Sunday, 29 June 2014

BRICS under the Second Cold War

“We are slowly but surely moving toward a second Cold War, which no one needs,” Russian Prime Minister Dmitry Medvedev said in a recent Bloomberg interview. He blamed U.S. President Barack Obama, his one-time partner in a reset of relations, for a lack of “political tact.” Upon closer inspection, especially China and Russia may indeed feel being increasingly circled by the US and US allies. Despite Russia´s occupation of the Crimea and China´s territorial disputes with its neighbors in the South China Sea and the Senkaku Islands, it is not obvious at all that they only have to blame themselves. Worried about its relative economic and political decline, the former hegemon – the United States of America – has been turning increasingly ´nasty´ during the Obama years.

From a Russian perspective, the occupation of the Crimea in Spring 2014 aimed at blocking a scheme by the North Atlantic Treaty Organization (NATO) to roll right up to the Russia’s western border. If the Ukraine crisis has indeed set up a Second Cold War, it is linked to the chaos in which the First Cold War ended: Moscow has long asserted that the Soviet Union allowed Germany to unify only in return for a pledge from Washington never to expand the Atlantic alliance. While refuted by the West, papers and files released by various leaders (Kohl, Gorbachev, Bush Sr, Baker), providing first-hand evidence on the February 1990 talks leading to German reunification, provide some substance to Russian grievances that there had been deals that NATO would not extend to the East[1].

Hillary Clinton, then US Secretary of State, had explicitly formulated a new Russia Containment strategy in 2012 as a reaction to Russia´s attempts to deepen economic integration with her neighbors. Clinton told a news conference in Dublin that the US was trying to prevent Russia from recreating a new version of the Soviet Union under the ruse of economic integration. “Clinton vows to thwart new Soviet Union” appearing on the Financial Times website on 6 December 2011 had caught much attention.

From a Chinese perspective, the US containment of Russia is not driven by impulse but has to be read in the context of China´s rise: “To keep a potential strategic competitor at bay and preserve a uni-polar world order under Pax Americana, Washington must prevent Moscow from building a Eurasian Union that includes Ukraine – and thus thwart any chance of a revived Soviet Union. America’s strategic interests demand that it does this, even at the risk of further straining relations with the Kremlin.”[2] (Note that this view was chosen as editor´s pick.)

Meanwhile, many Chinese officials have come to think that the US and its closest regional allies Japan and Australia have embarked on a China Containment Policy[3], despite official US declarations to the contrary. Building military, economic, and diplomatic ties with countries adjacent to China's borders, the US have been frustrating China's own attempts at alliance-building and economic partnership. The presence of American military in Central Asia, recently strengthened ties with South Korea and Japan, efforts to improve relations with India and Vietnam and the Pivot to Asia Strategy for increased American involvement in the Pacific have been pointed to as evidence of a containment policy.

Sir Alan Winters has recently argued, convincingly in my view, that the Trans-Atlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) can´t naively be discussed in a purely economic context (as many economists have done) but has to be viewed primarily in the context of a particular US foreign and economic policy package[4]. TPP, according to Sir Alan, is the most visible and advanced element of this US package. The problem with TTP[5], to quote him:

The TPP is a deep international integration arrangement between the US and 11 other Pacific states, which would cover 40% of world GDP and over 30% of world trade. It seeks to address as series of issues that 21st century commerce, but arguably its most obvious feature is that it excludes China – the world’s largest international trader and before long the world’s largest economy. There are, of course, the ritual genuflections towards ‘open regionalism’ – China can join if only it will agree to the necessary policy requirements – but this is about as much use as saying the Chief Rabbi can dine with you while insisting that the menu contains pork.

