Un-Building Blocs

At a recent board meeting of the Tocqueville Trust, I offered an update on our continued, negative long-term view of the U.S. dollar (see, among other papers: The Dollar and the Euro). It should be seen, I suggested, on the backdrop of widening efforts by other nations to insulate themselves from the possible consequences of increasingly unilateral U.S. policies, whether intended or not.

One of our thoughtful trustees followed up with a note asking me: “You said that countries were trying to get out of the way of the clumsy heavy foot of the United States, [his terminology, not mine]. Is it possible that many more countries are trying to join in behind a superpower that is truly attacking fifty years of tyranny?”

Of course, such countries exist and, interestingly, they are located mostly in eastern and central Europe, where the memories of tyranny are most recent and most vivid. Many of these countries, including several ones hoping to be admitted into the European Union, passed on “an opportunity to keep quiet”, to quote President Chirac, to support the United States on the way to war in Iraq. A statement by a group of central European countries known as the “Vilnius Ten” noted: “Our countries understand the dangers posed by tyranny and the special responsibility of democracies to defend our shared values”. And Mart Laars, Estonia’s former Prime Minister, added: “This is just the beginning. Central Europeans and others won’t stand for French-style anti-Americanism”.

However, my role is not to judge which country is right or wrong, or holds the best values. It is to try and decipher emerging trends -- whether we like them or not – and how they might affect the global economic outlook. And one such trend is for more and more countries to take their distances from U.S. policies and insulate themselves from the consequences of these policies.

Anti-Americanism is not New, but…

Since many Americans narrowly view recent developments in international relations as a mere reflection of rising anti-Americanism, it is worth mentioning a recent article by Andrew Kohut, of the Pew Research Center, for YaleGlobal. Reminding the reader that there have been earlier episodes of anti-Americanism, followed by returns to favor, Mr. Kohut analyzes a broad sample of recent international surveys documenting his assertion that “this time it is different: the anti-Americanism runs broader and deeper than ever before. And it’s getting worse.”

Some of the findings come as no real surprise: the number of Germans having a “favorable view of the United States” fell from 61% in 2002 to 45% today, hardly better than the French, whose favorable views of America declined from 63% to 43%. Of course, in the Muslim world, the figures are dismal, and we should not be surprised that even among Indonesians, arguably the most moderate of Muslims, the proportion looking favorably upon the United States has shrunk from 61% in 2002 to only 15% today.

What is more striking is the sinking view of America among peoples more removed from the politics of the war in Iraq, like the Brazilians, whose views of America went from 52% favorable last year to 34% today. The same holds true in Argentina and, I am finding out, in Mexico.

Of course, survey results mostly reflect the opinions of those who ask the questions, and we should take them with a grain of salt. Furthermore, I do not have any statistics about opinions in China and India where, after all, nearly half the world’s population lives. But the trend elsewhere is fairly evident and broad enough to raise some questions.

…While Irritation and Envy are Old…

What we perceive as anti-Americanism is really a combination of two attitudes toward America: irritation and fear.

As early as 1997, former CIA Director and Defense Secretary James Schlesinger analyzed the irritation factor with great insight.  I’ll just quote liberally from his article in The National Interest.

“The only restraint on a nation in the position of the United States, with all the global power that it has acquired, is ruthless self-criticism. But, to put it plainly, ruthless self-criticism has never been a principal characteristic of the American people. Humility is not our national style. Rather, we are given to the exuberant enjoyment (and praise) of our own exceptionalism…”

“…To be sure, American hubris is more acceptable than the hubris of other nations in the past”… “We have no territorial ambitions; we are reasonably benign. We just want to instruct others on how to behave. Still, it is an American illusion that other nations are eager to have pointed out to them what the U.S. government regards as their defects...”

“…The upshot is that the United States has successfully established itself as a nigh-on universal nag. It makes us feel good, even though our hectoring irritates others.”

Most of us would acknowledge Secretary Schlesinger’s analysis, but feel that we have earned the right to be humored by others. After all, our “hubris” is no more irritating than, say, France’s constant posturing and teaching, and we have actively promoted and defended universal values such as democracy, freedom of speech and women’s rights. The difference is that no one fears France, while more and more foreign populations have come to fear the United States.

…Fear of America is New

On that subject, Mr. Kohut’s article offers some striking insights. For example, even in the United Kingdom, our staunchest ally, 55% of the respondents see the United States as a threat to global peace, while in Greece, Spain, Finland and Sweden, America is seen as a greater threat to peace than even Iran or North Korea! Meanwhile, 71% of the Turks and 58% of the Lebanese believe that the United States may someday threaten their country.

How can this be?

