Political Economics Prof

Tag: European Union

  • Wealth and Power in Pre-World War I Europe

    Wealth and Power in Pre-World War I Europe

    Krupp Steel Works, Gun Shop #1, 1917
    Library of Congress

    New Nations in Europe and Global Political Change (1860s – 1914) 

     

    New nation-states were formed in Europe at the beginning of this period – Italy in 1867, Germany in 1870, Austria-Hungary in 1867, and new nation-states carved out of Ottoman empire in the Balkans in the 1870s. 

     

    Other countries pursued new policies. France and England expanded their colony empires and fought a number of wars against native resistance (this was the first time machine guns were used). Russia attempted to expand its influence and control into Central Asia and the Far East (Siberia and Manchuria). Under pressure from the outside, Japan ended its isolation and started rapid industrialization in the 1860s and 1870s. By the 1890s, Japan began imperialist expansion by defeating China in a war and establishing control of Korea, Taiwan and part of Manchuria. The Chinese dynastic system came to an end in 1911, starting a period of internal chaos and violence. The United States also began to pursue an imperialist policy, defeating Spain in a short war to expand into the Caribbean and the Philippines. Combined with building the Panama Canal and control of Hawaii, America was becoming a Pacific power.

     

    These geopolitical changes would have serious consequences in the period leading up to World War I and later. They led to increased national rivalry in Europe and national confrontations in Africa, Central Asia and East Asia. Russia, China and the United States would all come up against Japanese imperial expansion in the 20th century.

     

    Nation-states in Europe were bigger, with access to more resources, including new, deadlier weapons (for one example, see the post The Maxim Machine Gun and Smokeless Powder).

     

    1870 – 1914:  New Political and Economic Dynamics in Europe

     

    Most of history has been the story of the struggle for power. Conflicts, wars, conquests, and civil wars among the political and warrior elites. Peasants who worked the fields for the landowning elites and paid taxes to the political elite, did not count for very much in this story.

     

    This narrative began to change with the coming of the American Revolution, the French Revolution, and the Industrial Revolution. Economic competition was added to political competition. New sources of wealth and power were created. The spread of literacy, the expansion of the franchise (right to vote), and the formation of political parties, representing the new middle class and industrial workers in the late 1800s and early 1900s, began to challenge the political dominance of king, the governments they appointed, and the landowning aristocracy that supported the status quo. This happened in Russia, Germany, and Austria-Hungary. In England, royalty and the nobility lost most of its political power. The House of Lords, a bastion of the old order, was stripped of its veto power, and new tax laws were undermining the economic base of the landowning aristocracy. Both political parties were headed by politicians with middle-class backgrounds. In France, unresolved ideological tensions were heightened during this period, culminating in the Dreyfus Affair of 1894-1906 that bitterly divided society between conservative and liberal groups. As a result, the Catholic Church, an important part of conservative power, was stripped of much of its political power and influence by new laws passed by a liberal government in the early 1900s.

     

    It was a period of tremendous economic development, economic growth, and social change. Some economic historians call this period the Second Industrial Revolution.  Much of the technology of the modern world was created during this period – electricity, steel, skyscrapers, autos, oil refining, chemicals, telephones, radio, movies, record players, and airplanes. There was a large expansion of railroads and steamships. A global telegraph network was built (called the “Victorian Internet” by Tom Savage’s delightful book of the same name). Everywhere there was the rapid expansion of mass production of industrial products, food and clothing, new consumer products, in factories, industrial centers and modern corporations. To finance this was a parallel expansion of banking and financial institutions. An increase in the international trade in food products threatened established national economic groups with political power, especially European landowners and peasants (except in Austria-Hungary). New industrial centers arose and the population of cities exploded.

     

    As the Industrial and Transportation Revolutions accelerated after 1870, new socioeconomic groups were formed and expanded, collectively creating new economic structures and great wealth. A small group of industrialists and financiers who owned or financed the new corporations became immensely wealthy. The spread of large and complex economic organizations created a demand for a new type of manager; a new industrial and organizational management class was formed. The new industrial and information technology also created a new social group based on scientific, engineering, intellectual and professional knowledge. Professional societies were formed, helping to raise the status of the new technological elite. 

     

    The new economic class of industrialists and capitalists were legitimatized by the political philosophies of free-market capitalism and liberal democracy. They lived in an intellectual post-Enlightenment and post-French Revolution atmosphere. These groups often came from poor backgrounds or religious and ethnic minorities.  

     

    The new economic order did not go unchallenged. It threatened the wealth, power and status of the traditional elite groups, especially the landed aristocracy and gentry. This elite from pre-industrial society often led the opposition to liberal democracy and bitterly opposed the disruptive changes of the Industrial Revolution. They upheld and defended the traditional values of the pre-Industrial Revolution world. They destroyed or tried to limit attempts by liberal or social democratic political parties to share power.

     

    This was a period of great technological and organizational change. These changes created rapid urban growth and disrupted the traditional agrarian social order. It caused great social stress and anxiety, especially among groups who felt they were socially or racially superior. (see Philipp Blom, The Vertigo Years:  Europe, 1900-1914, for an insightful analysis)

      

    Trade among the nations of Europe greatly increased. One consequence of the spread of international trade was it directly threatened the landed aristocracy who lived off rents. Their incomes declined as the price of agricultural output fell due to regional and international trade in agriculture products (watch the later episodes of Downton Abbey).  Lower tariffs, less protection, lower prices. The aristocracy relied more on service in government, especially in the foreign affairs offices and as ambassadors, and in the military, to retain power, income and status. Examples include Junkers (landed Prussian aristocracy and gentry) in Germany and the landed aristocrats in Russia and Austria-Hungary.

     

    The landed aristocracy controlled the top positions in government and military. Over 80% of top German military officers at the beginning of World War I were of Junker (Prussian titled nobility) background. They allied with other conservative, reactionary, and anti-modern groups – kings, churches, dispossessed artisans, peasants, and political and intellectual conservatives and reactionaries – who formed conservative political parties and influenced public opinion. Ideology and mythology romanticizing pre-industrial societies were used to denounce the effects of liberalism and capitalism. Related arguments demonized groups that benefited from these trends, especially Jews. Political anti-Semitism was effective in Austria-Hungary, especially in Vienna (see the post Austria-Hungary Before WWI). It was a potent weapon during the Dreyfus Affair in France. The tsarist regime in Russia promoted deadly pogroms (race riots against Jews) to divert national anger heightened by the disastrous Russo-Japanese War (1904-1905) and the violent suppression of the 1905 Revolution.

     

    Conservatives everywhere tried to divert opposition by appealing to nationalism, racism and imperialism. Bismarck and successor Prussian leaders successfully co-opted large industrial and banking companies, tying them to reactionary Prussian-dominated Germany, partly with government military contracts.  

     

     

    World War I

     

    World War I shattered the political power of pre-capitalist, reactionary groups in Russia, Austria-Hungary and partly in Germany. It seemed possible that liberal democracy, national self-determination and free market capitalism would triumph in Europe. The war broke up the empires of Russia and Austria-Hungary, creating new states in Central Europe. The Treaty of Versailles reduced the size of Germany and greatly limited the size of its military. But WWI led to chaos and violence in Central Europe, Communism in Russia, fascism in Italy and bitter, and violent opposition to the Weimar Republic in Germany. The Versailles Treaty in Germany was the target of German nationalist rallying cries. 

     

    HISTORICAL ANALOGIES (AND LESSONS?)

     

    We may be returning to the political world of the early 1900s. After World War I, appeals to nationalism and prejudice by anti-democratic demagogues were used against the “failure” of liberal democracy and capitalism. Now, “populist” national parties and their political leaders rally opposition to the new “liberal” economic and social order, angry at the growing wealth and power of new elites. International organizations and global trade are denounced. National “populists” expand power by demonizing ethnic and religious “enemies.” 

    —————————————————————————————————-

    BIBLIOGRAPHY

    GENERAL HISTORY OF THE 19TH CENTURY

     

    Richard J. Evans, The Pursuit of Power:  Europe 1815 – 1914. 2016.

     

    Good, general history of Europe.

     

    Jurgen Osterhammel, The Transformation of the World:  A Global History of the Nineteenth Century. First published in German, 2009. English translation, 2014.


    Large, dense book that discusses the 19th century by topics and themes rather than chronology. Covers an incredible range of topics. Pick and choose.

     

    BEFORE THE STORM

     

    Charles Emmerson, 1913:  In Search of the World Before the Great War. 2014.

     

    Attempts to describe what the world was like just before the war. A world tour of 21 cities. Some interesting material and commentary. Reenforces the idea that almost no one in Europe or elsewhere thought about the conflicts in the Balkans or the prospect of war.

     

    Philipp Blom, The Vertigo Years:  Europe, 1900-1914. 2008.
     

    Despite the book’s structure of picking one theme in each year, surprisingly insightful look at the years before WWI. Attempts at parallels to current (or continuing) society. Emphasizes psychological stress and social disruption caused by economic change, and their political and cultural consequences.  

     

    AUSTRIA-HUNGARY AND VIENNA.

     

    For a more detailed look at Austria-Hungary before WWI, see the related post

    Austria-Hungary Before WWI)

     

    Carl Schorske, Fin-De-Siecle Vienna:  Politics and Culture. 1980.

     

    Brilliant, seminal book on how the liberal, capitalist, upper middle classes lost political and cultural dominance in Vienna. Their newly-found influence and power were symbolized by the Ringstrasse and the buildings on it.  Rise of mass movements to challenge existing political order, including the use of anti-Semitism as a reactionary political weapon. (Observed by a young Adolf Hitler.)  Cultural (and psychoanalytic) attack on rationalist and ordered culture of Vienna. In the background, the gradual disintegration of Austro-Hungarian Empire.  Tie-in with Morton’s book.

