President Trump’s tariffs and duties and the transformation of the world economy
The 45thPresident of the United States, Donald J. Trump, keeps on repeating he wants to make America “great again”.
Hence, first and foremost, he wants to reindustrialize his country which, in fact, is currently the world champion in the loss of productive, manufacturing or industrial companies.
The birth of a country that now consumes without producing much, namely the USA, materialized initially under Reagan’s Presidency, but continued rapidly with the successive Presidents.
For example, at the end of the 1960s, the US industrial labour force was at least 35% of the total number of people employed, while currently this labour force is only 20%.
Since 2001 over 70,500 companies with more than 500 employees have been closed down definitively.
The Gospel of Matthew (4:1-11) perfectly clarifies the situation of the post-productive post-economy – if we can use this expression.
Jesus Christ, who was hungry after having fasted forty days and forty nights in the desert, was tempted by the devil who told him: “If you are the Son of God, command these stones to become loaves of bread”.
Jesus answered to the devil: “Man shall not live by bread only, but by every word that comes from the mouth of God”.
Hence Jesus – as a great economist – explains to the devil that we must not change the Creation and replace God, but instead follow Smith’s liberal and socialist labour theory of value.
Without the processing and transformation of materials – according to their laws – there is no value and therefore not even price.
Only manual or intellectual work, in fact, does transform materials, but never creates and hence does not even destroy them.
Hence we should produce only those goods and services that the market really asks for, without useless miracles, which are already incorporated in the Being as it is.
But let us revert to the economy of the powerful and stable North American de-industrialization process.
However, some sectors of US companies are still active, such as semiconductors and electronics, while clothing, for example, has fallen by 60% despite the US population has almost doubled since 1950.
When this happens, high value-added work increases, while all productive activities having a low incidence of unit value have definitively been delocalized outside the USA (and the EU – although in this case, the debate has a political, military and strategic nature).
It is worth recalling that immediately before the first subprime crisis of 2016, the US industrial production had fallen by 15% – and this was certainly not by mere coincidence.
Later it started to grow again by approximately 4% – with many sectoral differences -in the years in which the United States managed to move their financial crisis elsewhere.
But let us revert to the factories that the US President deems necessary to make America great again, and to the specific policy of import and export duties imposed by President Trump in record time.
In fact, on March 1, 2018, the President announced it would imposed a 25% customs duty on steel imports from China and a 10% additional one on aluminium imports from China.
This, however, increases the production costs of the aforementioned US sectors that still handle and stand up to global competition, which obviously recoup the money lost from end customers, by increasing prices.
If – like the USA, but perhaps not for much longer – a country still lives on electronic manufacturing and components, the increase in the factory unit prices leads to an increase in the final price and, hence, restricts domestic or foreign markets.
Any price increase, albeit small, leads to a decrease in the buyers of those goods. Pareto taught this to us ad nauseam.
But clearly it was not enough.
Later, on April 3, President Trump announced he would impose further 25% duties on additional 50 billion Chinese imports of electronics and aerospace products, as well as machine tools.
This means that – paradoxically, but not too much – President Trump wants to slow down precisely the productive sectors that China deems strategic for the future, as shown in its Plan for 2025.
In 2017 China produced a total of 23.12 trillion US dollars, calculated on the basis of power purchasing parity (p.p.p.).
Currently the EU only ranks second, with 19.9 trillion US dollars, again calculated as p.p.p. In 2016 it was the world’s top producer.
The United States only ranks third, with a yearly product of only 19.3 trillion dollars.
Financial stones cannot be turned into loaves of bread.
In spite of everything, China has a yearly per capita income of 16,600 US dollars, while the US yearly per capita GDP is equal to 59,500 US dollars.
Scarce domestic consumption, all focused on exports, is the Chinese model that has developed since Deng Xiaoping’s “Four Modernizations”, which survives only in an area in which all macroeconomic variables are not left to some “market” invisible hands, but to a central authority.
However, this is exactly the reason why China is the largest world exporter.
Hence it rules end markets.
In 2017, it shipped abroad 2.2 trillion US $ worth of goods and services.
Currently 18% of Chinese products are exported to the United States.
This much contributes to the US trade deficit, which currently amounts to 375 billion US dollars.
China is also the second largest importer in the world, to the tune of 1.7 trillion dollars in 2017.
The mechanisms of interaction between China and the United States, however, are even more complex than we could guess from these scarce data and statistics.
It is not by mere coincidence that China is still the largest holder of US public debt.
In January 2018, China held 1.2 trillion in US government debt securities, i.e. 19% of the US public debt held by foreign investors.
A very powerful monetary, political, strategic and even military leverage.
Obviously China buys US securities to back the value of the dollar, to which the yuan is pegged.
However, it devalues its currency (and hence the US dollar) when Chinese prices need to be kept competitive.
Therefore, while the United States wants to increase the yuan value, with a view to favouring its exports, China threatens to sell its US public debt securities immediately.
The dollar increased by 25% between 2016 and 2016, but since 2005China has devalued the yuan.
A very clear example of aggressive monetary pegging.
Moreover, the issue of China’s unfair commercial behaviour is now long-standing and it was also raised by many candidates to the US presidential elections.
In fact the success of Paulson, the former US Treasury Secretary, was to reduce the American trade deficit with China and to later ask for opening to foreign investment in key sectors of the Chinese economy.
For example in the banking sector, thus putting an end – in some cases – to the Chinese practice of export subsidies and administered and capped prices.
Just deal with realism and intelligence and Chinese Confucianism can find solutions to everything.
The other side of the Chinese miracle, however, is the very high debt of companies and households, which is obviously still connected to the balance between the yuan and the US dollar.
In this case, however, the programmed slowdown of the Chinese GDP growth and the limits on strong currency exports, as well as the control of wages and profits are enough.
But let us revert to President Trump’s tariffs and duties.
In fact the US President has imposed these new tariffs and duties on Chinese imports to force China to remove the foreign investors’ obligation to transfer technology and patents to their Chinese partners.
