but it is more a set of shrewd negotiating skills, rather than some grand plan about how to offload America’s liberal order commitments onto others’ shoulders.  In the Middle East, at least, Trump’s foreign policy approach has seemed more inept, than somehow secretly Machiavellian.

And why would Trump limit his advantages?  He prefers to play to them. The American people may not relish, so much now, putting US boots on the ground overseas, but the US has missile muscle with which to threaten, and more importantly, the US controls the financial system.  Sanctions can hurt, exclusion from the financial clearing system can bankrupt an economy, a bear raid on a currency can (and has) brought down governments.  And best of all, a crisis, a threatened conflict, thus generated, both stimulates the US economy, and sends foreigners racing to send their dollars to America – so to fund America’s budget deficit, through their purchase of ‘save haven’ US debt. The world therefore appears forced to play to US dollar advantage: And Trump knows, and relishes, this US negotiating ‘advantage’.

In other words, this Administration’s notion of foreign policy is centred around Trump’s personal skill set (the Art of the Deal), where he uses advantage, or gains advantage.  It is transactional.  It is not conceptual.  As Robert E. Hunter has noted, Trump probably did not read the full NSS, beyond a short précis, and it is probable that General McMaster’s staff filled in the spaces around the theme of America’s ‘falling behind’ and the transactional remedy of putting America First, with ‘boilerplate’ drawn from the 2002 NSS. 

So what does this mean for foreign policy?  It means that foreign policy is overwhelmingly geared to restoring America’s domestic economic situation, plus the need to sustain the image of a surging US economy in the wake of Trump assuming office. And, as a corollary, of course, the need to keep ‘terrorists’, ‘terrorist states’ (North Korea and Iran), and unfair foreign economic practices at bay (i.e. America’s moat).

But also, we need to put the NSS and Trump’s foreign policy notions into the context of America’s ongoing low intensity internal ‘civil war’.  If the US is to avoid a descent into total political gridlock from this ‘war’, Trump needs to find common ground with his own Republican leadership - and with enough Democrats to enable him to enact some key, contentious legislative initiatives.

Even if the policy wonks find the NSS lacking a conceptual structure, serendipitously, signs are emerging that it is serving a purpose: It is finding a foothold of common ground: Everyone in Washington, it seems, now believes that China is the mercantilist ‘villain’, and that financial sanctions offer an effective way to impose US power without spending money or sending troops. Eminent US historian, and beltway insider, Russell Mead has written in an op-ed, entitled Left and Right Agree: Get Tough on China: U.S. foreign policy feels as polarized as ever. But a new consensus is forming, that:

“Not since the Vietnam War have the politics of American foreign policy been this polarized … at the same time, these real and damaging divisions may be overrated. The most important trend in American foreign policy today is that a consensus is emerging. Liberals, populists and conservatives quarrel bitterly over the Middle East and Europe, but they increasingly agree that America must do substantially more to counter … China … This agreement hasn’t yet created a new national-security consensus anything like the Cold War consensus on containing the Soviet Union. But it is getting there …

Within the Republican Party, China is what unites the Steve Bannon wing with the H.R. McMasters and the Rex Tillersons … As many traditional pro-China voices in corporate America fall silent in the face of Beijing’s mercantilism, the Richard Nixon-George H.W. Bush legacy of Republican friendship with China is on the wane …

Democrats also are increasingly focused on perceived threats from Beijing. Organized labor has long argued that Chinese competition undermines American wages and jobs. Even the Democratic focus on Mr. Trump’s alleged ties to Russia is pushing many liberal foreign-policy experts to look at China with renewed concern. Espionage, hacking, using business ties to advance state interests: These aren’t just Russian techniques. They are Chinese tools as well.

The U.S. wants a prosperous and secure China that acts as a responsible stakeholder in the world system and a good neighbor in Asia. But Republicans and Democrats alike are coming to understand that achieving this will be harder than they once hoped; and that treating Beijing with kid gloves may set that project back. China seems determined to test the strength of the world system, and it will be up to the U.S. to ensure that the world system survives.”