     

    Geoffrey Wawro, A Mad Catastrophe:  The Outbreak of World War I and the Collapse of the Habsburg Empire.

     

    Excellent history of the combination of unreality, arrogance and stupidity of the military and political leaders of the Austro-Hungarian Empire that led to World War I.  Mostly a military history of the performance of the Austro-Hungarian army during the first year of the war.  Incredible incompetence leading to defeats against Serbia and Russia, resulting in horrific casualties.

     

    Stefan Zweig, The World of Yesterday.

     

    A literary and moral autobiography.  The tragedy of Europe as seen in the life of a literary intellectual who believed in a European community of intellectuals.  Dreamed of a peaceful, united Europe. Committed suicide in exile.
    ================================================
    For related posts, which could be read in order, see


    Bismarck and the Origins of World War I

    The Beginning of the Twentieth Century:  The Start of World War I


    The Austro-Hungarian Empire Before World War I


    Europe on the Brink of World War I


    The Immediate and Long-Run Historical Consequences of World War I


    The Maxim machine gun, which fired 600 rounds per minute, was one of the new weapons that made the WWI battlefield so deadly.


    The Maxim Machine Gun and Smokeless Powder


    For a list of all posts, with links, see List of Posts by Topic.





     

     

  • “Pax Americana”: The World That America Made

    “Pax Americana”: The World That America Made




    There are two kinds of empires: the kind that rules through ruthless exploitation, and the kind that seeks to induce allies into defending themselves through economic incentives. (George Friedman)


    INTRODUCTION


    America’s power and influence in the world rests on three broad, interrelated bases:


    1) Overwhelming military power that can be projected anywhere in the world,     supplemented by security arrangements with allies and supporters.


    2) A large, innovative, dynamic domestic economy as the basis for global economic and technological leadership. The economy provides the resources and technology to support the military and a global foreign policy.


    3) Claims to moral and ideological leadership and influence, particularly the promotion of liberal democratic societies and supporting political institutions.

    This post will discuss the economic aspects and related security objectives of American foreign policy. It will focus on the structure of the global economy that America created after World War II, America’s trade treaties and policies, and the interaction of America’s foreign economic and political policies. It will analyze the current state of America’s projection of global power and influence through military power, security arrangements, and ideological and moral leadership and influence.


    The United States has been the primary force creating post-WWII economic institutions, global trade rules, and strategic alliances.

    Trade and strategic interests are intertwined.


    The coming decline of American leadership and influence in the world is due to the “critical state” of domestic and foreign trends. They have been building for a long time, at least since the collapse of the Soviet Union in 1991. They are converging to reduce American global power, credibility and influence. The post-World War II international structures that the United States created need reform. If unsuccessful,  internal pressures plus opposition from new groups of geopolitical and ideological rivals may bring the structures to an end.


    American voters decided in the presidential election of 2016 to elect a president who is disdainful of the global and regional institutions and treaties created by the United States after World War II. Mr. Trump signaled his beliefs by supporting the Brexit (or Leave) campaign in the United Kingdom and nationalist parties in Europe that want their countries to leave the European Union. These parties and leaders enjoy the support and encouragement of both President Trump and President Putin.


    President Trump has threatened and insulted the governments and policies of almost every American ally.  He has unilaterally threatened or invoked tariffs on allies’ exports to the U.S. President Trump questions whether America should be committed to NATO. He has questioned or denounced virtually every existing or pending trade treaty. He has mused about possibly leaving the World Trade Organization (WTO), the organization that oversees the rules of global trade. He has undermined America’s moral leadership by supporting authoritarian and anti-democratic political leaders, refusing to invoke American ideals as part of America’s foreign policy, and denouncing climate change and international attempts to combat it. 


    American foreign policy is retreating to protectionism and isolationism, a reduction in foreign commitments. This reflects a change in the psychology of a majority of the American people, who no longer believe that America benefits from being, or has an obligation to be, the world’s global power. 

    Many of President Trump’s threats are not credible or sustainable; they may not be carried out or reversed later. They are based on a simplistic world view that has long disappeared. But President Trump has the power – the economic and military might of the U.S. – to do damage. As a consequence, other countries are reviewing their national interests and adjusting to an international order where American power and credibility are diminished or uncertain.


    AMERICAN FOREIGN POLICY AFTER WORLD WAR II


    Since the end of the Second World War, the United States has led the global promotion of democracy, capitalism, and international economic cooperation. The projection of American force and influence was based on a desire not to repeat the perceived isolationist mistakes made after the First World War. 

    New military and economic alliances were formed within these frameworks to oppose Russian and Chinese Communism. Stated American ideals were often compromised in combating the spread of Communist influence. With the collapse of the Soviet Union and the economic opening of China to foriegn investment, many foreign policy-makers in the American government believed that America could return to the original post-WWII ideals.


    Right after WWII, the United States built a set of supranational institutions, starting with the United Nations. The economic institutions included the World Bank, the International Monetary Fund (IMF), global (GATT, later the World Trade Organization) and bilateral free trade agreements. Later, the United States would support the creation of the European Union and the North America version, NAFTA. The result of these policies were spectacular – extremely low tariff rates, fewer non-barriers to trade, global trade expanding twice as fast as global GDP, global mobility of capital, technology and labor. American allies adopted export-driven growth strategies, made possible by global markets and access to the large U.S. market.


    American military commitments were formalized in NATO, regional and bilateral military alliances (many on China’s periphery), military aid and foreign bases. Vast sums were spent on long-range projection of nuclear and conventional forces. Vital sea lanes were patrolled and controlled by the United States Navy. No foreign power could challenge the growth of international trade or the flow of raw materials to the industrialized and modernizing economies. Most foreign wars were fought on the periphery of the Eurasian continent in regions accessible by sea-based logistics and air power.


    The economic integration of the non-Communist world increased, the complement of the global military and foreign policy commitments of the United States and allies. Economic aid, trade treaties, access to the American market, and mutual security treaties were often intertwined.


    1989-1991 AND THE LACK OF REEVALUATION


    The overriding political objective was the containment and eventual collapse of Soviet Communism. To almost everyone’s surprise, it happened. After the breakup of the Soviet Union in 1991, global trade and economic treaties, the World Trade Organization (WTO), and regional trade groups like the European Union extended their economic objectives into new areas as many countries, including China, India, and former Communist countries in Central Europe, opened up their countries to foreign investment, joined the global economy, and promised to play by the free trade rules of the WTO and the European Union.  

    The global economy was created. It was increasingly dominated by huge global multinational corporations. made possible by the free trade economic framework created by the United States and Europe, and the encouragement of foreign corporate investment in China and other emerging countries. A massive amount of mergers and acquisition occurred, about $3 trillion a year, with little legal (anti-trust and anti-competitive rules) or political interference.

    These changes suggested that the regional and global economic institutions had a new economic roles to play in addition to reducing tariffs and non-tariff barriers to trade – establishing global standards for workers’ rights, pollution reduction, and protecting intellectual property; setting new and expanded rules for global competition among multinational corporations (MNCs); and mediating disputes between nation-states and multinational corporations. MNCs created new or sharper cross-border problems that needed new rules and regulations. Regional and global economic institutions were slow in recognizing the problems or attempting to deal with them, as was the United States. 


    Huge global multinational corporations were created, made possible by the free trade economic framework created by the United States and Europe, and the encouragement of foreign corporate investment in China and other emerging countries. As a result, multinational corporations (MNCs) now control most of the world’s economic resources, including advanced technology, and account for almost all of economic and technological innovation.


    POST-COLD WAR EUROPE AND NEW PROBLEMS 


    In Europe after 1991, American and European strategists saw the extension of post-war institutions to former Soviet satellites in Central Europe as the primary objective. Central European countries had to become democratic and capitalist to join the European Union and receive large infusions of aid and foreign investment. Besides economic growth, most of the new EU countries also joined NATO for protection against potential Russian expansionist policies and actions. As Putin consolidated power, he began to assert traditional Russian national interests in Central Europe. NATO, the European Union, and the United States found themselves once again opposing Russia but in a more complicated and fluid situation than during the Cold War/Iron Curtain period. 


    The long-range political strategy was the further economic and political integration of Western Europe, with the possible ultimate objective of a “United States of Europe.” A single currency and a European central bank were created. Some EU countries agreed to make labor mobility easier. But EU planners lost sight of the fundamental objective of promoting economic growth, now an end in itself and not a strategy of Cold War conflict or political integration.


    Economic growth in Europe was easier when Europe was recovering from the devastation of war and reconstruction was underwritten by American aid. Now, 60 years later since the beginning of European economic integration, recovery was complete in Western Europe and the economic challenges were more complicated. Europe, like Japan, now had to go beyond reconstruction and technological “catch-up.” To compete, Europe and its corporations had to compete on the technological frontiers to generate economic growth and employment.

    The large European “Common Market,” rather than fostering more cross-border competition, led to massive mergers and acquisitions to create European and global corporations. What was lacking were European startups and big company competitive innovation in the new industries that were driving economic growth. What was needed were radical reforms of traditional national and regional rules and behavior to promote economic growth and innovation. It did not happen. 