Nevertheless China trades many productsit could also manufacture on its own just because it wants to fully open Western intellectual property rights for its companies.
A few hours later, however, China responded to President Trump with a 25% increase in duties on 50 billion dollars of US exports to China.
On April 6, President Trump further reacted by stating he would call for the imposition of other duties on additional 100 billion dollars of imports from China.
It is worth noting, however, that this accounts for only a third of total US imports from China, which is considering the possibility of responding harshly to President Trump by steadily increasing tariffs and duties for all US products entering Chinese markets.
Besides the issue of relations with China, however, the other side of the US tariff and duty issue is the NAFTA renegotiation, officially requested by President Trump on August 16, 2017.
It should be recalled that the North American Free Trade Agreement is the largest commercial agreement currently operating in the world, signed by Canada, USA and Mexico.
Firstly, President Trump wants Mexico to cut – almost entirely – VAT on imports from the USA and put an end to the programme of maquiladoras, i.e. the factories owned by foreign investors in Mexico, in which the components temporarily imported into that country under a duty-free scheme are assembled or processed.
The maquiladoras programme started in 1965 to reduce the huge unemployment in the North Mexican regions, but currently there are at least 2,900 such factories between Mexico and the USA producing 55% of total Mexican export goods.
They mainly manufacture cars and consumer electronics, which are exactly the sectors that – as already seen – President Trump wants to revitalize.
Obviously the current US Presidency wants to dismantle the maquiladoras on its Mexican border, where 90% of such companies are located.
Thanks to these special factories, Mexico competes directly with US workers, considering that the local Central American workforce is much cheaper.
Thanks to this mechanism of cross-border production outsourcing – between 1994 and 2010 alone – 682,900 US jobs moved to Mexico, with 80% of US jobs lost in the manufacturing sector.
Moreover, again due to NAFTA, as many as 1.3 million jobs in Mexican agriculture were lost.
In fact, following the removal of duties between the USA and Mexico, the latter was flooded with US produce below cost and subsidized by the State.
All this happened while the Central American administration cut agricultural subsidies – which will soon happen also in the crazy EU – and focused the little State aid left for agriculture to the big haciendas, thus destroying and ruining small farmers.
Liberal and free-trade masochism.
NAFTA, however, also has many advantages for the United States.
Without the tripartite inter-American agreement, North American food prices would be significantly higher, while also oil and gas from Mexico and Canada would be much more expensive for US consumers.
As Carl Schmitt taught us, the American Monroe Doctrine (epitomized by the slogan “America to the Americans”) was developed above all against Europe. Nevertheless, the agreements like NAFTA allow to share – at least partially – the benefits of increased trade between the USA, Canada and Mexico in a less asymmetric way than usual.
The US primacy theorized by Monroe in 1823 and later rearticulated by Roosevelt in his State of the Union address in 1904, with the Roosevelt Corollary whereby “chronic wrongdoing may in America, as elsewhere, ultimately require intervention by some civilized nation and force the United States, although reluctantly, in flagrant cases of such wrongdoing, to the exercise of an international police power”, holds true also at economic level.
But are we currently sure that the most civilized nation is still the Northern one?
Just to better understand what we are talking about, it should be noted that the NAFTA agreement is made up of 2,000 pages, with eight sections and 22 chapters.
As such, it is currently worth 0.5% of the US GDP.
Since the official implementation of this agreement in the three countries which have adopted it, North American exports have created as many as 5 million jobs, with the creation of 800,000 additional jobs in the USA alone.
Nevertheless approximately 750,000 other jobs have also been lost in the United States alone, mainly due to the transfer of US activities to Mexican maquiladoras.
Hence a slight surplus.
Moreover, NAFTA has anyway ensured the status of “most favoured nation” to Canada and Mexico and has removed all tariffs and duties for the goods produced in one of the three Member States. It has finally established certain and clear procedures for settling trade disputes between the companies of every country belonging to it.
But above all NAFTA enables the United States to better compete with EU and Chinese products, by reducing the prices of the NAFTA goods wherever they are produced.
Also in this case, however, President Trump has threatened to walk out of the inter-American trade treaty and impose a 35% duty on imported Mexican products.
The aim is obviously to bring back investment in the maquiladoras to the United States.
Is this useful, also with regard to an evident trade war with the EU, Japan and China, as usual?
Is there currently sufficient real liquidity in the United States to back the supply increase which is thus created, with the return of all these productions back home?
Or is the idea prevailing of having everything be bought on credit, with all the consequences we can easily imagine?
Or is it possibly a matter of sending the NAFTA productive surplus back to European, Chinese and Asian markets?
Moreover, with specific reference to another multilateral trade agreement, the Trans-Pacific Partnership (TPP), President Trump announced he would like to establish a series of new bilateral trade relations that the US President likes more than the multilateral ones.
It is worth recalling that the TPP applies to the USA and to other 11 countries around the Pacific Ocean, namely Australia, Brunei, Canada, Chile, Malaysia, Japan, Mexico, New Zealand, Peru, Singapore and finally Vietnam.
All these countries together account for 40% of the total global GDP, which is currently equal to 107.45 trillion US dollars annually. They are also worth over 26% of world trade per year and as many as 793 million global consumers.
Obviously the list does not include China and India, considering that the TPP architecture has been designed to surround, close or at least limit the growth of the two great Asian countries.
President Trump also wants to renegotiate the TPP, which by2025 is expected to increase trade among all Members States to the tune of 305 billion us dollars per year.
Hence if President Trump walks out of the TPP, many Member States will look to China for replacing the USA – and, indeed, many of them are already doing so.
Therefore the US President’s idea is to make the United States grow – through this wave of various forms of protectionism – by at least 6% a year, with an expected 3% net tax increase.
Too much. It would inevitably lead to high inflation and the classic boom-bust cycle.
If the economy grows by 2-3% a year, the cycle can expand almost indefinitely.