To understand how and why attitudes have changed, it helps to retrace developments of the past decade. More than ten years after the collapse of the Soviet Union, and with the September 11, 2001 tragedy as a catalyst, we have finally entered the post-Cold War era.

Longing for the Cold War?

During the Cold War, there existed a military balance – real or perceived -- between two superpowers: the United States and the Soviet Union. By necessity and for economic reasons, most democracies were content to live under the American military umbrella. But, in a perverse way, the existence of the Soviet threat was somewhat comforting, as a check on any imperial temptation on the part of the United States. Furthermore, the balance of power between the two superpowers did give lesser powers a say in world affairs – by trading votes in international organizations such as the United Nations or participating in ad hoc alliances in exchange for other favors and privileges. This demanded, on the part of the superpowers, at least a pretense of seeking advice and approval from lesser nations, a state of affairs that was delightfully and ironically depicted in Peter Ustinov’s 1961 play and film, Romanoff and Juliet.

Even after the collapse of the Soviet Union (in 1991, if one date must be picked), an elusive threat remained and the United States continued to behave as the leader of the democratic world, careful to obtain approval from and build consensus among its allies, while skillfully using international forums such as the United Nation, NATO and the World Trade Organization. With 9/11 as a catalyst, however, a new foreign policy doctrine that had been much discussed in the 1990s was wholeheartedly embraced by the Bush administration. This doctrine replaces the previous policy of deterrence and alliances by one of pre-emptive strikes and “coalitions of the willing”.

“We Are All Mexicans Now”

This new doctrine implies that our allies are often indecisive, if not effeminate as suggested in Robert Kagan’s now famous statement: “Americans are from Mars and Europeans from Venus”. In a world where the danger is everywhere and immediate, this new doctrine holds, there must be maximum freedom of action, which makes international forums, institutions, treaties and consultations obsolete. In such a view, the United States being several military-technological orbits above the rest, “needs merely assistants, not allies”, points Josef Joffe, editor of Die Zeit in Hamburg,

Stephan Richter, editor-in-chief of The Globalist goes one step further in an article entitled “We are all Mexicans now!” Referring to the American stereotype of Mexicans as laborers employed in lower tasks, appearing when they are needed and disappearing once they are done, he asserts that Washington has recently been treating its long-term allies like domestic employees.

In Joffe’s view, Secretary of Defense Donald Rumsfeld’s famous statement that “the mission determines the coalition and not the other way around” also spelled the demise of NATO as we knew it – as a community that would either act together or not at all.

But, says Joffe, history teaches us, not only that the price of victory usually is the death of alliances, but also that the international system abhors imbalances, so that power begets counter-power.

“We Do It Because We Can”

Indeed, with the Soviet threat gone, and with it much of the need for America’s military umbrella, many nations are above all worried of the United States’ unbridled power and what Chancellor Gerhard Schrö calls “American adventurism”.

Schrö’s view, by the way, is not an isolated one. During the run-up to the Iraq war (which I supported in principle), I complained that no one had really explained to us why an invasion that had been at best on the back burner six months before had suddenly become so urgent. One of my red-blooded American partners answered: “We are going because we can”. This summarizes perfectly, not only the current American administration’s view of the world, but also the rest of the world’s view of America. They can’t help wonder: “If we follow them, where will they take us next?” And also: “How will America’s next adventure affect us, even if we don’t participate?”

One recent example of a developing paranoia toward the United States is a statement by Chinese President Hu Jintao: “The United States has strengthened its military deployments in the Asia-Pacific region, strengthened the US-Japan military alliance, strengthened strategic cooperation with India, improved relations with Vietnam, inveigled Pakistan, established a pro-American government in Afghanistan, increased arms sales to Taiwan, and so on. They have extended outposts and placed pressure points on us from the East, South and West. This makes a great change in our geopolitical environment.”  (Cited by Robert Suffer, visiting professor at Georgetown University)

Just as significant is a recent editorial in Japan’s Asahi Shimbun: “Over the decade or more that has passed since the end of the Cold War, America has risen to a position of clear dominance on the military and economic fronts. This superiority is fueling that nation’s unilateral tendencies…. Washington believes that even its allies must not stand in its way… The Bush administration is turning its attention to Iran, North Korea and other states and organizations suspected of posing threats as future enemies…This is a new era of war: a superpower is willing to launch missiles in the name of peace and democracy… If Japan becomes preoccupied with the threats immediately under its nose, or if it cares too much about US requests, it will fail to see the forest for the trees and continue to wander in circles.”

Hungary’s Prime Minister recently stated in Beijing that his country and China had the same views about the need for a multi-polar world. Asked how his statement fit with Hungary’s signing of the letter supporting President Bush in Iraq, Mr. Medgyessy answered that America represents certain values (freedom, democracy, independence, competition) “that we all consider to be good”, but that “even the wisest and most excellent great power needs control”.

