What After The End of the American International Order

Mikhail Gorbachev said: ‘In 1989 the World Chose Peace; We Need That Vision Today”, But today is the time of transformation and uncertainty. In much of the world, the lightning-fast, cross-border flows of ideas, information, people, money, goods, and services—the same forces that have created so much opportunity and prosperity—also generate fear. Fear that the world now becomes more complicated and more dangerous in real-time. Fear that the world we knew is gone for good, and fear that no one is willing and able to do anything about it.

China has made its decision. Beijing is building a separate system of Chinese technology—its own standards, infrastructure, and supply chains—to compete with the West. This is the single most consequential geopolitical decision taken in the last three decades. It’s also the greatest threat to globalization since the end of World War II. The million-dollar facing the world today is: At this moment in history, why is there so much alarm?

Japan is both blessed and burdened by its unique place in this G-Zero world. Japan has the political stability, the foresight, and the technological talent to help lead the world into a brighter future than the one we currently face. We all have reason to hope that Japan’s leaders, its companies, its political will, and its people will help lead the transition toward a new order, one in which human ingenuity, moral imagination, and courage can help all of us meet the challenges to come.

 The Geopolitical Recession

An emerging market can be defined as any country where politics matters at least as much as economic fundamentals for market outcomes. Countries like Japan, the United States, Canada, and the leading nations of Western Europe offered a much more stable and predictable political landscape, but more modest opportunities for growth.

Those days are gone. The financial crisis of 2008 and the turmoil that followed have brought politics directly into the performance of economies and markets in even the world’s richest countries.

We also face a growing number of transnational threats. The U.S.-led global order is finished. So many of the dark clouds now hanging over us—from climate change to cyber-conflict, from terrorism to the post-industrial revolution—move unchecked across borders, leaving national governments much less able to meet the needs of their citizens.

Today, it is not economics but geopolitics that has become the main driver of global economic uncertainty. The world has entered a “geopolitical recession,” a bust cycle for the international system and relations among governments. It’s a time when alliances, institutions, and the values that bind them together are all coming apart. From an historical perspective, geopolitical recessions are both rarer than economic recessions and longer-lasting. We’ll be living in this geopolitical recession for at least a decade to come.

How did we get here?

Economists tell us that the process of “creative destruction” fuels the engine of growth that builds the future, and history says that’s true. But lives and livelihoods are destroyed in the process, and growing numbers of people say their government is either powerless to help them manage or doesn’t care what happens to them. Resentment of elites is on the rise in every region of the world. The system is rigged against them, they believe; it’s increasingly hard to argue they’re wrong.

This creates opportunities for a new breed of populist who offers scapegoats and promises of protection. These politicians did not invent this problem. They’re just profiting from it.And the greatest worry is this: All this anger is building in good economic times. What happens when economies start to slow?

History shows that governments that are unpopular at home are more likely to make trouble abroad, especially with their neighbors, to rally public support and divert attention from domestic troubles. That breeds less trust among governments. The risk of misunderstanding rises. Accidents are more likely—and more likely to escalate toward conflict.

The Implications

The first centers on “tail risks,” the low-likelihood-but-high-impact events that have become commonplace in a world reshaped by China’s rise, Middle East turmoil, populist Europe, revanchist Russia, divided America, a world-record 71 million displaced people, and the destabilizing effects of technological and climate changes.

Imagine a military accident in the South China Sea, at a time when the U.S. and Chinese presidents are locked in a war of wills over trade and technology, and determined to project strength at home, that spirals out of control.

Turn to the Middle East—the U.S. has confronted Iran. Since President Trump withdrew the U.S. from the Iran nuclear deal and then re-imposed sanctions, Iran has taken bold military action—including a strike on the heart of Saudi Arabia’s oil infrastructure. Washington responded by sending troops to Saudi Arabia, a move which, you might recall, sharply increased the risk of terrorism in the U.S. a generation ago.

What if President Trump is defeated for re-election next year, and North Korea’s Kim Jong-un discovers the next U.S. president won’t accept his phone calls? What provocative action might he take? What accidents might he risk?