Conversely, if there is too much money looking for too few goods to buy, inflation will always come and the booming phase will stop all of a sudden.
Hence the bust materializes, with the quick reduction of wages and credits, as well as with an increase in prices and interest rates.
Therefore President Trump’s very dangerous idea is that – in such a monetary and economic context -the United States can keep on borrowing all the liquidity needed because, as he said recently, “we never default, because we can print our currency”.
This is true. But if too many green bucks are printed, interest rates will rise immediately and this new version of Reagan-style supply-side economics will be stopped.
Finally a very serious recession would materialize, which currently would not be so easy to export to “friendly” countries.
Recently the dollar area has much shrunk.
It is no longer true – as the former US Treasury Secretary John Connally once told to his European colleagues – that “the dollar is our currency, but it is your problem”.
So far, however, President Trump has decided 29 commercial or financial deregulation operations and over 100 internal guidelines and directives to the Administration, as well as other 50 new global market rules discussed by the Congress.
On February 3, 2017, the US President also decided to reform and almost repeal the rationale of the Dodd-Frank Wall Street Reform Act, with rules and regulations further reducing checks and audits on banks, which are no longer obliged to send to the Treasury Ministry data and information about the loans granted.
Moreover the banks with clients’ deposits lower than 10 billion US dollars must not even abide by the Volcker Rule, which forbids banks to use clients deposits to make profit.
Therefore, since 2015, banks cannot hold hedge funds and private equity funds.
Nowadays, however, with the reform of the Dodd-Frank Act, many credit institutions can avoid these difficulties and restrictions and play roulette with clients’ deposits.
For the new US lawmaker, Volcker’s and Greenspan’s policy was a way to avoid the implosion of the US financial system, after the fatal end of the Glass-Steagall Act which had been lasting since 1933.
It is worth recalling that the Glass-Steagall Act had come into force when the Roosevelt’s Presidency decided to imitate the Fascist legislation of the new separation between deposit banks and merchant or investment banks.
Banks did not want the Glass-Steagall Act because they wanted to be “internationally competitive”.
They also wanted to create money at will, regardless of the relationship between investment and collection.
What happened is before us to be seen.
President Trump wants to abolish even the Departments of Education and Environmental Protection, with an increase in military spending that is supposed to lead to a total public deficit of 577 billion US dollars.
Hence, in this new context, can the US Presidency avoid the Chinese commercial pressure and also ensure that the jobs repatriated to the USA from NAFTA, from negotiations with Japan, from the TPP and the rest of the multipolar trade system are such as to back the dollar without creating excessive inflation?
Moreover, all international trade experts agree that it is not the simple and traditional tariff barriers – but rather the non-tariff ones, which are very fashionable today – to cause real problems.
In short, we need to consider trade policy together with strategy: if US protectionism increases, the growth of peripheral economies will decrease.
Thust here will be increasing possibilities of crisis in developing countries, while China’s desire to replace the USA in multilateral economic mechanisms that directly affect it may increase enormously.
Also the desire of global US competitors, such as the EU, to replace US exports at unchanged rates – at least for a short lapse of time – may increase.
There is no need for dumping – non-tariff transactions and the quality standard of made-in-Europe products are enough.
Therefore, nowadays, nothing is certain.
Certainly not US protectionism, of which we have noted the dangers for North America and also for its geo-economic partners. Not even universal free trade, which does not consider the political evaluations and the economic, monetary and military planning of the various world commercial areas, is feasible and practicable.
Indeed, as in military policy, a great agreement – as the initial GATT was – is required in the current world market, with a view to establishing – for at least ten years – the areas and spheres of economic and productive influence and their possible future changes.
There is no free trade without planning.
In a Topsy-Turvy World
In our time now, the sheer complexity of the world political matrix, its fluidity of alliances and the absence of straight forward solutions, makes the whole pregnant with amorphic ideas much too lacking in form to translate them into positive action.
Within the US alone, there is Donald Trump who has announced a run for president in the 2024 election. His answer to a pressing problem is simple: deny it exists. Climate change is a hoax to keep climate scientists in a job; on Ukraine? He says that’s not our problem; it’s local, to be decided between Russians and Ukrainians; leave them alone, they will settle it themselves. They probably will … at the point of a gun.
On the other hand, the warring parties had once agreed to a negotiated settlement until Biden moved in and yanked Zelensky out of the talks.
Any attempt at engaging Russia appears to be unacceptable to Biden even to the point of blowing up a Russian gas pipeline (Nord Stream).
The world might have changed, but our cold-war warrior seems intent on making it a hot one. He seems to be harking back to George R. Kennan who developed the cornerstone of US foreign policy known as the Truman Doctrine during the 1940s. But the world has changed . Russia is no longer the Soviet Union, and for evidence we have all the new countries loosened from its yoke.
So what is the consequence of the Rip Van Winkle approach to foreign policy? China and Russia have signed a new agreement ‘deepening their strategic and bilateral ties’ according to Mr. Xi. Mr. Putin claimed all agreements have been reached presumably referring to the subject matter of the talks. He added economic cooperation with China was a priority for Russia.
In 2016, Iran and Saudi Arabia broke formal ties after the latter executed Shia leader Nimr-al-Nimr and Shia protesters attacked Saudi diplomatic missions. The relationship deteriorated further during the Yemen civil war with the rebel Houthis, backed by Iran, fighting a government supported by Saudi Arabia.
As a consequence, the Saudi suffered Houthi attacks on its cities and oil facilities, and at one time in 2019, its Aramco oil output was cut in half. A UN panel of experts concluded Iran supplied key missile parts allowing the Houthis to develop a lighter version of Iran’s Qiam-1 missile and others. It is all in the past for Iran and Saudi Arabia have now signed a deal brokered by China.
China and Pakistan have always had close ties and a Pakistani representative met his Chinese counterpart Qin Gang for reassurance after a noticeable improvement in its relations with India. In our topsy-turvy world, China is now acting as a peacemaker encouraging the two sides to resolve their differences. Bilawal Bhutto, the Pakistan foreign minister has been in India for a meeting of the Shanghai Cooperation Organization defense ministers.
