Trump, Russia and China by Alasdair Macleod for GoldMoney

Even before he takes office, President-elect Trump is turning the world upside down.

It has become clear his attitude towards Russia and China is very different from that of his predecessors. Amazingly, he is already wresting power from the deep state, causing it great resentment, which under Obama, Clinton and the Bushes, ran geopolitical policy. From January, barring accidents the world will not be the same, the establishment up-ended.

This short article builds on information available to date and speculates how America’s relations with Russia and China are likely to evolve, and the implications for NATO and Europe. It attempts to cut through the disinformation and noise (from all sides) to assess how Trump will change super-power relations.

Russia

President-elect Trump has signalled his respect for President Putin as a leader, and Putin, who has been careful to not comment on the US presidential election, has indicated his respect for Trump. Furthermore, Trump, who admittedly said lots of contradictory statements to get elected, clearly wishes to reduce America’s funding commitment to NATO and to reduce American involvement in the Middle East. These objectives will obviously find favour with Putin, and could form the basis of a relationship reset between Russia and the West.

The American deep state was responsible for moving missiles within range of Moscow, under cover of targeting Tehran, in this year’s escalation of a new cold war. It follows the covert destabilisation by the US of Ukraine over the last decade and American backing for various terrorist groups in Syria, following Syria’s refusal to permit pipelines from the Gulf to cross her territory five years ago. Since the fall of the USSR, NATO has moved its eastern border to within 300 miles of Moscow. Elements in the CIA, working to their own agenda, are still trying to demonise Russia without any evidence, as the Washington Post story about Russian intervention in the election demonstrates.

The Trump team dismissed this attempt to blacken the Russians as disinformation, from the same sources that came up with the fiction of Saddam Hussain’s weapons of mass destruction. The timing of accusations over Russian involvement probably has much to do with influencing the electoral college’s votes, a last stand against Trump’s election, in which case the intervention is politically outrageous. But this is a side-show, and doubtless Trump will deal appropriately with those involved when he is in office.

Rather like super-tankers that need seven miles to stop, regional powers are also finding it hard to adjust to these new realities, but adjust they surely will. European governments and NATO members will have had background briefings, but the normal channels for this, the CIA, the US Military advisers and American diplomats are not on Trump’s page, so confusion still reigns. But one thing is becoming clear: Trump will not be diverted from a general policy of détente and de-escalation of military presence in both Europe and the Middle East.

The process of détente is reasonably predictable. A summit with Russia to agree strategic arms limitations (called SALT3 perhaps?) is a proven path to follow. It should be a step-by-step process scheduled over five or ten years, with pre-agreed conditions designed to satisfy concerns in the Baltic States and Poland that Russia might attempt border-creep. For their part the Russians must agree Ukraine’s independence (excepting the Crimea, Donetsk and Luhansk, which should be formally ceded to Russia). Ukraine and Belorussia will be independent buffer states between Russia and the European Union. Under a SALT3 both NATO and Russia will agree to a phased withdraw of all military hardware other than limited ground troops and their associated equipment.

In the Middle East, America will concede that Syria remains in the Russian sphere of influence, and will withdraw all support for rebel organisations. This is no more than reality. China, doubtless, will help in the physical reconstruction of Syria in due course. Agreement will be sought as to the means of destroying Daesh. Beyond that, a reduced American presence in the region will continue to ensure security for Israel and the Gulf states. Already, the British have announced they will step up their presence in the region, which should also contribute to regional stability.

Iran should be persuaded by Russia to take a more constructive approach to peace with Sunni states, such as Saudi Arabia, and towards Israel. This could be difficult, but should be possible, given Iran has become considerably more moderate since the days of Ahmadinejad, particularly if the right tone from America is forthcoming. Iran’s days of hiding from western sanctions behind Russia will be over, and should be replaced with an emphasis on trade. And Saudi Arabia can no longer afford to wage wars, such as that in the Yemen, contributing to a less belligerent outcome.

All this is practical, possible and predictable. Behind the change in geopolitical reality for the Middle East is the fact that Peak Oil is being pushed further into the future. Not only are large new oil fields still being discovered (such as the Kashagan Field in the north of the Caspian Sea), but modern technology is bringing other forms of ecologically-friendly energy supplies on stream and higher prices will unlock shale oil supplies. The strategic importance of the Middle East has therefore declined, particularly since insignificant quantities of oil from the region go to America. And with that decline goes less need for geostrategic intervention by the US.

