The Return of Spheres of Influence

Traditionally, international relations were driven by what is called spheres of influence.  European and Japanese governments divided Asia and Africa among them. The spheres were often political concessions or the result of direct force,   War was often the price to be paid for increasing one's sphere.  Though simplistically expressed here to a fault, this the world the US entered after being absorbed by the Civil War and Reconstruction. 

The Spanish-American War (1898) was the US thrust into Asia.   The big game, though, was in China.  In the Spanish-American War, the US secured a chain of coaling stations that allowed it to project its power to Asia and took the Philippines as its first and only colony.  The issue was how to compete in China.  Secretary of State John Hay, who had been a secretary to Abraham Lincoln, argued there were a limited number of possibilities.  The US could seek its own sphere of interest in China or challenge someone else's sphere.   

Neither of these alternatives was particularly attractive to Hay, who instead offered an alternative.  He positioned the US as the revisionist of the day, rejecting the entire sphere of influence approach.  Instead, he offered a spirited defense of China's territorial integrity and a vision of another type of international order.  Instead of fixed spheres of interest, Hay depicted a system of variable shares, and that variability was determined by economic prowess. 

Profit-seeking was to replace the rent-seeking. It is free-trade--a set of rules that minimize tariff barriers to trade.  The first attempt faltered after WWI, but after WWII, it was not only embraced but globalized.  The "Open Door" was embodied in the post-WWII institutions (IMF, WB, and GATT).  

The US political and economic elite and intellectuals were convinced that the rules of free-trade would benefit America.  America was increasingly the factory and farm, and soon to be banks of the world.  The Open Door or Pax Americans, if you will, was rules-based because the American elite was confident that it could succeed under such rules.  The outcome could be more favorable for it than a negotiated division.

This was the thrust of the US policy until now. The trade deal struck with China is a volte-face.  The US has abandoned the rule-based approach of the Open Door and sought a sphere of influence.  China imports about $2 trillion in goods and services.  The agreement with is that China boosts its imports from the US by $200 bln 2017 level, which was about $128 bln. In 2019, China imported about $98 bln of goods and services from the US, so the new demand from the current level is closer to $230 bln.  The dollar value of China's overall imports fell by about $50 bln last year.

While a more granular analysis is possible as there are some industry targets, the US has secured around 16.5% of China's 2019 import market. It is the result of a political process, not an economic competition, and in this sense, arbitrary.  The US has abandoned the rule-based approach of the Open Door in favor of the outcome-based strategy of spheres of influence.  While it is easy to dismiss this as a short-term deviation due to the idiosyncrasies of the Trump Administration, it would fail to appreciate the bipartisan shift that has taken place. 

There is a faction in the American foreign policy circles that have consistently backed a hard line toward China.  They opposed China's entry into the WTO and the yuan's inclusion in the SDR.  The containment camp did not have the dominant policy hand in the Bush or Obama years.  They have been joined many the usual defender of American manufacturing workers, unions, and businesses, policy wonks, and intellectuals.  A consensus has emerged that China has gamed the rules, which were not designed, in any event, for the extensive use of state subsidies. To the extent the US-China deal has been criticized  in the US, it is because it was too soft on a range of issues including currency, intellectual property protections, and state-subsidies, 

The outcome has so deviated from what the market would allow that the rules-based system itself is now being abandoned in America.  Even if the outcome falls short of what the trade agreement calls for, the approach will be difficult to abandon even if there is a change in the White House in 2020, let alone 2024. The mistrust of China runs deep and broad. And even if the political will returned, it's wavering, and the damage inflicted on the WTO may make it difficult to restore international credibility. America's defection from the free-trade system encourages as if further encouragement is needed, of others to defect and purse economic nationalist policies.

Treasury Secretary Mnuchin confirmed what had seemed obvious. With the trade deals struck with China, Japan, NAFTA 2.0, and South Korea,  US attention will turn toward Europe.  There are many outstanding issues, and the US continues to brandish the threat of auto tariffs (on national security grounds). Nor has the US offered any special consideration to the UK, which is about to leave the EU and with whom trade negotiations will begin in earnest shortly, over the digital tax or Airbus subsidies. EU Trade Minister Hogan has "reserved the right" to challenge the US-China agreement at the WTO. This is mostly symbolic as the conflict-resolution capability of the WTO has been neutered by the US block of new appellate judges.  

The outcome-based approach of the fixed spheres of influence is seductive. There is less debate over whether the rules have been violated and efforts focus on the effects of changes in behavior, which are arguably more transparent. At the same time, it reflects a retreat from its hegemonic role, and by that, we understand it as political scientists do, as setting the broad rules of the international competition, as the UK did previously.   

This has been expressed too in the continued retreat from offering access to the dollar and the dollar-funding market as a public good of the international order. Since at least 9/11, the US has increasingly used it as a tool of international statecraft to impose its will on friend and foe.  This encourages the search for alternatives, such as in payment systems, and workarounds, such as with the appellate process at the WTO. The abdication of the US hegemonic approach to global power and the re-nationalization of the dollar is a separate issue from the cyclical factors that drive exchange rates over most reasonable timeframes. Nevertheless, a Rubicon has been crossed.  

The Open-Door is being shut and abandoned.  Pax Americana, RIP.

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