America, in short, is going to raise hell for China, Russia and Iran this year.  Trump’s authority to impose financial sanctions is virtually open-ended now via the Global Magnitsky Act, and the Countering America’s Adversaries Through Sanctions Act.

So 2018, it seems, will be the year of financial war.  Russia – after the Russiagate hysteria - is ‘low hanging fruit’ in DC: It will be targeted as the weak link in the China, Russia and Iran ‘pairing’ who comprise the three principal architects of an ‘alt’ trading system (the East Asian Economic Community, plus BRICS).  Trump is ‘all in’ for this financial war, we are told.  And maybe it will widen further: Pakistan has already been punished financially, and Turkey’s turn may follow soon in the wake of the Atilia/Halkbank verdict in NY.

There is little sense here (in the NSS) that America’s ‘falling behind’ and ‘hollowing out’ may be as much a result of America’s dollar hegemony imposing on trading partners the need to trash their own currency to maintain dollar reserves, or the arbitrage between high wage and low wage economies, or America’s export of its QE and interest rate policies across the globe – as owing to the alleged ‘stupidity’ and poor negotiating skills of former US administrations.

Here too, in the domestic sphere, Trump is finding some unexpected common ground. Both sides of the Congressional aisle seem to like Trump’s ‘supply-side’ economics Tax bill (albeit, for differing reasons).  This too is a part of his foreign policy of financial attrition against ‘revisionist’ rivals.  The tax cuts on corporations are intended to bring back home, businesses that had gone overseas - and for America to thumb its nose at foreign competitors. It is a highly popular bill, and markets are soaring euphorically, but it still begs the question: If the cause of America’s ‘falling behind’ is misdiagnosed in the NSS, and by Trump – how can the remedy be appropriate?

The supply-side economics of the tax bill is little more than a different name for ‘trickle-down’ economic effects. Yet the efficacy of supply-side economics has long been questioned. A 2015 paper by researchers for the International Monetary Fund has argued that there is no trickle-down effect as the rich get richer: "[I]f the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth". 

In effect, the tax bill is little different than the existing policy: in one case the Fed ‘prints’ money, and in the case of the tax bill, the splurge of new liquidity derives from deficit finance: i.e. the Treasury ‘prints’ new debt instruments. It is just another form of debt creation and liquidity injection.

That aside, China this week intentionally leaked (and then denied the leak), that it is considering halting the purchase of US debt instruments. It was a warning (quickly brushed aside by the market after a brief spike in yields).  Only a warning – but not the action.  And a senior Russian banker earlier told the Financial Times in another warning about financial war, that if Russia should barred from the SWIFT clearing system in recommendations due to be finalised by the US Congress in February, the consequences, he said, would make the last Cold War seem like child’s play.

Janet Yellen does not seem to believe that America has a dollar problem, or a debt problem, but both China and Russia have been saying for some years (since at least 2013), that they do have a dollar problem. They have warned, but if the US does not listen to China or Russia on this issue (believing the dollar to be the ‘indispensable’ currency), then it might heed Moody’s, which (according to ZeroHedge):

“is the first of the major ratings agencies to venture some commentary on the impact of Trump tax reform on the US credit rating. In an ironic twist, on the same day as Chinese officials, reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, Moody's warns that US tax cuts are seen as a credit negative for the USA Sovereign rating.”

Yes, Washington may believe that it is acting from a position of absolute advantage, but what if the correct diagnosis is that the problem was not so much that which was flowing into the American homeland from abroad - whether cheap Chinese imports, illegals or terrorists (all this undoubtedly occurred) - but perhaps the fundamental cause of America’s economic hollowing-out, rather, has been the outward flow of Washington's financialised globalism, massive debt creation, consequent asset bubbles, near zero interest rates, and financial distortions - that has gutted the American Middle Class, and Blue Collar classes.

If this is so, and the complaint mis-diagnosed, America’s 2018 financial wars may well bring it some unexpected, and unpleasant, surprises.