    Since 1991, Europe has experienced low economic growth, high structural unemployment, rising social welfare costs of an aging population, public debt rising faster than nominal GDP, and a relative lack of innovation. European output has substantially declined as a percent of global output. The dual nature of sovereign states and regional institutions is combining the worse of both – dysfunctional national governments along with a large EU bureaucracy that does not seem interested in promoting economic change. EU rules, the use of the euro and the power of the European Central Bank (ECB) led to rigid national monetary and fiscal policies that made internal adjustments more difficult. The promise of high rates of economic growth as a result of the free movement of products, services, capital, and labor was not fulfilled. 



    CONTINUING IDEOLOGICAL CONFLICT


    The collapse of Communism as an alternative did not mean the disappearance of opposition to liberal democracy, individual rights and private capitalism. Critical authoritarian regimes replaced Communist regimes in Russia and China. Traditional appeals to national interests and objectives replaced the universal ideology of Commmunism. Similar attacks of liberal democracy are occurring in Europe and in the United States. Democratic governments are widely perceived as incapable of dealing with the problems and challenges of a rapidly changing and uncertain world. Out of anger and frustration, voters are rejecting established parties and candidates. They are increasingly turning to candidates and parties that are critical of existing policies and the underlying political liberal democratic institutions and ideals that support them.


    Defending private capitalism in the greatly expanded global economy dominated by huge multinational corporations means defending the global economic order. But it also calls for continuing to reform the global economic rules as technology changes, as new transportation and communications technologies emerge, and as new “negative externalities” threatened the system. Regional and global trade treaties have to address not only barriers to trade such as tariffs and quotas, but also topics such as pollution, access to information, human rights, intellectual property, technology transfer, climate change, immigration and working conditions. If not, nationalist politicians will blame their domestic economic problems on the institutions and rules of the global economy. Continued economic integration and even global economic growth could be at risk.


    Support for democracy and human rights has been part of America’s influence around the world. But the American use of torture, widespread surveillance and wiretapping of American citizens, combined with President Trump’s threats to jail political opponents, support of torture, intimidation of the judiciary and the press, and demonizing ethnic groups, opponents and critics have all undermined American moral leadership. Even more damaging, President Trump has expressed admiration for authoritarian leaders who have challenged democracy at home and American ideals abroad.


    Political support for private capitalism has always been difficult. Private capitalism claim to legitimacy rests on its continuing success in raising people’s standard of living, not on a set of moral arguments. The private capitalist form of industrialization has been incredibly successful over the last 200 years but, at any given time, is open to criticism and attack. Those who do not benefit often seek political solutions, or scapegoats.



    THE UNITED STATES, EUROPE AND RUSSIA


    This is a review of the rapidly changing politics of Europe, and American responses.


    Europe in 2017 is very different than the Europe of 60 years ago, at the beginning of what became the European Union. The Europe of 1957 was still recovering from the devastation of World War II. The Europe of 2017 has a total GDP equal to that of the United States. The Europe of 1957 had living standards far below that of the United States. The Europe of 2017 contains many countries with living standards equal or above those of the United States.


    An increasing number of Europeans see the European Union (EU) and related institutions as the source of their problems. Besides low economic growth and high structural unemployment, Europeans blame the EU for allowing unwanted immigration (and terror); being a huge, unresponsive, undemocratic bureaucracy; the cause of a loss of national sovereignty and national identity; and contributing to, not solving, the social costs of economic change. They see the economic benefits of the European Union accruing mostly to large multinational corporations, their owners, managers, and well-educated employees. The Brexit vote – England leaving the EU – was partly a revolt against England’s political and economic elite.


    Right-wing governments friendly to Russia have been elected in Hungary and other Central European countries. Democracy is under attack in Poland and Turkey. Political parties that are openly hostile to the EU have formed the new government in Italy.


    Far-right parties, some with neo-Nazi roots, have been increasing their share of votes in almost every European country. Even if far-right parties do not win this round of elections, they will have increased support, a larger voice in national legislatures, and will put continuing pressure on center-right parties and national coalitions. New events such as terrorist attacks or a deep recession could increase anti-EU rhetoric, and the appeal of their messages.

    It is difficult to understand how EU leaders thought that bringing recently independent, former Communist countries with dependence on Russia for natural gas and oil would strengthen the European Union.



    Great Britain (1)


    While opposition to the EU has been building in Europe, it has been given a boost by the vote in Great Britain to leave the EU.


    Great Britain’s vote in 2016 to leave the EU encourages and accelerates the breakup of the European Union and possibly related organizations.  Mr. Trump supported the “Leave” position; President Obama supported the “Remain” position.


    The consequences could be serious, including the breakup of the United Kingdom. Scotland voted 62% to 38% to stay in the EU. The Prime Minister of Scotland has called for a referendum on Scottish independence from the United Kingdom. If Scotland leaves the UK, it takes the North Sea oil with it. Northern Ireland also voted to stay in the EU; this might give Catholics a non-ideological argument to reunite with Ireland.


    England’s remaining power and influence will be diminished. The English economy will suffer, with the greatest threat to the global financial sector in London. There will be no countervailing “special relationship” with a protectionist and isolationist U.S. president. 


    With England outside the EU and without an economic agreement with the EU, England’s preeminent position as the financial capital of Europe is at risk. 



    Germany


    During the presidential campaign, Mr. Trump called Hillary Clinton “America’s Angela Merkel” and Germany’s humane refugee policy “insane.” He singled out German automobile companies as a future target for increased tariffs. At the first meeting of President Trump and Chancellor Merkel, President Trump pointedly refused to shake her hand. President Trump has unnecessarily antagonized America’s most important ally on the European continent.


    Germany could be returning to Bismarck’s nightmare – being a large, isolated power in the center of Europe surrounded by enemies and with weak allies. The EU and NATO were established partly to guarantee that this would not happen.

    Germany is the largest and strongest economy in Europe. It exports about half of its GDP, primarily to EU countries and the United States. Germany has economic incentives to keep the EU together.  


    Given current political trends in Central European countries and subject to the results of the German election, it is unlikely that Germany will form a separate security alliance with Poland and the Baltic states in the near future. Germany and Poland have strong economic ties but fundamental and increasing bitter political differences that are weakening the European Union. Without the support and encouragement from the United States and Germany, Central European governments might be forced to be more accommodating to Russian demands.


    Russia and Mr. Trump’s Vocal Support for Vladimir Putin


    Combined with questioning America’s commitment to NATO and the EU, Mr. Trump’s praise of Mr. Putin encourages Mr. Putin to increase pressure on Central European and other countries on Russia’s periphery. Ukraine is a potential flashpoint. As Mr. Trump’s naïve admiration of Mr. Putin seems to encourage and support President Putin, Mr. Putin appeals to Russian nationalism and the illusion that Russia is a great power. As part of this these, Mr. Putin emphasizes foreign conspiracies, nationalism and xenophobia as political themes to bolster domestic political support. The historic Russian-German rivalry over the “borderlands” of Central Europe is again a possibility, with the United States currently playing an uncertain and often confusing role.


    As President Trump talks about American isolationism and “Fortress America,” Russian President Putin uses the old rhetoric of “spheres of influence.”


    NATO


    There has been no strategic reappraisal in the mission of NATO since the collapse of the Soviet Union in 1991. Believing Russia did not pose a military or political threat, European countries reduced military spending. Military preparedness, especially in Germany, deteriorated.  


    NATO never became an integrated regional or global military force. There was little European support for American wars in Afghanistan and Iraq. European forces (and their governments) were unwilling or incapable of even intervening in the conflicts that erupted from the breakup of Yugoslavia.


    A basic problem with NATO, as with all European institutions, is that sovereign nation-states have veto power over collective decisions. But unlike the other pan-European institutions, the United States dominated NATO, providing some cohesion to NATO’s strategy.


    The rise of nationalism, greater social welfare costs, and the weak fiscal condition of some European governments could make financing collective security less likely.


    European countries are much wealthier in 2017 than right after World War II but continue to rely on American nuclear and logistical support rather than building a European core in NATO. European defense spending as a percent of total GDP has been falling since 1991. This may be changing. Poland, the Baltic States and Germany have increased defense spending in response to increased Russian pressure.  


    Candidate Trump criticized the cost and questioned the usefulness of NATO.  President Trump may become more supportive of NATO if he is briefed on the new military reality. Russia is modernizing its conventional and nuclear forces. A particular threat to Europe is a new generation of intermediate-range cruise missiles with nuclear warheads. It remains to be seen how Europe and the United States respond to renewed Russian political pressure and military threats. Specifically, what role NATO will play in the future.


    Anticipating American force reduction or withdrawal from NATO, Germany and France have set up a small joint-planning operation outside of NATO, with plans to expand it in the future. Central European militaries have held joint discussions and military games outside of NATO. The new president of France has called for a European military force, apparently without American leadership or participation.


    Total European military spending is quite substantial, over $200 billion a year. Europe could be moving towards an alternative – no American oversight of NATO, a nationalist government in Germany controlling the strongest military force west of Russia, facing an expansionist Russia. This is not a scenario any sane American or European would like to see occur. Again.


    Strategic questions remain:


    ·      Will the U.S. continue to provide a nuclear umbrella over Europe if NATO collapses? 

    ·      What will happen to Ukraine and Central European countries?

    ·      What types of new defense alliances will be created in Europe, without the United States? 

    ·      What type of bilateral military arrangements will the United States have with the 28 countries in NATO? What bilateral commitments is the United States willing to make to Central European governments, especially Ukraine?

    ·      How will the United States respond to a rapidly modernizing Russian conventional and nuclear military force? “Fortress America” or greater involvement in NATO? Or both?


    EUROPEAN POLITICS


    The anti-EU and anti-immigrant movements represent the latest phase in the decline and collapse of the traditional post-war parties in Europe. Recent elections and polls in France show a rightward drift of the traditional center-right and conservative parties. More dramatic is the reduced support, almost collapse, of the center-left and socialist parties.