What if a debt crisis hits Italy, created when a future Italian government defies EU budget rules and inadvertently creates a financial crisis too large for lenders to manage? Or a miscalculation in Ukraine pulls Russia into a shooting war? Or a US-Russia cyber confrontation hits critical infrastructure, creating a humanitarian crisis inside an American city?

The lack of coordinated leadership in today’s world, our G-zero world, makes all of these crises both more likely to happen and more difficult to manage when they do. Individually, they are long-shots. Collectively, they pose unprecedented danger.

The second implication of the geopolitical recession is the breakdown of international institutions. The tens of millions of displaced people around the world today create one of the most urgent and expensive problems that the United Nations has to cope with. Yet, even as national governments are less willing to welcome big numbers of refugees, even fewer are willing to invest more to support the UN Refugee Agency.

We also see fragmentation of European institutions as voters send growing numbers of anti-EU politicians to serve in the European parliament. There is no longer consensus among Europeans on the free movement of EU citizens across borders, on how to manage immigrants from outside the EU, or on important questions like how best to manage relations with Russia.

The Trump administration has threatened the coherence of NATO, the most successful military alliance in history (French President Macron certainly seems to agree), and has withdrawn the US from the Trans-Pacific Partnership trade deal, the Intermediate-Range Nuclear Forces treaty with Russia, the UN Human Rights Council, and the Paris Climate Accord, to name only a few.

The inevitable consequence of all this is a world that has become more unpredictable and much less safe. There is little chance in this environment to establish new agreements and new institutions to help manage tomorrow’s crises.Instead, individual governments will adopt their own rules in an attempt to contain challenges that don’t respect borders. They will threaten economic penalties and military retaliation in a world with fewer institutions able to enforce generally accepted rules and practices.

The third implication of the geopolitical recession: The weakness of today’s international system not only leaves the world more vulnerable to crisis, but less resilient when crisis comes. In recent years, we’ve avoided a major international crisis. We’ve seen Brexit, the election of Donald Trump, the growth of populism across Europe, Russia’s bid to undermine Ukraine’s independence, Xi Jinping’s consolidation of power in China, a meltdown in Venezuela, and plenty of individual fires in the Middle East and in democracies across the world. But we have not yet experienced anything during this period that poses a challenge to the entire international system, and the global economy has remained relatively strong. There is one superpower in today’s world, one country that can project political, economic, and military power into every region. That superpower is still the United States.

That’s why it matters so much that Americans themselves no longer agree on what role their country should play in the world. But step back a dozen years and think about why Barack Obama was elected president. After eight years of George W. Bush’s war on terror, it was Obama who promised to end the wars in Iraq and Afghanistan—and not to start new ones. Other Democrats, including Hillary Clinton, were tainted in the minds of many Americans by their support for the war on Saddam Hussein. In 1992, Bill Clinton promised that the end of the Cold War meant the end of Cold War burdens. He promised a “peace dividend,” money no longer needed to defeat the Soviets that could instead be invested in strengthening America at home.

Americans don’t want to run the world. They haven’t for a long time. And with each passing year, there are fewer Americans old enough to remember the Cold War, to say nothing of World War II. In fact, there are now American soldiers on the ground in Afghanistan who were not yet born on September 11, 2001.

The reluctance of the United States as a superpower creates a global vacuum of leadership. But no one is stepping up to take that role in the way that, more than a century ago, America emerged just as the sun began to set on the British Empire.

Europe remains profoundly preoccupied, particularly over economic issues dividing north and south and political issues dividing east and west. And while President Xi Jinping has declared a new era for China in the world, China’s leadership remains fundamentally cautious when it comes to accepting heavy international burdens. That’s why, when it comes to international leadership, Beijing will not soon become any more reliable a provider of public goods than Washington.

And why a future crisis will be so hard to manage. 

