Violence Is Back As A Tool Of National Policy

By Benjamin Picton, senior market strategist at Rabobank

Flying Blind

News broke yesterday that a jet carrying European Commission president Ursula von der Leyen had to land using paper charts after its GPS navigation systems were apparently jammed by Russia. Traveling to Plovdiv in Bulgaria, VDL’s jet apparently circled for an hour before the pilot took the decision to do things the old-fashioned way and consult the map.

Such an incident targeting a head of not-quite-a-state is shocking to say the least, but serves as a neat metaphor for relations between Russia and Europe in recent years (decades?): European liberal internationalists assume old norms apply -> Russia disagrees and demonstrates that it views violence as a legitimate tool of national policy -> Europeans left stunned.

Some will remember the images of German diplomats guffawing at the United Nations in 2018 as Donald Trump admonished Germany for placing itself at the mercy of Russia for its energy supplies. Fast-forward to 2022 and suddenly Trump’s speech wasn’t so funny, and anyone who cares to bring up a chart of German industrial production can see the fruits of the lack of imagination of Germany’s leaders. Germany’s factories are now struggling to replace lost production for civilian applications with new production for military applications. But how to do this without cheap energy?

So, yes, violence is back as a tool of national policy. Russia is unapologetic about this. So is Israel. So is the United States if you consider the decisiveness of using B-21 bombers to drop bunker busters on Iranian nuclear facilities. Hamas and the Houthis are certainly unapologetic and China has also been stepping up the frequency and scale of ‘rehearsals’ for the invasion of Taiwan while the Chinese navy and coast guard have had semi-regular clashes with the Philippines over territories that China claims as its own through the ten-dash line. Those Chinese territorial claims are not supported by the United Nations Convention on the Law of the Sea, but that is really part of the point.

Despite being permanent members of the UN Security Council, China and Russia have never really fully subscribed to the legitimacy of the post-war global architecture. Many Western leaders continue genuflect to the ‘rules-based international order’ as if it was chiselled in stone and handed down from Mount Sinai. In reality, that rules-based order has always been a US-led order, upheld by US force of arms, and has always been viewed by China and Russia as such. Russia has demonstrated that the it is quite willing to flout the ‘rules’ when its national interest demands it. This does not mean that war is inevitable, but it does mean that it is a policy option that other countries need to dissuade revisionist powers from using. As Bismarck reputedly said “do I want war? Of course not! I want victory.”

Both the United States and China are now interested in re-writing the rules of the road to suit their own interests. The US now sees the liberal economic order as a threat to its position as global hegemon while China seeks to push the US out and establish itself as an Asian hegemon. In the view of the United States, a persistently overvalued dollar and unequal trade terms has offshored production from the US into China (and elsewhere) while the US got hooked on the drug of artificially high living standards courtesy of the strong dollar and the subsidized production of consumer goods in China.

As Scott Bessent explained to Fox News last week, the United States got a major wakeup call during Covid when it became apparent that many of the things that the United States needed (pharmaceuticals, personal protective equipment etc) were not made in the USA and could not be easily imported while global shipping was snarled up and the countries who DID produce the goods and own the ships were focusing on supplying themselves. Consequently, the US now cares about controlling supply chains for strategic goods, is using state-intervention to guide production and is increasingly autarchic. This is seen as a national security priority in the context of geopolitical competition with China. Everything must be understood through this prism.

A logical corollary of the MAGA program seeking to re-orient the US economy from being characterised by consumption to being characterised more by production (as it was at the end of WWII) is that there will have to be less consuming going on. The question then becomes which segments of society are going to see their consumption power curtailed? Trump and Bessent say the people at the top have had it too good for too long and will have to pay, while the losers from 40 years of globalization (those at the bottom of the income distribution) will see their living standards safeguarded.