    Recent votes may represent a continuing, fundamental change in the structure of the underlying economies and their workforce. Political parties and movements seem to reflect less and less the traditional class interests of industrialized societies. The industrial working class, the basis of socialist parties, is a declining percent of the workforce. As the middle class loses income and security because of automation, artificial intelligence software and machines, and “deskilling”, new political parties and leaders may use new political rhetoric to blame multinational corporations and the technological elite. Hints of the new rhetoric can be seen in President Trump’s denouncing of both foreign and domestic multinationals for America’s economic problems.  

    Single-issue parties such as “green parties”; regional parties in Scotland, Wales, Catalonia and northern Italy; anti-EU parties; and anti-immigration parties are on the rise and threatening the established parties. It is hard to put these parties on a political spectrum. But collectively they seem to reflect increasing frustration and anger with the staus quo, partly caused by the inability to adjust to globalization. The immediate target is the European Union, its policies, and related pan-European institutions.


    The tension between national politics and economic growth can be seen in Poland. The Polish government is attempting to weaken internal checks and balances to its power, has challenged many of the policies of the EU, and has deteriorating and increasingly bitter relations with Germany. But German corporations are the largest foreign investors in Poland.

      

    EUROPE


    The extension of the euro beyond the economic core of EU has weakened the EU. The adoption of the euro and the European Central Bank eliminated many of the macroeconomic adjustment tools of national governments – exchange rate, fiscal policy, monetary policy, relative interest rates. Whether European economies could have grown any faster without these new institutions is unlikely. But pan-European institutions are conveniently blamed for low economic growth and periodic crises.


    Even if the post-war institutions survive, there is a question of how valuable European countries will be as American allies. Many of the countries are facing a stagnant workforce, stable or declining populations, rising social costs of aging populations, and probably unsustainable fiscal policies. Budget deficits creating rapidly rising public debt have papered over the necessity of making hard economic and political choices. No government would voluntarily go through what Greece has been forced to do over the last eight years.

    With low economic growth, competition for funds for social welfare costs and national defense approaches a zero-sum game. It is difficult to imagine electorates voting to support tax increases to pay for large increases in defense spending. Domestic problems plus increasing anti-EU sentiment implies less support for European institutions and cross-border defense commitments.


    ASIA:  The United States, China and Japan


    The United States and Japan


    Japan is a politically stagnant, rigid, rentier society with a declining population and the oldest population of any country. Since the collapse of asset values in the early 1990s, Japan has had very low economic growth, a stagnant and now declining workforce, no reform to a rigid political and social structure, and massive government deficits to support the status quo in place of economic and political reform. Japan has the highest public debt/GDP ratio of any industrialized country. The Japanese people vote for a conservative program of preserving their high standard of living and stable social structure for as long as possible. 


    Japanese multinationals have exported large amounts of capital and technology, especially to China. China has replaced the United States as Japan’s largest trading partner. Japanese multinationals have a huge investment in China.


    Japan has the resources, but apparently not the collective will, to project economic and military power in East Asia. This may change if Japan feels threatened by China or North Korea and does not believe it can rely on American military protection. Early indications of possible changes has been the government quietly ignoring the constitutional limit of 1% of GDP for military spending (imposed by the American occupation after WWII) and joint military and naval exercises with other Asian countries.


    The United States and China


    We are seeing the end of forty years of détente, partly aimed at Russia. Mr. Trump’s call to the president of Taiwan, and subsequent comments, early undermined the basis for American-Chinese détente. For forty years, American presidents have supported a “One China” policy. Chinese and American leaders have tacitly agreed not to discuss Taiwan. Mr. Trump’s phone call to the president of Taiwan, the leader of the Taiwanese independence party, reversed this agreement.


    This is the third rail issue in China. The phone call angered China. It came after the pro-Russian sentiments of President Trump and Trump’s threat of a trade war with China. Candidate and then President Trump has gone out of his way to antagonize China.


    Both countries believed in the past that Russia was the primary geopolitical threat, the basis for detente. The current American government believes China is the more serious threat. Combined with Mr. Trump blaming American job loss on Chinese exports and economic retaliation like high tariffs, and his praise of Russia’s president, China will accelerate its efforts to eliminate American influence in Asia and elsewhere. China may also conclude it is in their long-run interests to form stronger ties with Russia, although history and conflicting national strategic interests may work against it happening.


    Under Presidents Bush and Obama, the Trans-Pacific Partnership (TPP) was America’s main effort to counter rising Chinese influence in Asia. President Trump has walked away from the completed treaty. The other signatories to the treaty are proceeding without the United States. Countries in Asia and on the Eurasian continent, including American allies such as Japan and Australia, are signing up with the alternative, a multinational, Chinese-dominated investment bank. The Chinese government is also financing its massive “Belt and Road” initiatives, which have potentially serious geopolitical and military consequences for the United States.


    Unlike the provisions in TPP, trading with China and borrowing from China does not entail commitments to allow free trade unions, employee protection, environmental protection, observing intellectual property rights, or free access to information and the Internet. The United States will not be setting the future trade rules in Asia.


    If the Trump administration imposes greater trade restrictions and higher tariffs on Chinese exports, how could China retaliate?


    ·      Increased tariffs and trade restrictions on American exports to China

    ·      Devalue currency to offset higher cost of exports (already being done)

    ·      Pressure companies like Boeing to manufacture in China

    ·      Restrictions on American multinational corporations in China

    ·      Stop buying or start selling U.S. government debt, which will increase U.S. government interest expense and budget deficits

    ·      Step up political campaigns to oust American influence in East Asia and throughout the world


    China no longer needs increased exports to the United States to drive economic growth. Total Chinese exports (and imports) are a declining percent of the Chinese economy as the economy continues to grow through domestic consumption foreign investment, and government investment. 


    Most of the growth in Chinese exports over the last decade has come from exports to Asian countries. For most Asian countries, including Japan, China is now their largest trading partner and overseas market. Asian countries are more inclined to accommodate Chinese political interests.


    “Silk Road” projects and investments in Central Asia and other parts of Eurasia could lead to Chinese economic dominance over much of Eurasia. If China follows through with its ambitious plans to build high-speed railroads, roads, pipelines, and port networks across Eurasia, either through or around Russia, this will weaken the American potential threat to cut off imports to China through international shipping lanes and chokepoints like the Persian Gulf and the Strait of Malacca.


    The United States seems to be ignoring a strategic response to rising Chinese influence in Asia – closer ties with India. This would be part of a global strategy that recognizes the geopolitical reality of the increased importance of potential regional hegemons. The United States should reexamine its relationship with such countries as India, Turkey, Poland, and Iran. This would be part of adapting to the “post-American world.” (The title of a book by Fareed Zakaria)


    GEOPOLITICS AND THE GLOBAL ECONOMY


    The return of geopolitics – the primacy of national interests – is not surprising after colonial independence plus the breakup of the Soviet empire and Yugoslavia created over 100 new or newly independent nation-states. Historical greivances and ethnic antagonisms resurfaced. What is different is the huge growth in the global economy, increasingly dominated by multinational corporations.

    Surprisingly, most of the economic growth in the last 30 years has occurred outside of the established industrialized countries. Europe and Japan have exhibited low rates of economic growth. As workforce growth rates slow down (Europe) or stop (Japan), economic growth fueled by high levels of capital investment and a better-educated workforce should lead to high rates of labor productivity growth, about equal increases in real wages, and lower unemployment. But real wage growth is kept down by substituting labor-saving capital for labor (automation) and moving labor-intensive jobs to lower-wage countries. Instead, low rates of productivity growth combined with low rates of growth in the labor force have led to low rates of national economic growth. Two partial solutions to this problem – labor mobility in Europe and increased H1-B visa immigration in the United States – are under severe political attack. As a sign of the divergence of corporate and national political objective, large multinational corporations support both programs.

    The United States experiences better productivity growh and higher rates of economic growth. Some proposed reasons are a growing workforce, more efficient use of capital, more technological innovation, and more support and less opposition (until recently) to disruptive technological development. But real wages have been stagnant for much of the labor force. A major reason is that large American corporations have become multinationals, transferring much of their increased capital and technology to other countries as part of a corporate strategy to reduce costs and to obtain most of their growth in sales and profits overseas.

    So low rates of domestic (home country) economic growth do not limit the growth of multinational corporations, as they continue to expand geographically and grow faster than the economies and markets in developed and developing countries. Investors and managers of these corporations, along with supporting technological, financial and organizational experts, are experiencing rising real incomes. The remaining home market workforce is experiencing stagnant real incomes. The widening income inequality and insecurity fuel domestic political anger and reduces support and tax resources for domestic and multilateral economic adjustment programs. This also makes it more difficult to pay the social costs of an aging population and technological change without large budget deficits. Domestic support in the United States for traditional foreign policies and institutions is declining.


    Returning economic oversight power to nation-states and weakening supranational institutions will make it more difficult to deal with global problems such as global warming, pollution, drug trafficking, cyberwarfare, and terrorism. There were be less cross-border control over the behavior of multinational corporations. The bargaining power of multinational corporations will be strengthened when negotiating with individual nation-states. The conflicts between concentrated economic power in multinational corporations and democratic governments could become worse.


    CONCLUSION


    With nationalist feelings running high in Europe and America rejecting or criticizing the global economic institutions and security structures it created, America is on the verge of a loss of power and influence in the world.