For the first time since the Six Day War in 1967 there is a realistic possibility of stability in the area, assuming the super-powers take a constructive approach to détente, and are willing to jointly police the region.

Regional implications of détente with Russia

The benefits of regional peace to the Middle East will, hopefully, materialise. Turkey is important, and will need to be considered as well. The coup attempt earlier this year, which was likely supported if not actually instigated by the US, has resulted in Erdogan tightening his grip on all opposition to his rule. However, Erdogan may have become Russia’s puppet, because the Russians appear to have tipped him off ahead of the coup and ensured its failure. If this is indeed the case, not only does he owe his power to Russia, but Russia can take it away. Under Russian influence, we can expect Turkey to continue to lean away from her impractical and unrealistic hopes of joining the EU, and instead pursue her more recent ambitions for membership of the Shanghai Cooperation Organisation. That would offer Turkey the best long-term future.

With Turkey’s future direction appearing to be decided, far more important is the effect of a reset with Russia on Europe and the European Union. As NATO members, European nations have gone along with Russian sanctions, which have been detrimental particularly to Germany’s economy. Their removal will give Germany a new long-term trade market of considerable potential, reducing her dependence on trade with other EU states, particularly France, Spain and Italy. The possibility of a new Hanseatic League, about which I wrote last March, is now on the cardsi. I was very surprised that it hadn’t been considered by the British Government and discussed with the Germans as a Plan B in the event of a vote for Brexit. However, the prospect of détente with Russia leads to a new Hanseatic League now becoming a realistic possibility.

Briefly, the trade route to Russia, both by sea through the Baltic and overland by rail and road, offers enormous trading potential for Germany, Britain, Holland, and Scandinavia. To this we can add Poland, Czech Republic, Slovakia, Austria, Hungary, and to a lesser extent, Romania, Bulgaria and Serbia. Furthermore, a northern trade route will link into China’s One Belt One Road project, further enhancing its importance. In short, the long-term future of France, Spain, Italy and Greece will be challenged by the rehabilitation of Russian trade, and potentially become one of relative isolation. An overriding reason why Russia will become so important is because of her partnership with China in the Shanghai Cooperation Organisation. Russia is, with sub-Saharan Africa, the source of natural resources for China’s planned industrialisation of all Asia. And as a resource-rich country, Russia will benefit from the continuing rise in raw material and energy prices. Détente with America and NATO will improve her economic outlook considerably, but she needs European commercial technologies and manufacturing techniques to help rebuild her own middle class’s wealth.

The underlying reasons a SALT3 will work for Russia are all there, and Trump is likely to take the view that Western Europe should not be his responsibility. There is little US trade with Russia, so trade negotiations for America are not in this mix, simplifying matters considerably. The trade bun-fight will be mainly confined to negotiations with China.

We can be sure that there will be a summit between President Xi and President Trump early next year, because Henry Kissinger, who is trusted by the Chinese, and despite his great age has been sent by Trump to arrange it. Reports in the press that Kissinger’s visit last week was just to calm things down after Trump’s telephone call with the Taiwanese leader are wide of the mark. Trump is simply establishing his negotiating position from the outset.

Trump is of the opinion that businessmen, not diplomats, should control trade negotiations. While diplomats might view this approach as naïve, the fact is Trump will be setting the agenda. Consequently, he is likely to be dismissive of past agreements, and impatient with the snail’s pace common in diplomatic trade negotiations. He will most likely wish to handle trade negotiations with China himself.

In order that trade negotiations progress without misunderstandings he has nominated Iowa Governor Terry Branstad for the post of Ambassador to China. Branstad has known President Xi through previous visits, and should be an effective communications channel. That’s the soft part of the deal. The hard part is Trump’s rhetoric, and his willingness to talk to Taiwan, which has established his opening gambit. His objective will be to get China to stop manufacturing copies of American goods, hacking into commercial websites to steal trade and technological secrets, and abusing intellectual property. It is likely China will agree to tighten up on this behaviour, in which case a new trade agreement can be reached.

While diplomats might find Trump’s style damaging to their careful construction of trade relations over time, there is little doubt his approach has merit. Success with China, even if it is limited in scope, is likely to be the outcome. It could alter not only the way trade agreements with China are set in the future, but could override the whole WTO process for other international trade relationships as well. And here again, we see the EU with its antiquated and obstructive approach to trade being most challenged.

