The US led free world (Western Europe, Japan and Australia) during the cold war were offered a pretty good deal. Mutual economic access (to a degree) and US military protection. In return the US got to set the majority of the economic terms. This was a very good deal for all involved. With the collapse of the Soviet Union and communism, this deal was extended to more countries. Eastern Europe, rest of Asia, and most notable from 2000 onwards China. The problem is that the US is reneging on its part of the deal.
As the War in Ukraine drags on, it’s increasingly clear that the US cannot guarantee security, a continuation of the problems in both Afghanistan and Iraq. As pointed out in the note on Australia, the US is now asking Australia to spend 50% of its defence budget for the next 30 years to supply the US with a nuclear submarine refuelling station in Perth. This has two negatives. Firstly it risks Australian access to the Chinese market, which is far larger than the US market for Australia. And it starves other parts of the Australian military of funds.
Secondly, the implication is that American defence spending, despite being larger than the next 10 nations combined, now requires its allies to spend more. That is the “implicit deal” for a country like Australia is getting worse. The biggest problem with this for me is that the basic assumption is that as an autocratic state, China is dangerous. That as President Xi is likely to be president for life, we need to build out military power for when, not if, China begins to take offensive military action.
The obvious problem with this logic, is that it is not applied to either Saudi Arabia or even Turkey, with the latter being a key member of NATO. Even India is beginning to show signs of single party domination with Modi, but the threat of China leads to this inconsistency to be overlooked. Close US allies, Japan and Singapore have had virtually single party rule since World War II. Even if the fear of Xi is correct - the appearance is that this is a China specific policy. That is even if China was democratic - US policy would still be focused on containment.
So the US is now asking allies to reduce exposure to China (the largest trading partner is most cases) and spend more on military to protect themselves from China. To compound the unattractive mess of the current US deal, the US has adopted industrial policy, offering heavy subsidies to attract new business to the US at the expense of its allies.
Why is the US treating its allies so badly? I have two reasons. With the advent of shale oil and gas, the US really does not need the rest of the world anymore. That is US policy can be completely geared to domestic needs, and ignore foreigners wishes with little negative consequences. The oil shocks of the 1970s showed the US it needs to pay more attention to the world, and to make the US dollar more attractive. With the US no long a net importer, there is no impetus to care about the rest of the world. If anything the pressure on China to reach out to other nations is rising.
The second reason is that income inequality is now so extreme in the US, domestic politics has become poisoned - and any concessions have become politicaly impossible. In essence US policy becomes “what can you do for me?” President Trump personifies this view, and is very popular with the US voting electorate. His chances of becoming President again have been rising lately.
The other way to look at US policy is that it is driven by corporate interests. US corporates love the access to Chinese markets, and to Chinese manufacturers, but are extremely uncomfortable with Chinese competition in leading industries. Hence Chinese tech needs to be disparaged as dangerous to stop it taking market share - see Huawei, TikTok, semiconductor investment etc. No doubt threats to the payment systems of Visa and Mastercard will portray WePay and AliPay as security threats. Or as BYD will be seen as a security risk if it begins to threaten Tesla’s position in the US. And yet the Chinese still run a large trade surplus with the US, as corporate America still needs the low cost manufacturing. Politically the US position makes no sense, but from a corporate profitability point of view it makes perfect sense.
The real problem that the US faces is that China is getting to a position where it could offer the deal that the US used to offer. Military protection, and access to a vast domestic market, but in return only asking to use a China based financial system, it at the very least, a non-US centric system. All the other pretenders to the US crown never had the military might to give security guarantees. Germany and Japan had the economic might in 1970s and 80s, but lacked the military might.
In this case the US seems to be helping the Chinese. The attractions of a non-US based system increases every time the possibility of US debt default rises. The problem is that the political logic of a debt default in the US is hard to escape. Republicans are committed to cutting taxes and spending, and Democrats are committed to raising spending. The main cost of the debt default would be born by foreigners, either by the US dollar falling or the value of debt falling.
Weirdly, if the US really wanted to damage China, a return to the tight monetary and fiscal policies of the 1980s and 1990s would probably be the best possible reaction to China’s rise. This policy combination led to the Asian Financial Crisis, as it destabilised the financial markets of Asia. But can US corporates bring themselves to endorse a policy that could see profits and valuations fall?