    America’s allies in Europe and Japan have stagnant or declining populations, low rates of economic growth and development (innovation), high structural unemployment and deteriorating fiscal conditions. These economic problems, fueling political conflicts and social stress, are lessening the value of these countries as allies. It is unlikely they will substantially increase defense expenditures for collective security unless they feel threatened and can no longer count on American protection and support.


    With the American president criticizing allies and questioning support for supranational institutions created by the United States after World War II, allies are looking to their national interests without relying on the United States. There will be political realignments in Asia and Europe. South Korea is pursuing a policy towards North Korea at odds with America’s policies. Asian countries are increasing military and economic contacts among themselves.  China will become more aggressive in pursuing national interests in Asia and Eurasia. Russia may step up pressure on Central European countries.


    According to polls, a majority of Americans no longer supports free trade and the cost of America’s global commitments. It is uncertain, or even desirable, that countries like Germany or Japan want to or are able to fill the widening void.


    Threatening to increase tariffs on imports from China, Japan, Mexico, Canada, and Germany reverses 70 years of American foreign economic policy. Opposing trade treaties with Pacific Rim countries (TPP) means that China will now set regional trade policy in East Asia. Opposing a trade agreement with the European Union (TTIP) – not creating the world’s largest free trade zone – will weaken the strongest argument for the continued existence of the European Union.


    Even if the European Union ceases to have influence as a political institution, maybe the original “customs union” aspects of the EU would survive (no tariffs, quotas or other barriers to trade). This seems to be the basis of the Brexit negotiations. Other countries may consider a similar relationship with the European Union.


    Countries in Central Europe might not be able to look to the United States and NATO for security. For some time in the future, these countries will be dependent on Russia for natural gas. Unless Germany fills the political void (unlikely), security for these countries will be negotiated with Moscow.


    Some countries saw the “New World Order” as a vision of American global dominance, the triumph of one nationalism and its ideals. Movement towards a “United States of Europe” was stymied by national political and institutional rigidity and the nationalism of newly freed states. As time went by, the social costs of globalization and rapid economic change became political issues. Multinational corporations and supranational organizations like the EU and NAFTA were blamed for domestic problems. Rising nationalist political parties and their leaders call for increased national power and control.


    The democratic revolution and battle for individual rights begun over 200 years ago will continue but with less America’s moral, verbal and financial support. America’s “soft power,” which includes support for liberal democracy and human rights, will diminish every time President Trump praises Vladimir Putin or some other authoritarian politician.


    Less support for supranational organizations and rules and a return to nationalism will make it harder to deal with regional, continental and global problems until a new set of institutions are created.


    Multinational corporations have reached the inflection point where they will be truly global. They will be able to create dynamic comparative advantage anywhere because of the fluid international division of labor, based on the free movement of capital, information, and technology.  Corporate policies to increase sales and profits will come into increasing conflict with nation-states, their national economic policies, and their political agendas. How these conflicts play out will determine the next “New World Order.”


    America’s allies – Western European democracies and Japan – are increasing opposition to immigration. They resist political and social change that threatens a desire to preserve their existing societies and high standards of living.


    So far, the supranational institutions and treaties that were the foundations of the post-war world, the Pax Americana, could not deal with a new set of challenges or the resulting the anti-global nationalism of nation-states. The collapse of Soviet Communism in 1991 took away the main argument for support. American management of the global order has not been flexible enough or imaginative enough to create a compelling substitute. The consequence, a return to nationalism and nation-state rivalry, is occurring. Nations and political leaders will talk more about the country’s national interests and appeal to the ethnic and historical basis of the country’s special version of nationalism. This will probably continue until a series of crises, such as global warming or the loss of any control over their national economy, forces national political leaders to create new supranational organizations or new forms of cooperation.

    The United States has confronted a number of foreign threats to American security since the end of the Cold War – al-Qaeda, ISIS, Iran, Putin’s Russia, Xi’s China, and supposedly Hussein’s Iraq. Yet the most serious threat to America’s national security are current American policies, supported by a substantial percent of the American people. Alienating allies and supporters and attacking rather than reforming global economic institutions undermine the global order America created after World War II. Most Americans do not recognize that a global economy based on free trade and the free movement of economic resources is the new basis of America’s economic prosperity. Attacking the institutional structure of liberal democracy at home and refusing to promote American ideals abroad weakens America’s claims to moral and ideological leadership. In the end, only the foreign policies of the American government and the changing political beliefs of the American people can bring the Pax Americana to an end. 


    ==========================================================


    (1) For my immediate reaction to Great Britain leaving the EU, see“Breaking Away:  Britain and the European Union,”June 27, 2016. 


    =====================================================================


    See the related post:  “The Beginning of the End of “Pax Americana”:  America“


    If you like history and speculative historical analogies, you might like the following two essays:

    The Roman Republic and America

    The Roman Republic Commits Suicide:  A Cautionary Tale for America

    For a list of all posts and economic tutorials in Pages, see Guide to Posts and Pages. The economic tutorials are equivalent to a course in economics.







  • “Pax Americana”: America as a Global Power

    “Pax Americana”: America as a Global Power

    President Trump

    Might
    Washington, like Rome, fall victim to imperial overstretch?

    Could
    military force abroad eventually have to be withdrawn because of bankruptcy at
    home?

    Might
    the whole idea of America eventually be challenged and destroyed by some
    charismatic new faith: some fundamentalist variant on Christianity?

    Or
    will nature disrupt America’s new world order?


    Robert Harris, “Does Rome’s fate await the
    US?,” The Mail on Sunday, October 12, 2003 (1)





    INTRODUCTION:  FOREIGN POLICY AND DOMESTIC POLITICS

    This post will discuss American foreign policy, with an emphasis on economic aspects. It will focus on the structure of America’s trade treaties and policies, and the interaction of America’s foreign economic policies and domestic politics. The companion post, “Pax Americana”: The World That America Made, the will discuss America’s projection of global power and influence through military power, security arrangements, global economic institutions, and ideological influence.


    During the Cold War (1940s – 1991) and until recently, Americans tended to separate foreign policy and domestic policy. This is no longer true.


    For Americans, there was prosperity at home and security abroad. There was a foreign policy consensus around anti-Communism, that America should take the lead in containing the Soviet Union and China. This consensus made possible large military and national security expenditures. Fortunately, this was a prosperous time for America. There was economic growth, fueled by new technology and pent-up demand following World War II. America was by far the world’s largest economy and American companies did not have to worry about imports from other countries. There were some concerns – Vietnam in the 1960s, supply and price of imported oil in the 1970s, and Japanese competition in the 1980s – but they were peripheral to the core objective of defending western Europe and matching Soviet military forces. 


    Americans no long see foreign policy and domestic policy as separate. Al-Qaeda’s attack on the World Trade Center came as a terrible shock. America’s subsequent attempt to contain Islamic fundamentalism has been inconclusive at best. China is now the main concern. Unlike Russia or Japan earlier, China is seen as a foreign rival and a threat to the domestic economy. America’s networks of military and economic alliances seem to be unraveling. The value of the most important military alliance, NATO, is being questioned. Multilateral agreements are attacked as constraints on national actions and concerns. 


    America is no longer isolated from the global economy. Imports and exports as a percent of GDP are rising, although still lower than most industrialized economies. Industrial supply chains are global. The largest American corporations have become multinational, making investment decisions increasingly independent of America’s national economic interests and policies. 


    President Trump believes in negotiating bilateral (country to country) economic agreements and ignores multilateral organizations. Multinational companies generally prefer global rules. They are opposed to President Trump’s nationalistic economic policies of increased tariffs and other barriers to trade.


    TRADE TREATIES AND AMERICAN FOREIGN POLICY


    What we might be seeing in
    the United States and globally is the end of the post-WWII era, the “American
    Century.” Why have a majority of Americans stopped supporting the global
    institutions that the United States created after World War II? Will America
    react creatively to guide the world to a new set of rules and regulations? Or
    will the United States revert to isolationism and protectionism, as it did
    after World War I, the last time America tried to impose a “New World Order”? 


    America, through many
    rounds of multilateral and bilateral trade negotiations since World War II, has
    set the rules and regulations for the current global economy. These trade
    treaties had three aspects:


    ·     
    Reduce barriers
    to trade such as tariffs and quotas.

    ·     
    Economic and
    political integration of the non-Communist world.

    ·     
    Access to the huge American market in exchange for military alliances and bilateral security
    agreements, including American bases abroad.


    With the collapse of the
    Soviet Union in 1991, it appeared that the economic and the national security aspects
    were separated. The global economy continued to expand. The combination
    of relatively free trade and new communications and transportation technology made it possible for
    large national corporations to evolve from exporters into multinational
    corporations. Technology, capital, management, finance and labor became mobile,
    creating complex financial structures and supply networks.


    AMERICA AND THE GLOBAL ECONOMY


    But there was growing opposition in America to the global economy. Presidential candidate
    Donald Trump tapped into and focused widespread discontent with free trade and
    the global economy.


    89% of Americans
    think that the loss of US jobs to China is a somewhat or very serious issue,
    according to Pew Research statistics…Only 46% of Americans think NAFTA was good
    for the economy.

    Business Insider, November 13, 2016.


    As in Europe, nationalist,
    anti-immigration politicians have turned long-standing economic problems and
    rising discontent into a political agenda. Rather than dealing with them
    domestically, these politicians blame outside groups and institutions –
    international organizations, immigrants, “unfair” foreign competition.
    Strangely, they don’t blame the organizations that actually moved jobs and
    investment overseas – multinational corporations. Top managers and owners of
    multinationals with large overseas investments are well represented in the
    current administration – Rex Tillerson, Wilbur Ross and Donald Trump.