While the world squabbles, Shanghai has just reported the hottest day in its history, and it seems we are all going to hell in a handbasket as the saying goes.
Of course, the “Unipolar Party” is over
On the right side of the Pacific, the U.S. media is eagerly asking as many scholars as possible whether the unipolar moment is over. On the left side of the Pacific, East Asian think tanks focused on questioning the sustainability of the U.S.-initiated Indo-Pacific Economic Framework (IPEF) during the APEC trade ministers’ meeting, indirectly confirming the end of the “unipolar moment”.
The post-World War II order, promoted by the United States through the creation of the Bretton Woods Agreements and various international economic and trade institutions such as the International Monetary Fund. This order was successful and won the Cold War, and the unipolar world also Get established. Until the US repudiates its past achievements, prioritizes protectionism, and declares that the new order is “America First,” the unipolar moment is doomed to an end.
The key to the success of the old order lies in “reciprocity”. Although the United States was the biggest beneficiary, countries that also benefited were willing to accept the creator as the biggest winner, which was the basis of the unipolar world. But today, the new dish served by the US is IPEF, a non-legally binding economic and trade “framework” implemented only by executive order, making it difficult for countries that once benefited from the old order to swallow.
To put it simply, the “reciprocity” with legal guarantees is sustainable, and the “framework” without legal binding is not sustainable. Therefore, the number of countries kneeling on one knee to the US is greatly decreasing.
The unipolar world is not only driven by economic and trade interests, but also by values that effectively whitewash abstract democratic freedoms, so that for at least a decade after the end of the Cold War, the world really thought it was the “end of history”.
But after two presidencies of Trump and Biden and seven years in power, the country that once admired the US has witnessed the great divide in Washington from the change in economic attitude. The unresolved partisanship has led to the incompatibility between the White House and Congress, and the “framework” is a product of skipping Congress, which may produce new changes at any time. This chaos has even weakened the soft power image of the US and created a negative perception of liberalism.
The Biden administration is trying its best to protect the domestic middle class, IT IS FINE, but at the expense of friends to approach that, well, you cannot ask everyone to continue to kneel on one knee. No market access, no legal safeguards, just like a party menu lacking meat and vegetables, certainly not enough to feed the guests.
Not only that, IPEF also requires members to open their markets and raise wages so that American goods can maintain their competitiveness. It’s as if guests have to dress up and bring their own rich meals to share with the host to ensure that the poor host is well fed. If the guests want to be fed, they have to join another party, hosted by a relatively generous China, which will also upset the US.
How can such a unipolar party be maintained?
Instead of seeing IPEF as economic cooperation, it should be seen as political cooperation because it has a strong political connotation of exclusivity. The US argument is, “My party food may be shabby, but China’s party food is poisoned, and it is better to be underfed than poisoned to death.
The guests who came to the American party after eating enough at the Chinese party were stunned, the corners of their mouths were still greasy from the last meal. The truth is, most guests would not have been able to dress up for the American party and share the beef stew they brought if they hadn’t eaten their fill at the Chinese party for over 20 years.
Of course, there are exceptions, such as Taiwan, which insists on staying on one knee, starving to serve their meal to their hosts – TSMC, the world-famous exclusive delicacy —- and Taiwan is not even allowed to participate in the IPEF.
The U.S. menu for Taiwan is the U.S.-Taiwan Initiative on 21st-Century Trade, and the menu is actually the same as the IPEF, with the difference that Taiwan is not allowed to participate in the party and can only eat in the servants’ room.
Taiwan’s ruling party boasted that the “Initiative” (Initiative) can greatly promote Taiwan-US economic and trade relations, and can “connect” with IPEF. It even hinted that it is a shortcut to join the CPTPP, and it is a ticket to the American Party. However, in general, the five issues that have been negotiated will help the US attract Taiwanese capital and increase employment in the US. and help the US have “long arm jurisdiction” over Taiwan regulations to protect US business interests, while the actual benefits to Taiwan are completely disproportionate.
The seven issues that have not yet entered the negotiations are even more severe for Taiwan. The main difficulty in the negotiations lies in the countervailing subsidies policy for state-owned enterprises, which is a “new order” in which the US attempts to reduce the competitiveness of other countries to the same level as the US, and is an issue that IPEF members strongly dislike.
The main reason why the current ruling party in Taiwan accepts all the unreasonable demands of the United States is that the party advocates independence and is a natural target of liquidation after reunification with China. The need to seek political protection from the U.S. is also a demand of some IPEF members, but the difference between Taiwan and IPEF members is that the latter will seek a balance between the US and China, while the former is completely out of balance.
However, even if there are examples like Taiwan that put political considerations above economic considerations, the core problem remains: “initiatives” without legal regulation are unsustainable, empty promises, and the United States can change its mind at any time without being held accountable for breaking them.
The desire to “rebuild America” at the expense of the interests of friends runs counter to the reciprocity principle of the unipolar order, and almost all countries believe that whether the next U.S. ruling party is a Democrat or a Republican, Washington’s “New Order” course will not change, which clearly means that the “unipolar party” is over.
The point is not that the US wants to shift internal problems to the outside – they have always done that – but that countries around the world already have other options, namely the Chinese party, and even hope for a possible “Indian party”. Not only that, China, which insists on non-alignment, has no intention of replacing the United States to lead the world, but wants to promote a multipolar order, giving countries another option, the “autonomy” that the unipolar order lacks.
No matter how one interprets the latest G7 consensus, it is undeniable that the US has had to abandon its quest for a new bipolar Cold War, as it is no longer the only country capable of hosting a party, and the menu is getting shabbier and shabbier, while the guests have to fill their stomachs.