Fallout for globalization

Then there is the impact of geopolitical recession on globalization itself. Globalization has changed our understanding of how things are made and how we might live. Around the world, we celebrate our national holidays with fireworks made in China. The customer service calls we make to fix our computers are answered in India. Our cars are made from parts that come from dozens of countries. We are all globally integrated. It is no longer meaningful to say where our products are produced. And, until recently, politics hasn’t played a big part in these processes. That’s no longer true.

There is no longer a global free market. China, soon to be the world’s largest economy, practices state capitalism, a system that allows government officials to ensure that economic growth ultimately serves political and national interests.

China’s state-capitalist system distorts the traditional workings of a market-driven economy by relying heavily on state-owned enterprises and state-backed national champions to ensure economic—and therefore political—stability. It depends on state subsidies that allow political officials to direct enormous amounts of capital and other resources as they choose. The government picks winners and losers.

The success of this system for China and the Chinese Communist Party is undeniable. The good news for the rest of us is that Chinese growth has supported global growth. Crucially, the hybrid global economy it has created does not end globalization. Both free market and state-capitalist systems still enable goods and capital to move around the world.

But the future of globalization is not so simple. Different parts of the global economy are adapting to the end of the US-led global order in different ways. The marketplace for commodities—especially food, metals, and energy—indeed is only becoming more globalized. US and Chinese tariffs dominate the news, for as long as they last, but the bigger story is the expansion of global commodity markets.

New technologies are making energy production more efficient and lowering costs at a faster pace than politics can drive them higher. That’s why, even after a dramatic missile strike earlier this year at the heart of Saudi oil infrastructure knocked half of Saudi oil production offline, the resulting jump in oil prices left them at levels just half of what they were in 2008.

With more than a billion people entering a global middle class over the past two generations, and the pace of that growth increasing, the globalization of the commodities market will continue.

The market for goods and services, on the other hand, will become less global. That’s in part because the role of labor in production is shrinking dramatically as new technologies bring automation and machine learning into the workplace. Manufacturers want to produce where production is least expensive. That won’t change. What has changed is the search for cheap labor, because the rise of middle classes in China, India, Southeast Asia, Latin America, and sub-Saharan Africa has increased wages everywhere, giving producers good reason to automate production.

Further, the growth in populism we’ve seen in so many countries is driven in part by anger over job losses. That means that political officials are more likely to build barriers designed to protect local jobs than to restrict the flow of trade.

These trends will shorten global supply chains for goods and services as each country or company works to reduce its vulnerability to disruption in countries involved in trade disputes. It won’t happen immediately, because CEOs don’t want to make difficult decisions until they believe they have to. But as the global economy tightens, those executives will increasingly produce goods and services where the customers are.

Finally, there is the global market for data and information. This market is breaking in two. It is no longer global. In the beginning, the internet—the Worldwide Web—was driven by a single set of standards and rules. With very few exceptions, one consumer had virtually the same access as another. No longer.

Today, China and the United States are building two distinct online ecosystems. That’s true for the transformation of today’s internet, but also for the construction of the new internet of things. The American tech ecosystem, with all its strengths and shortcomings, is built by the private sector and (loosely) regulated by the government. The Chinese system is dominated by the state. That’s also true for big data collection, for development of artificial intelligence, for the rollout of 5G cellular network technology, and for defense and retaliation against cyberattacks.

This leaves us with a big question: Where exactly will the new Berlin Wall stand? Where will we find the boundary between one technological system and the other? Will Europe align with the United States? Or will the EU fragment into individual decisions within individual European countries? How will India position itself? And South Korea? And Brazil? What pressures will even Japan face?

There is another fundamental question: Will the US-led data and information model continue to be driven by the private sector? Or will future fears for national security allow for the creation of a “tech-based military industrial complex” in the US?

The answers to these questions carry profound implications. In the markets for commodities, goods, and services, global players are both competitors and (potential) partners. Each player wants more market-share, but everyone benefits from an open trading system that creates opportunities for all. Trade wars may be launched to achieve specific goals, but this isn’t a zero-sum competition. Business as usual promises something for everyone. That’s a critical support for global peace and prosperity.