    What is the source of this
    discontent? One source is the change in the global economy. From the 1940s to
    roughly the 1980s, American corporations owned the American economy and didn’t
    worry about foreign competition. The rest of the world was devastated by World
    War II. There was new technology to develop, pent-up demand, and wartime
    savings. The result was rising real wages and employment security.


    By the 1980s, that began
    to change. The success of Japanese exports of autos and consumer electronics to
    the U.S. created a U.S. trade deficit with Japan, which became a political
    issue. American corporations found themselves competing with foreign companies
    at home and abroad. Capital (automation) continued to replace production and
    assembly labor even as industries such as autos and steel recovered. Real wages
    and real incomes stagnated for workers in the older industries. Job security
    and pensions disappeared.


    REALITY CHECK: 
    THE GLOBAL ECONOMY


    President Trump has a
    simple-minded view of global trade and the structure of the global economy that
    is at least two generations out of date. As a consequence, there is a disconnect
    between economic reality and political rhetoric.


    In outline:


    ·     
    Countries don’t
    trade, corporations do. About 60% of “Chinese” exports are produced by foreign multinational corporations. 

    ·     
    The mental
    picture of a country’s companies producing at home and then exporting is
    obsolete.

    • o  
      There are complicated
      global supply networks and an every-changing dynamic international division of labor.
    • ·     
      Where goods are
      produced is less important than where value is added.
    • o  
      Nike does not
      produce any shoes in the U.S. but most of the value-added occurs here. Same for
      Apple and many consumer electronics companies.
    • ·     
      There are
      complicated relationships between American and foreign companies.
    • ·     
      Over 25% of
      American manufacturing is owned by foreign corporations.
    • o    Foreign car
      companies account for most of American production.
    • ·     
      About 20% of
      America’s merchandise trade is intra-company.
    • ·      About half the
      sales and profits of America’s 500 largest corporations are outside the United
      States. Overseas operations account for most of their growth in investment, sales, and profits.
    • ·     
      A large part of
      American imports is of products and services created and marketed in the United States and
      produced by American companies abroad.
    • ·     
      The fastest
      growing part of American exports is high value-added services. This creates high-paying jobs. The U.S. runs a large trade surplus in services.


    ·     
    As discussed
    later, consumers in the United States, not “Mexico” or “China,” pay increased
    tariffs (taxes) on imports.


    The economic reality is that
    multinational corporations, made possible by the global economic order that
    America created, are crucial to American economic growth. A return to
    nationalism will increase conflict between domestic politics and the economic
    growth needed to address domestic problems.


    As discussed below,
    attempting to reduce America’s trade deficits through increased tariffs and
    other trade restrictions will not work.


    TARIFFS AND TRADE


    What would happen if U.S.
    unilaterally renounced trade agreements and imposed tariffs? A tariff is a tax.
    The income from tariffs goes to the U.S. government. It is a tax mostly
    paid by American consumers. It would raise prices on imports, including imports
    of inputs like parts and subassemblies. It would also raise prices on some
    American-produced products that compete with imports. 


    Other countries would
    retaliate. (2) The net result for America would be higher costs and prices
    (inflation), and lower standards of living. There would be few if any net new
    jobs in assembly or manufacturing. 
    Multinational corporations would direct new investment to countries that
    were not threatened, that didn’t retaliate or to countries that depreciated
    their currencies against the dollar since they would have relatively lower costs. Chinese and American
    companies in China are already moving labor-intensive production and assembly to countries like Vietnam,
    Bangladesh and Malaysia. Even hi-tech companies like Chinese solar panel
    producers have started doing this. (3)


    American exports would
    suffer as other countries retaliate. Companies in the U.S. would accelerate
    research and investment in robotics and AI in the United States, substituting
    fully automated assembly lines for manufacturing workers.


    America’s economic growth
    depends on innovating new products and services, keeping the high value-added
    part in the U.S., outsourcing the low value-added part to the global supply
    chain, and selling in the global market. Much of U.S. imports are raw materials
    such as crude oil and other inputs into processed or final assembled products
    with high labor, low wage content. Much of America’s exports are processed or
    manufactured goods with high capital and human capital content such as refined
    petroleum products and aircraft. We also run a trade surplus in services such
    as financial, consulting, and software. Any retaliation will damage American
    research and development, the source of economic growth. So will the proposed
    cutbacks in federal support for basic research, especially in the area of
    biotechnology.


    The stated goal of
    reducing the U.S. trade deficit might not happen. A reduced trade deficit could
    lead to an appreciation of the dollar against other currencies. This would
    increase the cost of American exports and reduce the cost of all imports,
    offsetting the economic effects of increased tariffs.


    Jobs leave the U.S. for
    other reasons besides lower wages. In the Carrier example, the president of the
    parent company, United Technologies, said the Mexican workforce is not only
    cheaper but also more productive, easier to train, and has lower rates of absenteeism
    than the American workforce.



    REDUCING DOMESTIC AND GLOBAL ECONOMIC GROWTH


    President Trump can reduce
    global growth through his trade and tariff policies. A president can raise
    tariffs or label a country a “currency manipulator” through executive
    privilege, without Congress’ approval.


    Candidate Trump promised to
    put a 45% tariff on Chinese exports, brand China a currency manipulator, tax
    Mexican imports, increase tariffs on German and Japanese cars, “rip up”
    existing trade agreements and kill the Trans-Pacific Partnership (TPP), which
    he called “a rape of our country.” If he did all this, he would ignite a global
    trade war, which the chief economist of Citi said “could easily trigger a
    global recession.” Other bank economists have said that even modest increases
    in tariffs on Chinese and Mexican imports could reduce real GDP growth by 0.5 –
    1.0%. (Business Insider, November 13,
    2016)


    Summarizing his analysis,
    Citi’s chief economist, Willem Buiter, concluded:


    The
    U.S. has been the champion of free trade and open borders for decades. A
    retreat from globalization by the US would likely lead to reciprocal actions
    from other countries, and reinforce the latest shift towards deglobalization
    and could be another nail in the coffin of the liberal global economic world
    that has supported prosperity since 1948. (Business
    Insider    , November 13, 2016) 



    DOMESTIC AMERICAN POLITICS AND FOREIGN POLICY


    Imperial overstretch, also
    known as imperial overreach,
    is a hypothesis which suggests that an empire or world power can extend itself
    beyond its ability to maintain or expand its military and economic commitments.
    The idea was popularized by Yale University historian Paul Kennedy in his 1987
    book The Rise and Fall of the Great Powers.


    America has financed its
    global military and economic commitments through borrowing, much of it in
    recent years from foreign governments and institutions. The Federal budget
    deficits over the last 16 years have been roughly equal to Defense Department
    spending. (Total spending on national security is higher.) The Chinese
    government is the largest foreign holder of U.S. government debt.


    A great power like the
    United States can also retreat into isolationism and protectionism if its
    people lose the will or ability to pay the costs or believe they are not
    benefiting from foreign commitments. A sense of frustration sets in. Foreign
    economic ties may be seen as a source of domestic economic and social problems.
    The American president and foreign policy strategists stop talking about the
    primacy of democratic governments and American ideals in foreign affairs.

    During the Cold War with the Soviet Union, Americans were willing to accept the idea of prolonged conflict without certain victory. Since the collapse of the Soviet Union, domestic support for prolonged wars and political conflicts to contain enemies rather than defeat them has been seriously eroded.

    There is irony when the
    country that built the greatest wall in history is now talking about open trade
    while the country that has led the post-war campaign to expand trade is talking
    about extending a wall. As Chinese emperors knew, walls are as much
    psychological as physical.


    Domestic problems may take
    precedence and divert resources. The combination of the rapidly rising cost of
    health care and social security for an aging population, large military and
    national defense expenditures, a rising backlog of public investment, proposed tax
    cuts, larger fiscal deficits, and large trade deficits is not sustainable. The
    proposed programs of the Trump administration will make the problem worse and
    probably accelerate the crisis.


    Decades of fiscal deficits
    and trade deficits, financed increasingly by foreign borrowing, have led to
    high and rising levels of the national debt-to-GDP ratio. Borrowing at low
    interest rates has made this possible. If the Federal government had to borrow
    at the post-war average, it would add over $250 billion to annual deficits.


    The next round of tax cuts
    for upper-income households and corporations will lead to larger structural
    deficits even in years of economic growth. The United States will find it
    increasing expensive (higher interest rates) to finance national defense and
    global commitments. This will reinforce President Trump’s call for reduced
    American involvement abroad. (4)


    Donald Trump blamed job loss
    and stagnant incomes on imports, particularly from China. While economic
    studies show that over 80% of job loss is due to technological change, and some
    of the rest to domestic trends like leveraged buyouts and corporate cost
    cutting, blaming “unfair” trade rules and other countries had more political appeal. As president,
    Donald Trump has said he will oppose the trade agreement with Pacific Rim
    countries (TPP), intends to unilaterally change some of the tariffs and trade
    rules of NAFTA, and has no intention to continuing trade negotiations with the
    European Union (this may change). Candidate Trump also singled out Japanese and
    German auto companies as targets for increased tariffs, despite the fact their
    investment in the United States revitalized the American auto industry.


    The related campaign theme
    was the emotional issue of immigration, both legal and illegal. Donald Trump
    demonized Mexicans and Muslims, blaming them for job loss of Americans, crime
    and domestic terrorism. Travel bans on Muslim countries, revoking of visas, and
    mass deportations were begun as soon as he became president. Combined with
    rhetoric that was racist and xenophobic, this will not endear the United States
    to its Latin American and Muslim allies, and fuels anti-American feeling. 