Putting the Ukraine crisis, China´s territorial disputes, TPP and TIPP into broader historical context then (rather than to portray them as Russian or Chinese aggression in isolation), points to the imprudence (to put it mildly) and enormous cost of a ´defensive´ US diplomacy in a recalibrated world where the economic gravity has been shifting East. University of Yale historian Paul Kennedy has provided the historical antecedents and textbook explanation for imperial overstretch in his 1987 classic The Rise and Fall of the Great Powers. Kennedy highlighted the precedence of the "four modernizations" in Deng Xiaoping's plans for China—agriculture, industry, science and military—deemphasizing military while the United States (and the Soviet Union) was emphasizing it. He predicted that continued deficit spending, especially on military build-up, would be the single most important reason for decline of any Great Power. Table 1, relating military spending to GDP for some ´Great Powers´ in 1989 (end of First Cold War) and latest (start of Second Cold War) shows that Russia and the US still spend more than double of their resources (as a fraction of their GDP) on the military than the other ´powers´.

Table 1: Military Spending as % of GDP, 1989 v 2012

United States

* EU = average France/UK

 Under the Second Cold War, both multilateralism and the provision of global public goods are going to suffer. The United States have ceased to be a benevolent leader (if they ever were). In a thought provoking blog post, Danny Quah[6] has just referred to Hegemonic Stability Theory (HST), initially inspired by the late economic historian Charles Kindleberger´s study of the 1930s recovery from the Great Depression. Just as it was the US that led the way to global prosperity after WW II, HST assumes that the interest of the US and of the rest of the world will coincide. In the HST perspective (shared and promoted by ´Atlanticism´)

“as global hegemon the US cannot help but be benevolent. The US provides global public goods on which the rest of the world either shirks responsibility or cannot afford. Under HST, the world looks with respect and admiration at its hegemon. The US’s soft power is complete: what the US wants is automatically what the rest of the world wants.” (Quah, 2014)

Quah doubts that the HST proponents can still reconcile their view with recent events and attitudes. He points to selfish action and rethoric by US Federal reserve officials in early 2014 and the reaction by Raguhram Rajan, the highly-respected Governor of the Reserve Bank of India, who had complained that international monetary cooperation had broken down when the emerging countries needed it while the latter had helped the West to recover from their self-bred crisis in 2008-09. (ShiftingWealth had analyzed the issue on February 1st in “Stop Preaching Emerging Countries, Blame Ben and VIX®”). To be sure, there a couple of further examples of US selfishness: The long failure to reign in its CO2 emission (accounting for 40% of world total); the traditional macroeconomic blame games on China, Germany and other performers; the use of US banking laws to enhance US strategic positioning (witness the BNP case): On the latter, Felix Salmon has just written a superb piece[7] that concludes (sic!):

 “No other country can get away with this: what we are seeing is unapologetic American exceptionalism, manifesting as extraterritorial powermongering. Using financial regulation as a vehicle for international power politics is extremely effective. It is also very cheap, compared with, say, declaring war. US officials never apologise for the fact that their own domestic law always trumps everybody else’s; rather, they positively revel in it. The consequence is entirely predictable: a very high degree of resentment at the way in which the US throws its weight around. The result is that genuine international co-operation is difficult to obtain, and generally shortlived.”

 But the end of American exceptionalism must be near. Quah stresses rightly that with the center of gravity having shifted 5000km east, drawn by the rise of China and the rest of east Asia, what is good for the BRICS is directly good for 40% of the world population and indirectly for the rest that trades with new economic center: “Soon perhaps even more than what is good for the US economy, it will actually be what is good for the East that is good for the global economy.

What the end of US hegemony and the Second Cold War mean for the multilateral system will be analyzed on these pages shortly. Think Bretton Woods institutions, OECD, WTO, multilateral development banks…

[1] Mary Elise Sarotte (2009), „Enlarging NATO, Expanding Confusion“, New York Times, November 29.
[3] Joseph S. Nye jr (2013), „Work With China, Don´t Contain IT!”, New York Times, January 25.
[4][4] L Alan Winters (2014), „The Problem with TTIP“,, May 22.
[5] Winters makes a second point, very important to the EU: “By signing TTIP Europe would be tying itself to a static rather than a dynamic part of the world economy and substantially reinforcing the US’s exclusionary policies.”
[6] Danny Quah (2014), „It is not easy to be the leader of the world“, June 27.
[7] Felix Salmon (2014), “America prosecutes its interests and persecutes BNP”, FT, June 5.