In a few years, the world’s view of the United States has changed from that of an enlightened and benign hegemony to that of a potentially dangerous wild card in international affairs. In the process, the values that the United States has always championed and which are still shared by most of our allies and former allies have lost their role as a rallying bond. This is the difference between leadership and despotism – and while leadership can survive a long time, despotism seldom does.

I normally avoid writing about politics and I would not have done so today if this new state of affairs were not engineering massive changes that threaten to have deep and potentially negative consequences for the world’s economic order.

In my view, confining the current change in the geopolitical environment to a rise in anti-Americanism would be dangerously narrow-minded, and would amount to confusing cause and effect.

Back to the Dollar

What is happening, rather, is the acceleration – perhaps the approaching climax -- of a thirty-plus year trend that has seen the re-assessment of America’s image from that of world savior and super-hero to that, simply, of a nation among others – even if still the most militarily powerful one and the one with the strongest economy. This trend has experienced up and down cycles, for sure, but it has been inexorable and the evolution of the dollar since the breakdown of the Bretton Woods monetary system illustrates it vividly.

No country today is in a position to oppose the United States militarily, and some may still need U.S. help to face lingering regional threats. Yet, increasingly, every opportunity to foster multilateral approaches and regional peace alliances is being seized by even our most faithful allies.

Perhaps more importantly, preserving access to the U.S. market remains a consideration for most exporting countries. However, this imperative, too, is being progressively eroded by the growth of trade taking place outside the United States, as well as by the recent rise of protectionist tendencies in America.

The Ascent of the Asian Bloc

Nowhere is this more evident than in the acceleration in the formation of an Asian bloc.

On the political and diplomatic front, the signs of an evolving bloc often require interpretation. Paul Evans, of the University of British Columbia, comments that East Asian regionalism is of a distinctly “soft” variety – a rising tide, but not the dominant force in regional politics, security or economics. He refers to “an emerging penchant for multilayered regionalism and the creation of a web of intra-Asian processes [which have] the ironic effect of increasing the general importance of regionalism while blurring the significance of any one regional identity or institution”. He explains that intra-Asian integration processes, contrary to the European model, for example, “are not deeply institutionalized, [because almost all countries] adhere to the view that high levels of cooperation are possible with only a low level of institutionalization.” In Asia, he says, “institutions are useful for dialogue and consultation, but can rarely produce collaborative policy development or collective action”.

Still, the signs of a more cohesive Asian bloc are multiplying, with China often playing a central role without outwardly showing any desire for leadership. It is interesting that, in spite of this restraint, the recent collapse of the World Trade Organization talks in Mexico was widely interpreted in Asia as a Chinese diplomatic victory. The South China Morning Post, for example, wrote: “The collapse of the WTO talks … was applauded yesterday as a victory against the powerful, rich nations that cemented China’s role as a leader of the developing world”. China, indeed, is slowly and discreetly but surely weaving a web of contacts and accords that is positioning it as the de-facto diplomatic leader of the Asian world.

The Shanghai Cooperation Organization, made up of China, Russia and four central Asian states was set up five years ago to offset what it denounced as “America’s global domination”. Put on hold after 9/11, the organization was revived last June when the leaders of the six nations signed a charter for their regional security bloc.

In September, China discreetly joined Galileo, a global navigation system scheduled to launch thirty satellites by 2008 in order to compete with the Pentagon’s Global Positioning System (GPS). Beijing’s 200 million Euros investment will make it the fifth financier of Galileo after Germany, France, the United Kingdom and Italy. These systems can use airliners in the guidance of missiles, and some experts have experienced discomfort at China’s statement that it expects to actively participate to the development of Galileo “and to its applications”.

Bringing Former Enemies Together

Even former Asian rivals or enemies have begun to cooperate, at least in symbolic or commercial endeavors.

India and China, for example, have agreed to coordinate their positions on a range of issues in the World Trade Organization. In particular, they started several cooperative projects in the information technology area, while smoothing out some decades-old territorial disputes and even conducting joint military exercises – in what was described as the biggest step forward in bilateral ties for at least fifteen years. Sino-India cooperation in IT, bio-technology and medical science is not entirely new, and it has helped bilateral trade between the two nations grow from $1 billion in 1996 to $5 billion in 2002. But in the first quarter of 2003, Sino-Indian trade further increased by seventy percent.

China recently announced that it will soon let short-term visitors from Japan enter the Mainland without visas. This development is not unrelated to the sharp increase of Japanese investments into China or to the fact that, in little more than ten years, Japan’s imports from China have grown from 5% of Japan’s total imports to almost 19% -- surpassing for the first time Japan’s imports from the United States.