At the end of the day, Trump’s language is one the Chinese will understand, and in return for backing off over Taiwan, they are likely to concede America’s beef over intellectual property abuses, hacking and commercial espionage. China’s focus is moving away from that sort of business anyway, towards higher-level services and improved infrastructure for its rapidly-growing middle classes, and she plans to spread the benefits of her industrialisation throughout Asia.

Furthermore, there are likely to be echoes from Trump’s big-bang on trade. Removing diplomats from the act of setting the trade agenda, disconnects trade from geopolitical considerations generally, allowing Japan, for instance, to join the Asian Infrastructure Investment Bank. It is even conceivable that the US itself might apply to join it at a future date, in which case, you heard it here first.

Trump’s trade negotiations with China, if successful, could have far-reaching effects. They could, of course, go badly wrong, but the Chinese are realists and will almost certainly adapt to the new reality. It is in their interests to strike a deal with Trump, swiftly giving him concessions that established diplomatic practice would be unlikely to yield.

Political and economic consequences for America

In the first half of 2017, Trump is likely to achieve both détente with Russia and a new, better trade deal with China. If so, his pre-election stance, that the American establishment was failing the people, will have been amply proven. Trump will likely be riding high in the opinion polls.

However, you cannot demolish the status quo without consequences. While much good will be achieved if Trump’s approach to Russia and China succeeds, the EU will be undermined both politically and financially. The European Union is already threatening to break up following Brexit, and Trump’s détente with Russia could give Germany a realistic opportunity to cast off from the European Project. The financial cost of a European break-up will be a difficult pill for Germany to swallow, and renewed trade links with Britain and Russia is her best shot at recovery. The future for the euro, whatever happens, is being challenged, more so if Germany decides to replace it with a new Deutschemark. If Germany replaces the euro, the Eurozone’s banking system and currency will be increasingly vulnerable to collapse. And if the Eurozone has a banking crisis, it will inevitably infect the global banking system, undermining America’s banks as well.

If we make the optimistic assumption that somehow the Eurozone and its currency manage to stagger on, there is a further problem for America. Industrial raw material prices have been rising strongly throughout 2016, measured in dollars, despite the dollar’s strength against other currencies. Trump’s stated ambition, to cause US infrastructure investment to rise significantly, coincides with China’s thirteenth five-year plan for building new Silk Roads and associated projects. Consequently, both America and China will be aggressively bidding against each other for raw materials in 2017.

Price rises in raw materials and energy will become a major factor driving the rate of price inflation sharply higher on America’s Main Street. Yet the ability of the Fed to raise interest rates in their traditional attempts to limit price inflation will be checked by the height of the nominal rate that will trigger widespread debt liquidation. Debt, as the cliché goes, is the gorilla in the room.

Trump’s basic problem is that he understands business, but not necessarily economics. He obviously thinks that trade deficits arise from unfair trade practices. It’s a common mistake, but they don’t. They arise from unfunded government spending and the expansion of bank credit. His fundamental belief, that fair terms of trade will make America great again is therefore badly flawed.

It is also difficult to see where he stands on monetary policy, if at all. In business, he has personally benefited from the expansion of bank credit, but does he understand the eventual price consequences of unlimited expansion of bank credit? Very few businessmen do, in which case we can only hope he will be well advised.

Past US presidents, from Herbert Hoover onwards, have been generally poorly advised on basic economic theory, thinking the state is well equipped to fix things that go wrong. The evidence for this error is found in the unremitting accumulation of public sector debt since the Wall Street Crash in 1929, confirmed when Roosevelt devalued the dollar against gold in 1934, and reconfirmed when Nixon temporarily abandoned all gold convertibility in 1971. That Trump might be better advised must remain a pipe-dream, unless contradicted by events.

Therefore, my broad expectations for 2017, the first year of the Trump presidency, is success in foreign and trade policy will be offset by rising price inflation and falling asset prices as interest rates rise (see my article dated 1st December, Credit cycles and gold), terminating in a credit-crunch from higher nominal interest rates. Good on the geopolitics, bad on the economy.

ihttps://wealth.goldmoney.com/research/goldmoney-insights/brexit-and-a-hanseatic-league

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