This is no longer true in the data and information economy. Here, much as in the US-Soviet Cold War, the existence of two competing systems limits commercial opportunities and threatens national security. Each side’s hoped-for outcome is elimination of the other system.

 America and China

We now need to talk about China and the United States. What should the rest of the world want from China? We should want it to succeed. The world needs China to remain stable, productive, and increasingly prosperous to fuel global growth. We need China to play a constructive international role, even if only a limited one. To work with other governments to meet the challenges posed by poverty, conflict, public health risks, lack of education, lack of infrastructure, climate change, and the advance of disruptive new technologies. And, of course, we need these things from the United States too.

The threat China poses to the US is smaller than many in Washington believe. China has even less interest in going to war with the US than the US has in going to war with China. China is a regional, but not a global, military power. Economic interdependence will continue, despite concerted efforts on both sides to reduce economic vulnerabilities.

The greatest source of US-China conflict comes from technology. Here, China is, today, a true superpower. Here, there is a Cold War structure to the relationship that will affect every region of the world. Here, the US does have an interest in seeing China fail, because China’s technological development poses a foundational challenge to the values on which global stability and prosperity depend.

The stakes are real. The idea of a Splinternet, the creation of parallel technology ecosystems, isn’t just a threat to globalization. It’s a competition that those who believe in political freedoms might lose.

What should we do?

Allow me to offer two proposals. The first is the creation of an organization equivalent to the UN’s Intergovernmental Panel on Climate Change, the body that’s responsible for objectively assessing the world’s vulnerability and responses to climate change. We need a similar group to establish ground rules for our digital world, the data and artificial intelligence that fuel it, and its future development.

My second proposal is this—the world needs a digital WTO, a World Data Organization. As with the WTO, uniting governments that believe in online openness and transparency in an organization that China will ultimately have an economic and security incentive to want to join, especially if it’s the only way Beijing can secure access to developed markets. Carrots will work better than sticks.

America, Europe, Japan, and like-minded willing-and-able partners must work together to set future standards for artificial intelligence, data, privacy, citizens’ rights, and intellectual property. Develop a permanent secretariat to determine these digital norms together, and a judiciary mechanism to enforce them. The Americans have the innovative capacity and startups. The Europeans are the regulatory superpower. Japan is the principle laboratory for a world that needs to see how AI can improve people’s lives.

That’s how we can address the U.S.-China technology cold war.

There is, however, an area where Chinese cooperation with the West is both critical and entirely feasible right now. To combat the advance of climate change and its worst effects, we need to build a “Green Marshall Plan,” a mainly Western-funded project that includes the best ideas of private sector thinkers and state-funded scientists from the West and China on how best to make the policy changes and invent the technologies to clean the world’s air and water and limit the damage inflicted by climate change.

The so-called “Green New Deal” now under scrutiny in the US presupposes that Americans can solve their own climate problems. They can’t. China is now the world’s #1 carbon-emitter, by a wide margin, and China shares an interest with the rest of the world in fighting climate change. It isn’t just New York and Tokyo that face the coming storms and rising seas. It’s Shanghai too.

The End of the American Order

As we look toward the future of relations among nations, there is one prediction we can make with certainty: No matter what happens in next year’s U.S. elections, no matter who is president or which party is in power, the American-led international order is finished. It is not coming back.

But it’s just as important to recognize that the aspirations that this order represents for many people remain.

These aspirations, these values, were not invented in the United States. They are not “Western.” They are not simply the product of Europe’s Enlightenment. The drive for liberty, fairness, rule of law, freedom of expression, and the undeniable human drive for openness and exploration are universal.

America can no longer claim to be the primary driving force in defense of these values. Americans have our role to play. So do Europeans. So do the people of Japan. And inside China, Russia, Egypt, and Saudi Arabia, inside countries large and small, there are people hungry for the chance to become captains of their fate.

Competition and conflict among nations are inevitable. The warming of the planet and the rise of artificial intelligence will bring existential challenges. But we live in a G-zero world, a world without leadership that people can trust and count on. It’s up to all of us to fill that void.

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