In fact, the United States also has to fill its stomach. According to the data released by the Fed, in 2022, only 63% of American adults will be able to immediately spend $400 to deal with emergencies, which is a drop of 5% from 68% in 2021, This background can explain why the “American Party” is so shabby. In the unipolar moment 30 years ago, the lives of blue-collar workers in the US were better than the elites in most countries.
American scholars know what the media wants to ask, but most are reluctant to risk their academic reputations by giving concise answers to a vague notion of “polarity”. However, they know very well that the world has changed dramatically, and the US must adapt to a new order that is no longer so “convenient”.
The process of forming a multi-polar order is bound to be chaotic, but instead of sticking to a party that cannot fill your stomach, it is better to open the door to another party. It is the general rule of history that a revolution occurs when there is not enough to eat.
Can the U.S. afford to lose the Middle East?
If a nation aspires to attain global power status, any location across the globe can assume strategic significance for that nation. Undoubtedly, at different historical junctures, Vietnam, Cuba, and other locations have garnered significant significance within the framework of United States’ interests. Nonetheless, following the culmination of the Second World War, Europe and the Middle East assumed a paramount position in American foreign policy.
The significance attributed to Europe stemmed from two primary factors. Firstly, Europe served as the domain wherein the United States fostered its closest alliances. Secondly, Europe confronted an imminent threat posed by the Soviet Union, which stood as a global adversary to American leadership. Had the United States not undertaken the defense of Europe through the establishment of military bases and other forms of support, Western and Southern European nations might have met the same fate as their Eastern European counterparts, potentially succumbing to becoming Soviet satellites.
The significance attributed to the Middle East also emerged as a paramount priority for the United States, driven by three key factors. The first factor pertained to the region’s abundant oil reserves. During the Cold War era, more than half of the world’s oil and gas resources were concentrated in the Persian Gulf, thus rendering the security and stability of Middle Eastern energy supplies critical for Western industries. Secondly, the establishment of a strategic buffer zone in the Middle East and the Islamic world aimed at containing the Soviet Union and impeding its access to warm sea routes played a crucial role in sustaining American global leadership. Lastly, the indispensable nature of the Middle East for the United States stemmed from the imperative of ensuring Israel’s security. These three strategic considerations have rendered Middle Eastern affairs the most prominent focal point of American foreign policy for several decades. Consequently, American policymakers have dedicated substantial energy and effort to managing relations with key Middle Eastern actors such as Lebanon, Iran, and Palestine.
The profound ramifications of the Iraq War and subsequent Afghan retreat following the traumatic events of 9/11 have significantly undermined the self-assurance of the United States as a superpower, fostering a surge in isolationist inclinations within the corridors of power in Washington, D.C. The perception of American global leadership also suffered from the notion that the country, which reached its apex in the 2010s, was in a state of decline, further exacerbating its negative impact. Consequently, the United States began perceiving itself as considerably weaker than its actual capabilities. The Trump era further solidified the notion that America had transitioned into an ordinary power, leading to the prevailing belief that maintaining a widespread military presence worldwide was wasteful. President Trump, operating under the paradigm of running the state akin to a corporation, argued that the allies of the United States were enfeebling the country by burdening it with the majority of defense expenditures. He particularly singled out Germany and Japan, urging them and others to assume responsibility and augment their defense budgets to at least 2 percent of their respective GDPs.(1)
Within academic and think tank circles, a prevailing notion emerged regarding the unnecessary expenditure of energy and resources by the United States in the Middle East. Questions arose regarding the purpose and reason of American soldiers sacrificing their lives in the quagmire of the Middle East. The significant financial losses incurred by America in the region also came under scrutiny. Despite the assumption that the inauguration of Joe Biden as President on January 20, 2021 marked the end of the Trump era, many of Trump’s perspectives persisted and gained influence within American discourse, permeating various domains. One such idea entailed the diminishing power of American global leadership, suggesting that it would no longer suffice to extend its influence over every region
CHINA: RISE OF DRAGON
The perception of inadequacy regarding the capacity of American power to extend influence across all regions was primarily bolstered by the unprecedented economic ascent of China, which stands as the most significant contributing factor in history. Over a span of 23 years, China’s GDP surged from a mere 1.2 trillion dollars in 2000 to approximately 20 trillion dollars, marking a remarkable sixteen-fold increase. In contrast, the US GDP only grew 2.6 times during the same period, reaching 26.8 trillion dollars. In 2000, the US economy surpassed the Chinese economy by a factor of 8.5. However, as of 2023, the US economy stands at a mere 1.3 times the size of its Chinese counterpart. Economists assert that if this trajectory persists, it is merely a matter of time until China surpasses the United States as the world’s largest economy. The disconcerting transformation evident in GDP figures is not the sole cause for concern, as alarming data pertaining to US leadership emanates from nearly every sphere of the economy. During the pandemic period, a discernible weakening in the hegemony of the US dollar, which represents a paramount source of American power, became evident as its share among world reserve currencies dwindled to 59 percent by 2023. Notably, the process of dedollarization has favored China’s currency, the yuan, as the primary beneficiary. China’s influence now extends across diverse regions, from Brazil to the depths of Africa, challenging the United States at every turn. China engages in treaty negotiations, fosters reconciliation between previously hostile nations, and most significantly, conducts extensive trade with nations across the globe. Presently, there are only a handful of countries that do not count China as their largest trading partner. The growth in China is not limited to its economic and trade prowess; its military and defense capabilities are also expanding. China presently ranks as the second-largest country in terms of defense expenditure globally, with a defense budget surpassing the combined defense budgets of Britain, Germany, France, and Japan. These figures raise concerns for the United States, given the realization that no nation would allocate nearly $300 trillion towards armaments solely for the protection of its trade interests.