Even “the curious relationship between Seoul (South Korea) and Beijing has come a long way from antagonistic enemies to cooperative partners for the future”, writes Jae Ho Chung, visiting fellow at the Brookings Institution. Again, this is no coincidence, as last year China surpassed the United States as South Korea’s largest export market, while South Korean investments into China have skyrocketed. In the process, Beijing’s historical, special relationship with North Korea has been overlooked, while relations between Seoul and Washington have become increasingly strained. A growing number of South Koreans (though perhaps not a majority, yet) resent America’s military presence in their country, as well as its protectionist tendencies, while no longer sensing a severe threat from a much weakened North. Increasingly, too, Beijing looks like a better choice for brokering a “soft” resolution of the Korean crisis than Washington.

Economic and Political Motivations Are Intertwined

Recently, a free trade zone has been tentatively discussed by East Asia’s three largest economies (China, South Korea and Japan). Both China and then Japan have already signed landmark deals with ASEAN (Association of South East Asian Nations) or with individual countries within it. South Korea is reportedly considering similar treaties. Already, China is lowering tariffs for ASEAN countries (as of January 2004) – including agricultural products, which, in contrast, remain a sore point of contention with Europe and the United States. China’s total trade with ASEAN already is $55 billion, or half of its trade with the United States and, according to 13D Research, its imports from ASEAN soared sixty percent in the first four months of 2003.

Altogether, intra-regional trade, which accounted for 25% of the total trade of East Asian countries in the early 1980s, is now more than half – and set to accelerate further. We may temporarily take solace in our technological leadership and ability to innovate, but one must wonder what might come from greater cooperation and freer technology transfers between Japan, Korea, China and India, if the ties between these former rivals continue to solidify.

Unfortunately, one factor that serves as a catalyst to such solidification is the Asian nations’ common position toward the United States’ unchecked dominance of global security and trade.

Paul Evans puts the emergence of an Asian bloc in the appropriate perspective when he writes: “There is no question that the volume of intra-Asian flows has increased dramatically and with [it] the perception of shared regional interests and possibilities”. Unfortunately, the rapprochement between the nations of the emerging Asian bloc is not only about opportunities. He adds elsewhere: “[There] is a set of feelings and sentiments rarely written about but frequently discussed in regional gatherings. One is the attitude of “never again”, referring to the desire to avoid another economic crisis… Another is the feeling of humiliation that accompanied the economic crisis and the American management of it. Others speak resentfully of American arrogance (and) triumphalism”.

The Shape of Things to Come

So, my emerging view is that of a world economy re-arranging itself around, but increasingly outside, the United States, and where the other major players will be 1) Europe and the broader community it is (painfully) trying to aggregate and 2) China and the emerging Asian bloc. Of course, along with the trade re-arrangement will come a political re-arrangement, for the two follow the same logic and seem inseparable – to the point where it is sometimes difficult to tell which is the chicken and which the egg. [Note that, at the moment, Russia is skillfully playing an outsider’s game, capitalizing on its huge oil reserves and what remains of its aura as a military and scientific power].

One of the unavoidable casualties of this transformation will be the unique status of the U.S. dollar in the global economic and financial system. As the world rearranges, all around us, the need for dollars will diminish in relation to the need for other currencies. Less trade will be conducted in dollars and, as more stability is likely to be maintained among the other regions’ currencies than between these currencies and the dollar, the incentive to hold corporate or central bank reserves in dollars will be lessened. (Note that the proportion of international reserves currently held in the US currency is practically back up to the levels that prevailed after the first oil shock, in the mid 1970s).

Furthermore, the pricing of oil (and secondarily of some other commodities) in dollars, which has been imposed and fiercely defended by the United States for decades, is coming under attack. Such attacks have happened before, without much success. But now, Russia is again raising this possibility and while a shaky Saudi Arabia would probably not dare to initiate such a move, OPEC would in all likelihood be more than happy to join in. This would lessen the need on the part of oil consumers all around the world to permanently hold a stock of U.S. currency to fund their future purchases, and permanently lessen the demand for dollars. According to some observers, there are signs that China, which has been accumulating international reserves at the fastest pace in defense of the dollar, may be beginning a process of diversification into other currencies and, possibly, some commodities for which it would not mind building national stockpiles.

The scenario which I have just outlined is unlikely to unfold quickly or in a straight line. In fact, I fervently hope that no rash action precipitates it, for the two previous selling climaxes in the dollar were closely associated with the 1974-1975 global recession and the 1987 global stock market crash. But the direction is clear and should provide a lot of fun for a number of years to all the experts who will be dreaming up the world’s next currency and trading system.

Merry Christmas and happy new year to all our readers,

François Sicart

December 25, 2003 in San Miguel de Allende (Mexico)
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