Spheres of Influence or Trilateralism 2.0

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One of the biggest challenges is to ensure there is room at the economic table for China and to make this as least disruptive as possible.  US President Trump has escalated the US confrontation with China over its trade practices.   From a high level, here is a context to understand what is happening.  

Spheres of influence were the conventional language of expansion.  Countries compete to increase their sphere of influence, and wars were often the result.  In the late-19th century, a rising power challenged this concept.

The US was the revisionist power.  As part of its defense of the territorial integrity of China against the imperialist in Europe and Japan that were carving up China into spheres of influence (e.g., the Bund district in Shanghai, Hong Kong), the US offered an alternatively organizing principle.  It picked up the UK mantle of free-trade.

Instead of fixed spheres of influence, the US proposed variable shares of the world economy. The variability would depend on economic prowess.   The more efficient one can produce a good that people want to buy the greater one’s share.  The spheres of influence were rent-seeking behavior in the extreme.  Concessions were granted by political authorities, often under duress.   To be sure the US proposal was not based on a sense of altruism or pacifism.

The rising US economic prowess, coaling stations through the Pacific snatched from Spain at the end of the 19th century, gave it the ability to project its power and trade into Asia.   It was late to the game of carving up the world.  The cherries had already been picked.  As a revisionist power, it did not simply challenge this or that concession, but the entire system, and proposed one in which it could succeed.

The initial attempt at the end of WWI failed.  The US did not have the institutional capacity or political will.  The America First and the rejection of the League of Nations was part of the “return to normalcy” as the period has been called by some historians.    The railroads, for example, that Wilson nationalized during the war effort, were privatized again.  By the end of WWII, things changed.  Americans were now more willing recognize that what happens abroad affects American prosperity at home.  The post-WWII institutions, like the IMF, World Bank and Bretton Woods was the globalization of the variable share strategy.

This is not just a historical narrative.  It is particularly relevant given Chinese President Xi speech earlier today.  Most of the market coverage seems to recognize that little new ground was covered and that the Core Leader reiterated pledges and promises made before about new efforts to open the economy and strengthen intellectual property rights.  This is boilerplate stuff.

What seems to have been largely overlooked was Xi’s comments on spheres of influence.  Xi said China would not “attempt to overturn the existing international system or seek spheres of influence, no matter how much progress it has made in development.”  To the extent that declaratory policies mean anything, this is substantive.

The critical problem is that while China says ts eschews the spheres of influence approach others may be embracing it.   It turns out, for example, the European prosperity was partly predicated on leaders in Northern Africa and the Middle East keeping their people down (and in).   Since 2010 and the beginning of the Arab Spring coincided with the EMU crisis, and even now immigration is threatening to rip Europe apart even as the economy enjoys the broadest expansion since the advent of the euro.  Europe is looking inward.  The European project is being challenged post-crisis by Brexit in the west and illiberal representative governments in the east.

Asian regional trade is increasing, and Japan’s development assistance and infrastructure surpass China.  Several sectors, including autos, are being integrated on a continental basis.  The TPP will facilitate more regional integration.  China’s businesses are moving production facilities to cheaper labor supplies also help integrate the region.

Trump has claimed the NAFTA agreement was the worst ever.  While he has threatened to quit it, there is a new push to reach an agreement as early as the end of this week, at least in principle. Negotiating posturing notwithstanding, it seems to sustain a confrontation with China, protecting one’s flank is important.

In the early 1970s, David Rockefeller launched the Trilateral Commission, a nonpartisan forum that saw North America, Western Europe, and Japan as the three pillars.   While there interest in some quarters for a new Bretton Woods agreement, which we think is far-fetched, we could be experiencing the second incarnation of a trilateral world.

Under the original and in the new version, an Asian bloc is less tangible.  Originally, it was that the Japanese leg was the weakest by almost any metric, its insular perspective, and estrangement from other countries in the region prevented it from emerging as a regional leader.  In the new version, China and Japan are regional rivals.  Neither is providing what Germany does to Europe or the US in North America.

Trilateralism 2.0 ?