The world is in a “transformative moment” in power and relationships within and among nations, which is guiding trade patterns, and potentially reducing globalization and broad-based supply chains, said Rodger Baker, vice president of strategic analysis for Stratfor.
“The world system is not stable. There is no center of gravity” among the leading powers of the U.S., European Union and China, he said during a keynote address at Breakbulk Americas.
Baker framed his discussion looking at the balance of global power at specific, recent times. He noted that the cold war was ironically a period of great stability, as the two major powers of the U.S. and Soviet Union competed, but also balanced the globe and held together unstable parts of the world between them.
“With the end of the Soviet Union the world was tipped completely out of balance,” Baker said. “The U.S. was a singular power, it as dominant politically, economically and militarily.”
While viewed optimistically through the leftover cold war lens that the single-largest economic and military power would maintain peace and stability, the idea of a “unipower” world was unrealistic he said. Enter the European Union, which became the single-largest economic entity, and China, which became the driver of single-source manufacturing for exports to the U.S., Europe and the world.
This three-pillar balance has shaped the way international trade has worked and began to shape economics and politics around the world. Then came the global financial crisis and “the system started to fracture,” Baker said.
While the U.S. market fell then recovered, Europe’s economic decline “pulled the rug out from underneath China, because Europe had become the single-most dominant space for Chinese exports by that time,” he said.
Cracks began to form in China’s more traditional East Asian economic system – export- and growth-oriented – as companies started operating at negative profit margins just to keep employment going and growing. As exports fell, China tried to stave off crises by ramping up infrastructure development.
At China’s latest party conference in mid-October, “one of the big issues there is the concept of redistribution of wealth,” Baker said. “It’s taking the money from the rich coastal areas that have grown faster and are … shifting those resources and that attention to the interior,” reaching 900 million people that aren’t currently part of the active Chinese economy.
Baker said Europe is moving towards “dis-integration – not disintegration. Not a complete removal of the European Union.” Rather than the dream of a pan-national entity based on trade and shared values, the EU is experiencing pushback.
That response is realistic, he said. “You can’t expect, for example, Greece to be able to manage its economic problems based on a German economic model.”
As those systems have started to break down, the migrant flows exacerbated the nationalist mindset, but didn’t cause it, he explained. “It was the sense internally in Europe that nations needed to start consolidating and thinking about themselves. If you’re the chancellor of Germany in the end you are answerable to the German people, not the Greek people, not the Italian people, and that’s one of the biggest weaknesses of that European system.”
In the dis-integration Baker predicts, certain blocs will remain – the EU and the euro may still exist, “but the concepts of tighter and tighter integration are going to break apart,” not just in Europe but globally.
While China’s history reflected a country that could isolate itself when it needed, “it can no longer afford to do so,” Baker said.
China has gone from self-sufficiency in natural resources to importing two to five times its own production of natural resources. Its economy has become too tightly linked internationally “and China is being forced to push out and become a more activist player economically, politically and, in the near future, militarily.”
The purpose of the ambitious Belt and Road Initiative is in part to alleviate the cold war concept of containment, Baker said. One is to “find redundant trade routes so that the U.S., the naval power, can’t block you in.”
The goal is to create multiple connections to countries to reduce the ability of countries to be used as pressure points against China. The country’s infrastructure investments into its interior also creates transportation connections, forcing trade flows through the interior and outward to other markets, he said.
Baker said Russia “is heading toward a major demographic crisis. Ethnic Russian populations are decreasing, as Islamic ethnicities are increasing, a trend similar to the U.S. in which minorities will make up most the country. Russians are also not living as long, reducing the amount of available labor, he added.
Showing a Russian map turned upside down, he explained that Russia is trying to create space around its borders to increase security. “It doesn’t feel secure until it’s pushing out all the way to the Carpathians. It doesn’t feel secure until it’s pushed down to the Caucasuses. The Ural Mountains don’t even provide security; that’s why they have to push all the way down to the Tien Shan.