UKRAINE WAR AND RISE OF THE AMERICAN SENSE OF INADEQUACY
Amidst mounting concerns surrounding American global leadership, the eruption of the Ukraine War in February 2002 rendered the European continent a battleground once again. Despite the passage of a year, neither party involved in the conflict in Ukraine managed to achieve a decisive advantage. This prolonged stalemate has led experts to express concerns regarding the potential protraction of the war, with apprehensions mounting over the prospect of its spillover into other European nations. Throughout this period, the United States extended considerable support to Ukraine, offering military aid amounting to tens of billions of dollars, establishing itself as Ukraine’s primary benefactor. While there appears to be no significant opposition within America to this support provided to Ukraine, numerous experts in the field of International Relations argue that as the Chinese dragon strengthens its presence in the Asia-Pacific region, it would be ill-advised to unnecessarily fragment American power between engagements in Ukraine or the Middle East with Asia-Pacific. For instance, according to John Mearsheimer, a professor of political science at the University of Chicago, the United States should refrain from depleting its power in the Ukraine War or any other conflict, urging a swift shift in focus towards China. (2)
In alignment with Mearsheimer, Elbridge A. Colby, a former US Assistant Secretary of Defense, the contention arises that the United States lacks sufficient and appropriate military capabilities to effectively address all the threats that impinge upon its interests. Colby asserts that it is imperative for America to prioritize the mitigation of the China-induced threat within the Asian region. According to Colby, Asia stands as the “decisive theater” on a global scale, with China indisputably representing the preeminent formidable state worldwide. (3)
In conclusion, Republican politicians and realist political scientists posit that the United States has experienced a decline in energy and power due to its entanglement in Europe’s inefficient rivalries, exemplified by the ongoing Ukraine War. In contrast, they argue that China is poised to exceed the United States in the global leadership competition. Henry Kissinger, the former Secretary of State, coined the term “the necessity for choice” to describe such circumstances, emphasizing the importance for decision-makers to prioritize based on their country’s strength. (Henry Kissinger, Diplomacy, 1994). Under these circumstances, what type of regional emphasis should the United States prioritize? Would traditional focal points of American foreign policy, namely Europe and the Middle East, now take a backseat in this regard?
If the United States diverts a portion of its influence from Europe towards the Asia-Pacific region, it is conceivable that US allies and partners such as Britain, Germany, and France could fill the resultant power vacuum in Europe. However, can a similar scenario be anticipated for the Middle East? However, in the event that the United States withdraws from the region, would American allies and partners regain dominance in the Middle East?
THE MIDDLE EAST: NO LONGER IMPORTANT TO AMERICA?
According to Ambassador Martin Indyk, a member of the Council on Foreign Relations, the United States has unnecessarily suffered huge and unnecessary losses in the Middle East. In his article featured in the Wall Street Journal, Indyk asserts that the objectives set by the United States in the Cold War era no longer hold relevance in the present day. For example he contends that the United States’ dependence on Middle Eastern oil has reached its conclusion, and emphasizes that Israel has achieved a level of capability to ensure its own security. (4)
According to Indyk, neither the Palestine problem nor Syria should be the problem of the Americans anymore. “After the sacrifice of so many American lives, the waste of so much energy and money in quixotic efforts that ended up doing more harm than good, it is time for the U.S. to find a way to escape the costly, demoralizing cycle of crusades and retreats,” Indyk says.
According to Indyk, both the Palestinian issue and Syria should no longer be the concerns of the United States. Indyk argues that after the significant sacrifice of American lives and the squandering of substantial resources and efforts in misguided endeavors that ultimately resulted in more harm than good, it is imperative for the U.S. to seek a means to extricate itself from the costly and demoralizing cycle of crusades and withdrawals.
Indyk‘s perspective finds resonance among others who share similar viewpoints. They posit that the Middle East no longer holds paramount importance for the United States, and that the American economy is no longer reliant on oil from the Persian Gulf. Even among a diminishing minority in Washington who continue to emphasize the significance of the Middle East, the prospect of ceaseless Arab disputes, Arab-Israeli conflicts, and conflict-ridden regions such as Lebanon, Syria, Libya, and Iraq evoke aversion and reluctance. Numerous political analysts and scholars now grapple with comprehending the purpose of America’s presence in the Middle East.
The distressing failures in Iraq and Afghanistan loom large in the minds of policymakers in Congress and the White House. These unnecessary wars resulted in the loss of thousands of American lives and the expenditure of trillions of dollars, yielding minimal returns for such sacrifices. Moreover, these endeavors failed to contribute positively to the region, leaving behind a trail of hundreds of thousands of casualties and devastated cities.
It can be said that the trend that the Middle East is not a priority for America started in the Obama era, accelerated during the Trump presidency, and became clearer in the emerging Biden Doctrine. (5)
In recent months, there has been a growing chorus advocating for the United States to disengage from the Middle East, with some experts asserting that this withdrawal has already been accomplished. The Newsweek news magazine, in its commentary on March 5, 2023, went so far as to proclaim that the American century in the Middle East has come to an end and that the United States has exited the region. (6) The question arises: has the United States truly departed from the Middle East? As the United States seeks to rebuild its global leadership, has it relinquished the Middle East to concentrate its power exclusively on Asia, particularly China? Can one effectively assume the role of a global leader without exerting dominance in the Middle East? This essay aims to explore these inquiries and provide insights.
THE MIDDLE EAST OR THE CENTER OF THE WORLD
To address the question of whether the United States should withdraw from the Middle East, it is imperative to first examine the region’s strategic and economic significance. In a historical context, it is noteworthy to mention that astronomer Charles Piazzi Smyth suggested in 1864 that the Great Pyramid of Giza (30°00′N 31°00′E) in Egypt represented the center of the world based on his calculations of the Earth’s landmass. However, in 1973, physicist Andrew J. Woods utilized a digital global map and employed mainframe systems to determine coordinates, concluding that the center of the world was located at 39°00′N 34°00′E, near the district of Kırşehir and Seyfe Village in present-day Turkey, approximately 1,800 km north of Giza. Alternatively, there exists another perspective proposing that Mecca, which holds symbolic importance as a religious site, is considered the center of the world, akin to the significance attributed to the Earth’s two poles.