    President Trump has
    encouraged similar rhetoric in European and South American countries. He has
    antagonized and isolated America’s strongest ally on the European continent,
    Germany.


    Immigrants are vital to
    American economic growth and development. Graduates of elite foreign
    universities often came to the United States; “over 75 percent of the graduates
    of the Indian Institutes of Technology in the 1980s emigrated to America.” (5) Over
    half of the science and math graduate students in American universities are
    foreign. Keeping them in the U.S. with H1-B visas is vital. Immigrants and
    their children are entrepreneurial, accounting for a disproportionate share of
    new businesses. Managers from all over the world are necessary if American
    multinationals are to remain competitive.


    Mr. Trump’s call for
    economic nationalism and isolationism reverses 70 years of American foreign
    economic policy. Global economic integration will continue but without the
    United States setting the rules. The United States has pulled out of global organizations attempting to reduce global warming and intends to loosen domestic environmental regulations. China, on the other hand, is taking up leadership to
    combat climate change.


    Exports, including tourism,
    will suffer, thus reducing a major driver of American economic growth and job
    creation. Tariff and trade wars will hurt U.S. economic growth and development.
    They will increase the insecurity and frustration of more Americans. 


    Blaming the social costs of
    technological and economic change on foreign scapegoats will make it more
    difficult to deal with these ongoing problems. This will continue to fuel
    domestic anger and support for isolationist and protectionist policies.


    President Trump does not
    believe that government is responsible for dealing with the “negative
    externalities” or social costs of industrialization and rapid economic and
    social change. The Trump administration is not concerned with pollution and
    climate change. This reduces American influence in dealing with these important
    global problems. This makes the transition to non-fossil fuel energy more
    difficult. It also means that new energy technologies such as solar panels and
    wind turbines cannot expect any government support, ceding these high-tech,
    growth industries to corporations in other countries.


    The issue of global warming
    illustrates the loss of American leadership in international attempts to solve global
    problems. The American denial of global warming will have consequences to
    American influence. Candidate Trump denounced global warming as a “hoax.” As
    president, he has quickly supported of fossil fuel companies by relaxing environmental
    rules on the production of oil, natural gas and coal, particularly on the
    release of methane and carbon into the atmosphere. His first proposed budget
    slashes support for climate research, solar and wind turbine power, and
    electric cars. President Trump has also announced that he does not support the
    latest global agreement setting targets to reduce carbon emissions. Appointing
    the CEO of Exxon/Mobil as Secretary of State, in charge of America’s foreign
    policy, is a clear message.



    POSSIBLE SHIFTS IN FOREIGN POLICY


    President Trump is pessimistic
    about the global order and America as a global power. If he believes America
    can influence global events from behind “Fortress America,” he is deluding
    himself and the American people. If he thinks he can be isolationist, protectionist,
    and xenophobic without damaging American power and influence, he is deluding
    himself.  If he thinks he can praise Putin
    and support right-wing, anti-EU parties in Europe without damaging American
    influence, he is deluding himself. If he thinks he can insult the governments
    of Germany, England and other allies without consequences, he is deluding himself. If he
    thinks he can denounce, repeal or unilaterally change trade treaties without
    consequences to the U.S. economy, the global economy and American leadership,
    he is deluding himself. If he thinks he can reduce America’s commitment to NATO
    without reducing American power and influence in Europe, he is deluding himself. And us.


    The damage has already been
    done.  Even if President Trump backtracks
    on some of his threats, no one can trust that what he says
    at any moment will not change. For domestic political reasons, he will probably
    return to the nationalist, anti-global themes that got him elected, and could
    get him reelected. America has become an unreliable ally. Allies will reevaluate their national interests and foreign policies in light of uncertain American support.


    CONCLUSION


    The last presidential
    election shows that many Americans, probably most, are no longer willing to pay
    the cost of maintaining American power and influence in the world. Domestic
    problems are blamed on “unfair” global competition, global institutions,
    immigrants and foreign governments.


    It matters little if
    President Trump does not follow through with his threats. The damage has been
    done. Increased tariffs and trade restrictions will hurt the American economy
    and make it more difficult to deal with domestic political issues. Scapegoating
    foreign governments, minority groups and corporations will fuel anger and discontent,
    making it less likely America will react creatively to its economic challenges. The coming massive disruptions of robotics and artificial intelligence will increase domestic tensions.


    More Americans are against
    global institutions and against the United States bearing the cost of being the
    world’s global power. Pew Research polls showed that this trend started well
    before Donald Trump ran for president. Mr. Trump has tapped into these feelings,
    making them the driving force of a successful presidential campaign. His continued focus on these themes will probably continue to erode American support for the post-war economic institutions and rules America established.


    America’s commitment to
    promoting democracy and free trade around the world is waning. America’s
    current president seems comfortable with authoritarian rulers and
    anti-democratic far-right political leaders in Europe. Many of these leaders
    want to dismantle the European Union and return to national currencies and national economic policies. Some,
    like Marine Le Pen of France, want out of NATO.


    China has replaced Japan as
    the cause of America’s economic problems. America’s relationship with China is
    moving from détente to confrontation.
    America’s allies in Europe and Asia are recalibrating their relations with
    Russia and China as the American president talks of isolationism. America is
    becoming an unreliable ally.


    America’s resolve to bear
    the costs of being a global power is waning. America’s domestic social and
    economic change has generated a politically powerful backlash. Most white
    Americans do not want their government to support or promote social change, do
    not support the open global economic order America created, do not want to bear
    the cost of being a global superpower. These are related. Continued
    presidential rhetoric, despite his policies, will encourage and broaden these
    beliefs. Trump’s dark, pessimistic picture of America’s isolationist,
    protectionist future may be a self-fulfilling prophecy.


    America’s “New World Order”
    is coming apart. The last election and opinion polls indicate that most
    Americans do not believe in it. America’s allies in Europe are under attack
    from nationalist groups that want to dismantle it and appease the Russian
    autocrat. These groups are given vocal support and encouragement by the
    American president.


    President Trump, by
    renouncing TPP, has signaled America’s abdication of influence in East Asia;
    allies now have to look to a combination of nationalism and accommodating
    China. New national security and economic arrangements among Asian countries will be considered. For example, South Korea has taken the first steps to signal easing tensions with North Korea, over the objections of the United States. The TPP countries intend to continue with the treaty without the United States.  China has started an ambitious economic and strategic program called “One Belt, One Road” to circumvent American military and strategic containment. Economic growth for East Asian countries will be increasingly tied to economic
    alliances and trade agreements with China.


    All of the political and
    economic institutions that the United States created or supported after World
    War II, mostly in response to the Communist challenges of the Soviet Union and
    China, are now under domestic attack. One group believes the post-war
    framework has outlived its usefulness, that it no longer deals with changed
    geopolitical and economic circumstances and is need of drastic reform. Probably
    a larger group no longer supports the foundations of the American world order.


    ——————————————————————————————————

    1. For
    suggestive analogies between America and the Rome, see “The Roman Republic Commits Suicide:  A Cautionary Tale for America,” June 19, 2011.
    https://politicaleconomicsprof.com/2011/06/pax-americana-i-washington-imperial.html


    2. Reuters, “China prepares
    to counter any U.S. trade penalties:  sources,”
    March 20, 2017

    http://finance.yahoo.com/news/china-prepares-counter-u-trade-093343375.html


    3. The New York Times, “When
    Solar Panels Became Job Killers,” April 9, 2017, page 1 of the Sunday Business
    section.


    4. “The Economy After the
    2016 Elections,” November 26, 2016

    https://politicaleconomicsprof.com/2016/11/the-economy-after-2016-election.html


    5. Fareed Zakaria, The Post-American World, 129.


    ============================================================


    See the companion post:  “Pax Americana”:  The World That America Made.”  https://politicaleconomicsprof.com/2017/03/the-beginning-of-end-of-pax-americana.html

    If you like history and speculative historical analogies, you might like the following two essays:

    The Roman Republic and America

    The Roman Republic Commits Suicide:  A Cautionary Tale for America

    For a list of all posts and economic tutorials in Pages, see Guide to Posts.


  • Breaking Away: Britain and the European Union

    Breaking Away: Britain and the European Union

    Breaking Away – Now What?

    INTRODUCTION

    No one, especially the British leaders who advocated Great
    Britain leaving the European Union, have any idea what is going to happen.  But the short-run economic problems from the breakup are easier to deal with than the underlying social and political problems.  It is these underlying problems that could tear the EU apart.  

    PRELIMINARY THOUGHTS

    Some preliminary thoughts on Britain breaking away from the
    European Union:

    Direct economic effects will be minimal, both for Britain and
    the EU.

         London will remain the financial capital of Europe.  The alternative isn’t Frankfurt; it’s New York.

         Much of Britain’s trade with EU is part of complicated supply chains within or between multinational firms.  This will also continue.  Both sides need each either.


         This will accelerate the current trade negotiations between the U.S and the EU.  Both sides want a deal in place before President Obama leaves office.  Both sides, and Britain, see this as a partial solution to the problems caused by the breakup.

    In longer run, lots of
    alternatives and economic agents (read multinational corporations) will adjust.


    Adjustment process in Britain probably not too difficult because:

    Britain not in Eurozone, so already controls own monetary
    and fiscal policy.

    Britain did not sign the EU free labor movement treaty, so
    already controls borders.

    Does get rid of stupid EU regulations but England has
    enough itself.

    Getting out of EU will not bring back British coal mining,
    steel industry, shipbuilding, textiles or fishing.


    The break weakens the EU more than Britain.  If all the uncertainty and panic leads to a global recession, Britain will survive. The EU might not.