As Russia will continue to be aggressive and assertive in their periphery, it is also increasing its attention on the Far East, and Japan and China as its European opportunities decrease. Asian investment in Russian mineral and energy resources improves the bond, though Russia needs Japan involved. “If it’s only Russia and China, then China owns Russia. But if it’s Russia and China and Japan, then Russia owns the relationship because it can play the balance off those two,” he said.
Baker downplayed the impact of Isis and al Qaeda on the world order due to their inability to hold sustained territory. Where they’re located are critical areas, but he noted that their insurgencies are usually within areas where problems pre-existed.
He does warn that, as issues are easing in Syria and Iraq, that Libya will become a place to watch, particularly for southern Europeans.
More ominously, Baker said “there is no resolution to the North Korean crisis any longer.” The North Koreans won’t give up their program and the U.S. has declared they cannot except the program. “The U.S. policy now is to convince the Chinese that the U.S. is serious about attacking North Korea and get the Chinese to decide it’s more costly to do nothing than it is to overthrow the Korean government,” he said.
In response to a later question on the threat of nuclear war, Baker sees the highest risk is likely going to come from an accident, during some provocative act. “I would say it is very serious, but I have in-laws in Korea and I haven’t told them to leave,” he said.
Do We NAFTA?
While much has been made of the U.S. nationalism trends and wall-building, it is tightly entwined with Mexico and Canada, and economically, as well as geographically, placed smack dab between them.
The North American Free Trade Agreement – which Baker notes preceded the World Trade Organization – has not kept up with how manufacturing has changed. And while he doesn’t see NAFTA being completely thrown away, he sees necessities to change and update the trade pact.
“Certainly, the U.S. demands for local content levels are going to be very hard for the Mexicans and Canadians to fully agree with,” he said. He also noted that automakers may simply ignore a revived NAFTA because of local content rules, as taking a tariff on the automobile “will be cheaper than redoing everything else.”
Any movement on NAFTA is likely to lag. “The last set of talks was putting everything on the table in such an extreme way that nobody wants to come back and talk today,” he said. While talks should restart next year, two speed bumps are Mexican and U.S. midterm elections.
“It will be something that’s going to come out much different than what we’re used to seeing, but I don’t think nearly at the extremes that we’ve been seeing from the Trump administration,” he said.
In response to a question, Baker said the U.S. movement towards isolationism is a natural, cyclical trend, and wasn’t caused by the president. “World War I, World War II, Vietnam, you saw these same cycles that came because of changes in the perception of military, perceptions socially, economically, that pull it back in,” he said.
Rather than “isolationism,” Baker prefers “retrenchment.” He notes confusion within the U.S. on its moral and cultural vision, and it has happened multiple times in history. “The idea we are either the city on the hill that everyone sees or we go out and actively enforce how we want everyone to be, and we’re moving back towards the city on the hill mentality.”
Packing Up Trade Pacts
Beyond North America, China and the EU are exerting influence on Latin America and the Caribbean, China through being a leading trade partner, and Europe as the biggest provider of foreign direct investment.
In the middle is Mercosur and full members Argentina, Brazil, Paraguay and Uruguay. On one hand, the trade bloc offers an alternative for Mexico – which can do bilateral deals within Mercosur countries without Mercosur’s permission as a whole. But Mercosur is also looking outward at South Korea and China, and the EU as its main driver, along with other European groups.
As NAFTA, the EU and WTO ushered in a burgeoning volume of trade agreements starting in the early 1990s, Baker says the trend is reversing.
“It may be we still have a lot of trade agreements, but they’re going to go back to a lot of the bilateral and mini-lateral agreements,” he said.
The nationalist movements of nations mean removal of a lot of global elements that became enmeshed in the agreements, focused on changing political concerns. Instead he sees more inter-regional agreements replacing the extreme supply chains.