The precise identification of a geographically central town or village remains uncertain; however, upon examining the world map, it becomes apparent that the region commonly referred to as the Middle East occupies a prominent position at the global center. It serves as the converging point, or even collision point, of three ‘old’ continents: Asia, Europe, and Africa. Egypt represents the junction of Africa and Asia, with a portion of its territory situated in Asia and the remaining part in Africa. Observing the Sinai Peninsula on a map, one might perceive it as a piece of land that Asia and Africa have claimed for themselves, unable to share it. Similarly, the continents of Asia and Europe intersect through the nation of Turkey, where the Thrace region lies within Europe while the Anatolian lands extend into Asia. Spanning across Istanbul, one of the world’s most densely populated cities, the Bosphorus strait bisects the city into distinct European and Asian sectors. There is no other city in the world on two separate continents.Given the geostrategic significance of the Middle East, it becomes readily apparent why numerous major powers throughout history, ranging from the Hittites aspiring to exert dominance across Asia, Africa, and Europe, to the ancient Greeks, Pharaonic Egypt, and the Roman Empire, sought to seize control of this region.Historical evidence demonstrates the formidable challenge faced by a state aspiring to achieve and sustain “superpower” status in the absence of a dominant position in the Middle East region.
The Middle East region serves as a vital nexus, connecting not only continents but also the world’s most significant waterways and seas. Positioned amidst the Atlantic Ocean, the Mediterranean Sea, and the Indian Ocean, it encompasses a strategic location. The region is intersected by critical maritime passages and bodies of water including the Red Sea, Gulf of Aden, Persian Gulf, Arabian Sea, Gulf of Oman, Turkish Straits, Aegean Sea, and Black Sea, scattered throughout its expanse. These waterways hold immense importance for global maritime trade and military operations.
The Middle East occupies a central position in the world, encompassing not only its geographical significance but also its profound cultural and historical influence. While other regions were still inhabited by cave-dwelling societies, it was in the Middle East where the Sumerians made notable advancements, such as the development of writing, the introduction of the calendar system, and the initiation of foundational mathematical calculations. As the birthplace of humanity’s earliest civilizations, including the Assyrians, Babylonians, Akkadians, ancient Egyptians, and Hittites, the Middle East stands as the cradle of human civilization.
Furthermore, it is within the Middle East that the three prominent monotheistic faiths—Judaism, Christianity, and Islam—found their origins and thrived. This region bears immense importance as the spiritual birthplace and focal point of these religious traditions. Revered cities like Mecca, Medina, Jerusalem, and Ephesus persistently attract countless devoted pilgrims, serving as profound hubs of religious reverence and cultural legacy.
To sum up, given the geostrategic and cultural significance it embodies, it would not be an overstatement to assert that sustained global leadership is unattainable for any power that fails to exert dominance over the Middle East region in the long term.
CENTER OF OIL AND PETRO-DOLLARS
Following the discovery of oil in the early 20th century, the Middle East gained increased significance for major global powers. Notably, oil production commenced in substantial reserves in Iran in 1908, followed by Iraq in the 1920s, and Saudi Arabia and Kuwait in the 1930s. As the prominence of the oil-based industry grew, industrialized nations became heavily reliant on Middle Eastern oil. The escalating utilization of natural gas for residential heating and electricity generation further solidified the West’s indispensable dependence on the region. While oil initially served as fuel, its applications in modern society have expanded significantly over time. Petrochemicals, encompassing plastics, synthetic fibers, rubber, solvents, paints, detergents, fertilizers, and pharmaceuticals, as well as lubricants, asphalt, bitumen, and other petroleum-derived products, permeated various aspects of daily life. Presently, petroleum products find widespread utilization, spanning from cosmetics to automobile components.
The possession of this invaluable resource naturally enriched the countries of the Middle East. Nevertheless, during the initial years, Arab nations grappled with the question of how to manage their newfound petrodollars and opted to deposit their earnings in Western banks. The West, in turn, purchased oil with dollars, while Arab and Iranian nations, who exchanged oil for dollars, deposited their funds in Western banks or imported consumer goods from Western nations. Ultimately, both money and oil predominantly resided in the hands of the West. Following bitter experiences, this arrangement underwent a transformation, leading Arab nations to diversify their sources of income. Presently, oil-rich Arab countries own numerous Western companies. Moreover, wealthy individuals from Arab nations, bolstered by petrodollars, have invested in symbols of Western culture such as sports clubs like PSG and Manchester City. Gulf states such as Qatar, United Arab Emirates and Kuwait have also effectively succeeded in attracting the world’s wealthy to the region by constructing entertainment and grandiose shopping centers in the world’s tallest buildings next to oil wells…
In summary, as a result of capital accumulation derived from oil and gas exports, numerous Middle Eastern nations have emerged as significant importers and foreign investors on the global stage. The Arabian Peninsula accommodates nearly 20 sovereign wealth funds (SWFs), responsible for overseeing approximately $3.7 trillion in assets, which accounts for roughly one-third of the total state fund assets globally. For instance, the Kuwait Investment Authority stands as the sixth largest government investor worldwide, managing assets worth $769 billion as of 2022. As a result, Arab funds and investors represent coveted capital owners that each country seeks to attract to its domestic market. Similarly, the commercial cities of the Gulf have assumed a pivotal role in the global economy. Consequently, it becomes evident that any global power incapable of exerting influence in the Middle East would be excluded from highly consequential economic opportunities.
LAND OF TERROR OR OPPORTUNITIES?
Presently, if an average American or English individual were to be queried regarding their perceptions of the Middle East, their associations may encompass terms such as “terrorism” or “conflict,” portraying the region as a domain inhabited by adversarial forces. Nevertheless, over the course of the 20th century, the Middle East has significantly contributed to the economic and security realms of Western nations. Every impartial and non-ideological assessment unequivocally acknowledges that the Middle East has undergone a transformation, emerging as a region that mitigates the burdens on the United States and Europe, instead of serving as an additional source of obstacles or challenges across diverse domains. I do not find it realistic that the U.S.’s regional interests during the Cold War years are no longer valid in the new world order. If the U.S. still claims global leadership, it has and always will have vital interests in the Middle East.
