Geopolitics Trumps the Markets
America led a 30-year hiatus from history. It was nice while it lasted, but it’s over.
By Walter Russell Mead
https://www.wsj.com/articles/geopolitics-trumps-the-markets-1540852514?mod=e2twoThat crashing sound you heard in world markets last week wasn’t just a correction. It was the sound of the end of an age.
During the long era of relatively stable international relations that succeeded the Cold War, markets enjoyed an environment uniquely conducive to economic growth. The U.S. faced no peer competitors, and the most important great powers generally (if sometimes selectively) supported Washington’s emphasis on opening markets and reducing barriers to investment and trade. The positive-sum logic of economics trumped zero-sum international politics in the halls of power world-wide.
The results were extraordinary. Between 1990 and 2017, world-wide gross domestic product rose from $23.4 trillion to $80.1 trillion, the value of world trade grew even faster, more than a billion people escaped poverty, and infant-mortality rates decreased by more than 50%. The number of people with telephone service grew roughly 10-fold.
This hiatus from history was, by most measures of human flourishing, a glorious era. Now it has come to an end, or at least a pause, and the world is beginning to see what that means.
During the Obama administration, foreign-policy observers began to speak of “the return of geopolitics”—the idea that the international arena was increasingly defined by competition among strategic rivals. Russia, China and Iran were “revisionist” powers that aimed to upend the post-Cold War era of American dominance. These powers enjoyed growing success, particularly during President Obama’s second term. By the time Mr. Trump took office, there was little doubt a much more challenging geopolitical environment had taken shape.
For the most part, business leaders and investors paid little attention to such chatter; the basic elements of economic globalization appeared firmly in place. Russia, the most obvious challenger to the geopolitical order, was an insignificant and diminishing player economically. And China, notwithstanding its rapid economic growth and its anxiety about American military power, was unlikely to challenge the economic basis of its own success. Geopolitics might have been back, but that wasn’t an issue for markets.
That complacency was misplaced. The return of geopolitics means the basic framework for economic policy has changed. In periods of great-power rivalry, national leaders must often put geopolitical goals ahead of economic ones. Bismarck’s Germany could have saved money buying armaments from Britain, but building a domestic arms industry was worth the cost. If the U.S. is in a serious strategic competition with China, an American president might well be willing to sacrifice some economic growth to banish China from important supply chains.
The belief that the private sector could beat back any efforts by “nationalist” politicians to tamper with international economic institutions was also misplaced. Periods of geopolitical rivalry often see power shift from business to government. And by invoking “national security,” the Trump administration has found a legal basis, with roots in the Cold War and even earlier, to assert sweeping powers over the nation’s commerce. It has upended a generation of U.S. trade policy in a dramatically short period of time.
Companies may be outraged that hastily imposed tariffs introduce irrational and counterproductive costs, but they also fear the consequences of antagonizing an administration that can impose new and larger tariffs at will. With political authorities empowered to supervise national supply chains, hiring practices (no “suspect” foreign nationals in sensitive divisions) and choice of partners in joint ventures, companies have strong incentives to avoid a standoff with their government.
The new era of geopolitics is unlikely to be an era of small government. The Trump administration is reversing some of the regulatory excesses of the Obama era, and the president’s judicial appointees are prepared to rein in the administrative state. But it’s in the realm of national security that Washington’s most formidable powers are found, and Mr. Trump appears determined to make liberal use of them. Whether he will wield them wisely is another question: The evidence to date is mixed.
President Trump cannot be blamed for the return of geopolitics. Russia, China and Iran decided to challenge the American power on which the economic order depended, and Mr. Obama’s response to that challenge was, regrettably, insufficient. A recalibration of the U.S.-China relationship was likely inevitable as the world’s oldest civilization became an economic superpower. Hillary Clinton, who as secretary of state clashed with Mr. Obama over the need for a tougher approach to China, would not be a popular figure in Beijing if she had won the 2016 election.
The world has entered a new, complicated and dangerous era of nationalist competition. That is the realization now reverberating through the world’s financial markets. More such realizations are still to come.