    The discussion about future EU-Britain trade agreements is mostly irrelevant.  The EU does not have trade agreements with China, Japan and the U.S.  Most trade is governed now by the WTO, and bilateral and multilateral agreements. Neither side can afford to disrupt financial and trade flows.

    British voters may have also destroyed Great Britain.  Increases odds of Scotland leaving Great Britain and taking the North Sea oil with them.

    Scottish National Party got creamed in last national
    election; basis for comeback?

    Political effects in EU could be serious, with possible
    follow-on economic effects in the future.

    Now OK for people in other countries to vote to get out of
    EU.

         Questions of national sovereignty and immigration not limited to Britain.

    Continued attraction of nationalist parties appealing to
    racism and xenophobia, many anti-democratic.

    Long-term danger of reversion to nationalist economic policies that would damage global economy.

    Partial break-up of EU, maybe back to primarily free-trade zone
    agreement.

    Reverse of drive to further European integration as expense of national sovereignty.

    German economy depends critically on exporting to EU countries.  Would probably give up support of EU objectives to preserve free-trade zone.

    Further erosion of influence of U.S. in Europe and U.S
    commitment to NATO.

               Signaled by weak U.S. response to Russian pressure on Ukraine.

    Russia attempts to exploit EU weakness and eliminate economic sanctions.  Germany resists. European politics in the future will center on German-led
    Central European bloc, direct geopolitical rivalry with Russia.

               Poland becomes a major geopolitical player in
    Europe.

               If EU holds together, Germany becomes even more
    dominant.

    Most of European national governments just as dysfunctional as
    EU.  Unlike Britain after Thatcher, they do not have national economic policies that promote economic growth.

    Free markets and financial sector dominated by large,
    multinational corporations.  England
    becomes less attractive to foreign (non-European) multinationals as an entry
    point into the EU.

    Maybe British MNCs got it wrong; maybe they’ll be better
    off without EU regulations.

    Overall, Europe and the EU are increasingly less important to
    the world, both economically and politically. 

    The current American administration recognizes this with
    its “pivot” towards Asia.

    Britain leaving EU part of this trend.

    COMMENTS

    This vote brings out some wider questions about the EU and
    European politics.

    It is important to remember what were the original objectives of
    the EU:

    Promote free trade (low tariffs, no quotas, less national
    preference), economic recovery and economic integration of Europe.  Why?

    Reduce chances of another European war.


    Promote economic growth and development through
    cooperation.

    Promote democracy and democratic political institutions,
    often in countries where they were weak or historically non-existent.


    Contain Germany in an economically-integrated Europe.


    Provide economic foundation to oppose Soviet Union


    Lessen appeal of Communist parties in Europe.

    Has the EU fulfilled its original objectives and is less important
    today?  How relevant is it to the
    economic and political future of Europe? 

    How effective has the EU been in defining and meeting its new
    objectives since the collapse of the Soviet Union? 

    As the EU has taken on more ambitious objectives, become more complicated (bureaucratic?), and usurped more of the
    functions of national governments, has it become less effective and lost
    political support?

    The EU is no longer a vehicle for economic growth for the more developed countries of Europe.  Structural unemployment has been high for the entire EU for a long time.  National governments have used EU assistance and loans to avoid domestic reforms.

    It is the EU, not Britain, that is facing a political and economic crisis.  I would suggest that if the
    EU is to survive and be an effective set of institutions and policies in the
    future, it has to undergo a radical rethinking of its objectives, procedures
    and structure, including its relationship with the national governments of
    Europe.  And it has to do it now.  The British vote was a wake-up call.

    FOOTNOTE. By coincidence, I’ve been doing a lot of reading about Europe during the generation before World War I and evolving German political objectives during World War I.  Much of my reading has been on the Austro-Hungarian Empire and the rising tensions in Central Europe.  There are some similarities to the current situation, including the class and social tensions partly driven by technological change.  

    One way to understand what is happening, in Europe and throughout the world, is through geopolitical thinking.  Two place to start:

    George Friedman, his articles in stratfor.com, Geopolitical Futures, and his book Flashpoints.



    Robert Kaplan, The Revenge of Geography.  Half of the book is an introduction to past geopolitical thinking and the other half is an application of geopolitical analysis to current conflicts.

    President Obama’s announcement of a “pivot” towards Asia echoes the founding article of modern geopolitics, H. J. Mackinder, “The Geographical Pivot of History,” 1904.  Copies are on the Internet.

    =====================================================================

    For a list of all posts and economic tutorials in Pages, see Guide to Posts and Pages.

  • The Crimea, Russia, and U.S. Options

    The Crimea, Russia, and U.S. Options

    Ukraine President

    Russia’s
    illegal invasion and annexation of the Crimea will set off a chain of events
    that could strengthen U.S. power and influence, especially in Eastern Europe.  Putin is gambling that President Obama and
    conservative Republican leaders lack the will to energetically react to Russian
    expansion.  First U.S. reactions have
    been weak.  Unless there is a change,
    Putin might be encouraged to annex other Russian-dominated areas outside
    current Russian borders.

    Ukraine
    has tried to balance Western and Russian pressure.  The popular revolt against the pro-Russian
    Ukrainian Prime Minister upset the balance and precipitated the crisis.

    Putin may have decided to upset the unstable status quo in Eastern Europe, starting with Ukraine and Moldova.  Russia’s next step could be to annex the eastern third of Ukraine.  This area includes the Donetz Basin, which
    contains a Russian majority and industrial resources.  If successful, Russia could then move along the
    north shore of the Black Sea to Odessa and maybe to the Rumanian border.  Russia
    already controls the eastern third of Moldova, presenting Ukraine, especially
    the Kiev region, with the possibility of being threatened or attacked from both
    the east and the southwest.

    The
    Russians are very concerned about their long-term demographic trends.  Russia’s population is declining.
     Russia’s population is now about 1/2 that of the U.S. and the gap is
    widening.  And, in the foreseeable future, European Russians will be
    outnumbered by Asians (east of the Urals) and Muslims within Russia.  Adding millions of European Russians may have
    played a part in the decision to annex the Crimea.

    All of
    this has domestic advantages for Putin.  His moves are popular in Russia.
     Future leaders will probably also have to be nationalistic and probably
    expansionist, putting pressure on Russia’s periphery.  It was naive of the U.S. to     think that Russian nationalism suddenly disappeared with the Soviet Union.

    An
    expansionist Russian foreign policy entails huge risks.

    About 40%
    of the population in the Crimea is Ukrainian and Tartar.  Both groups in the region have centuries-old
    historical grudges against the Russians.  By making a de facto control de jure, the Russians are making sure that 40% of the Crimean population will now feel
    like a conquered minority and will look to Ukraine for support.  

    The takeover might also finally unite the pro-West political leaders in the Ukraine. Ukraine
    has already signed the economic cooperation treaty with the EU that started the
    crisis.      Ukraine needs immediate
    financial support.      With loss of
    territory and increased Russian pressure, Ukraine will probably ask to join
    NATO if it can be guaranteed U.S. military support in weapons systems and
    training.      If this happens, Russia will
    be faced with another enemy, along its crucial southern European border.      Putin is gambling this won’t happen.

    It is also likely that Putin’s land grabs will reinvigorate NATO and focus  U.S. attention on European security issues.  

    All this will affect Poland. Poland
    does not have a border with Russia, except for a short strip to
    the north with the Russian enclave of Kaliningrad.      Poland has long borders with Ukraine and
    Belarus.  Belarus – the old Russian province of Byelorussia or White
    Russia – is between Poland and Russia.  But Belarus is for all intents and
    purposes still a province of Russia.  Poland, and NATO, still has to plan
    that Russia could put troops on the Polish border and attack across the
    northern Polish plain.  Poland will probably     have to step up military spending and ask for more NATO support.

    The U.S.
    is putting an advanced air defense system in Eastern Europe, mostly in Poland.
     One consequence will probably be to extend the system to southern Balkan
    countries and step up other types of military aid to Eastern European countries
    that are members of NATO or the EU.

    The
    Crimean takeover should drive Eastern European countries even closer to NATO
    and the EU.  But the U.S. has to provide substantial military support in
    training and weapons.  Given the sequester’s effects on the military
    budget, there is some doubt this will happen.

    Beside
    military support to NATO, especially Eastern Europe, the U.S. has a number
    of good responses, including a rapid increase in oil and especially natural gas
    exports to Europe.  I’m not sure Obama has the political will to overcome
    opposition within the Democratic Party to the pipelines and LNG
    plants to quickly approve them, although Putin has handed him a
    potent new argument.   Combined with developing huge untapped reserves of
    natural gas in shale around the world, the Europeans would be assured that they
    would not be dependent on Russian gas in a few years.  

    Russian
    sales of oil and natural gas account for about 70% of their export
    income.  Combined with economic
    sanctions, a fall in foreign investment, capital flight and a loss of tourism,
    the Russian economy could be severely damaged.

    Maybe
    Western European countries will wake up and realize that Russia is still a
    political and military threat.  If the
    U.S. does not act energetically and decisively, European countries, especially
    Eastern European countries, may decide they have to accommodate Russian
    aggression.  The danger is greatest for
    the next few years when Europe will still be dependent on Russian natural gas.

    Turkey, a
    long-time member of NATO, should finally be admitted into the European Union.

    Another
    possible consequence of Russian expansion could be America’s relationship with
    China.  If China sees Russia as more aggressive, this could improve
    relations between China and the U.S.  An extreme but interesting gambit
    would be for the U.S. to support Chinese claims to resource-rich eastern
    Siberia.

    ===================================================================

    See related post, President Obama Learns Some Game Theory.