Following the 9/11 attacks, President George Bush issued a cautionary statement that “America is addicted to oil” and advocated for a substantial reduction in imports from the Middle East. Since then, there has been a significant decline in U.S. imports from the Middle East; however, a complete reset has not been achieved. Nevertheless, refraining from importing oil specifically from Middle Eastern countries does not imply a lack of dependence on Middle Eastern oil. Irrespective of the source of oil procurement, oil carries a price like any other commodity, with oil prices predominantly influenced by the Organization of the Petroleum Exporting Countries (OPEC), comprising primarily Middle Eastern nations. Consequently, all nations worldwide, regardless of whether they import oil from the Middle East or elsewhere, remain reliant on the Middle East for oil, and this scenario shows no signs of imminent alteration. In fact, the U.S. President, seeking to curb escalating oil prices resulting from the Ukraine War, appealed to Arab states, particularly Saudi Arabia as the largest global oil producer. However, the Arab oil producers did not heed these requests, and oil prices soared once they collaborated with Russia. The surge in oil prices impacts every facet of the economy, given that oil serves as a fundamental raw material for numerous end products and constitutes a substantial portion of transportation and distribution costs. High oil prices have been one of the main contributing factors to the global inflation observed in recent years.
IS THERE A GLOBAL LEADERSHIP POSSIBLE WITHOUT THE MIDDLE EAST?
For a state to uphold its claim to global leadership, it will face significant challenges if it fails to establish a presence in the Middle East, given the region’s strategic location, abundant natural resources, and financial power. Moreover, a global power that attains influence over the Middle East does not merely shoulder new burdens, but rather discovers numerous sources of material and spiritual power that augment its influence in the region. The intentional or inadvertent creation of a substantial power vacuum by the United States in the Middle East has been recognized by China, which has discerned the region’s importance and fertility in global competition.
When China hosted the inaugural Sino-Arab Summit with Arab states in December 2022, the international media primarily emphasized the political aspect of the event. Similarly, when China successfully brokered reconciliation between long-standing rivals Iran and Saudi Arabia in February 2023, global public opinion centered on China’s potential political and military objectives in the Middle East. While it would be incorrect to assert that China’s new policies toward the Middle East lack political motivations, Beijing’s primary objectives for engaging with the region are driven by economic interests and energy security, rather than purely political ambitions. China’s annual crude oil imports from Middle Eastern countries exceed $170 billion, with Saudi Arabia alone exporting approximately $65 billion worth of crude oil to China in 2022. If China intends to sustain its economic growth, establishing a presence in the Middle East becomes imperative.(7)
Furthermore, the combined GDP of Middle Eastern countries surpasses $5 trillion, exceeding the combining GDP of both Japan and Germany. In essence, the Middle East region represents a prosperous market for Chinese goods. Notably, oil and natural gas-rich nations within the region possess investment funds worth trillions of dollars, as well as companies capable of making foreign investments. For instance, Saudi Arabia’s Aramco, a prominent petrochemical giant, has invested over $10 billion in refinery projects in China and is engaged in ongoing negotiations for further investments. As China currently serves as the Middle East’s largest trading partner, it aims to expand its sales to the region, increase oil purchases, and attract the trillions of dollars amassed within the region, which predominantly flow to Western markets, to the mainland Chinese economy.
In summary, China views the Middle East through an economic lens rather than a political one, offering a cooperative approach that benefits all participating nations. Unlike US-Middle East relations, this cooperation does not entail mutual political expectations between the involved parties.
Middle Eastern countries are presently content with China’s interest in the region, as it presents an alternative power capable of balancing Western policies in favor of local powers. Leveraging the global competition between China and the United States, local states will strive to assert their desires upon the major powers.
In order for the United States to uphold its position of global leadership, it appears impracticable to relinquish the Middle East to its adversaries. This is because the power that exercises dominance in the Middle East not only enhances its own power but also assumes a decisive role in global economies. It is evident that the United States has encountered a crisis of self-confidence in the region following its setbacks in Iraq and Afghanistan. Nevertheless, what is expected from the United States is not to repeat the mistakes of its past experiences in Iraq and Afghanistan, but rather to approach the region by assimilating lessons from those failures.
In his book titled “Grand Delusion” (Penguin, 2023), Steven Simon elucidates why America has sustained losses in the Middle East over a span of four decades. He identifies the crucial factor as Americans’ lack of comprehension regarding the region. If Washington desires to secure success in the Middle East, it must abandon its unilateral impositions and instead prioritize listening to its allies in the region.
(1) “President Trump Reportedly Wants Allies to Pay Full Cost of Hosting U.S. Troops Abroad ‘Plus 50%’”, Time, 8 MArch 2019.
(2) Steve Kraske, Zach Wilson, “Why one political scientist says the U.S. should focus on China instead of Russia’s war in Ukraine”, NPR, February 22, 2023, https://www.kcur.org/podcast/up–to–date/2023-02-22/why–one–political–scientists–says–the–u–s–should–focus–on–china–instead–of–russias–war–in–ukraine
(3) Elbridge A. Colby, “The U.S. Must Support Ukraine, But China Must Be Our Priority”, Time, 27 February 2022; Elbridge A. Colby and Alex Velez-Green, “To Avert War with China, the U.S. Must Pprioritize Taiwan over Ukraine”, The Washington Post, May 18, 2023.
(4) Martin Indyk, “The Middle East Isn’t Worth It Anymore”, Wall Street Journal, 18 January 2020.
(5) Jonathan Panikoff, “Shifting Priorities: The US and the Middle East in a Multipolar World”, The Atlantic Council, 12 July 2022.
(6) Tom O’Conner, “The End of the American Century Begins in the Middle East,” The Newsweek, 3 May 2023.
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