China, as the main power of the emerging BRICS bloc, is seeking partners in a new multilateralism aimed at replacing the US-led order with something that better suits the interests and ambitions of China and its partners. The events of the Shanghai Cooperation Organisation summit over the weekend demonstrate that Russia, Iran and Belarus are on board. India and Brazil (not an SCO member) seemingly are too, but there are problems.

Firstly, many of these countries have had territorial skirmishes in the recent past (e.g. the Sino-Soviet war in the 1960s and China-India border skirmishes more recently). Secondly, it is not immediately apparent how these powers could be incorporated into a new economic and financial architecture. The trade flows need to net and somebody needs to play the role of deficit runner if they are going to provide a replacement for the US Dollar as reserve currency. Nobody wants to do this because everybody wants to produce and export.

Additionally, the Chinese conception of world order historically posits the Chinese emperor as the intermediary between earth and heaven. That is to say, China has the ‘mandate of heaven’ that legitimises Chinese hegemony, and delegitimises the claims of anyone else to be on equal footing with China. How does India’s ambition for a multipolar Asia fit into this conception of world order? How does Iran’s conception of itself as a central Asian hegemon fit this view? How does Russia’s view of itself as a top-tier Eurasian power fit? The answer is: they don’t.

The UK Telegraph today claims ‘China unveils plan for new world order’. However, while team BRICS appears united in grievance against the US order, it is not yet clear that they are offering a coherent alternative. Xi Jinping made his pitch to the global south by encouraging them to embrace “free trade” and announcing that the Shanghai Cooperation Organisation would establish a new development bank to build influence in Eurasia by providing infrastructure loans for green industry. Establishing development banks extending loans in (presumably) Renminbi has the added benefit of de-risking the emerging bloc of the extraterritorial power of the US Dollar. Xi also said he would open up China’s BeiDou satellite system to SCO members as an alternative to the US GPS system (perhaps Ursula von der Leyen will be tempted?).

While the BRICS bloc coalesces towards a new conception of world order and seeks an economic and financial architecture to support it, Western powers seem unsure about the direction of their own political economy. Europe wants to be green but it also wants to re-arm, and the two are not compatible. Far right parties now hold polling leads in Germany, France and the UK as popular discontent at ‘the way things are going’ continues to rise.

European style anti-immigration protests recently broke out in Australia where a Canada style net inward migration rate of ~1.7% at a time where the country can’t house its own young is testing the social fabric. Recent comments by an Indian Minister suggesting that he was “in deep negotiations with my counterpart in Australia to create 1 million homes” using Indian labour trained in Australia and funding from the UAE is sure to add fuel to the fire. The supposed plan has not been corroborated by Canberra, but could be the most sensational economic chicanery since the Khemlani loans affair if it turned out to be true.

Whether fact or fiction, the plan does highlight an important point: for economies like Australia that have labor markets at ‘full-employment’, there is simply no surplus labour to do important stuff that needs doing. Labor is a factor of production subject to scarcity, and when scarcity strikes governments take on responsibility for directing the factors of production into their most useful employment. The United States is now doing this through ‘state capitalism’ and cherry-picking high value-add industries for its own economy.

This dynamic poses a question. Is Australia best served by having 55% of school leavers attend university to add to the oversupply of law graduates carrying unserviceable student loan debts? Or would it make more sense to direct the youth into trades training to address the undersupply of builders, tilers, plasterers, welders, farm workers etc etc? These are the trade-offs of economic policymaking under real constraints, but the Australian trade minister recently implied that a more active approach to organising production would not be taken when he said that Australia could be an example to the world by abolishing 500 “nuisance” tariffs.

So, the US is taking a more active role in directing economic activity, the BRICS are seeking to reshape the world order in their own image and Europe is searching for a new model of political economy that simultaneously delivers growth, security and social cohesion. Australia, meanwhile, wants to be an example to the rest of the world by evangelising an economic model that others are rejecting as failed. In this fractious new global environment leaving decisions of what gets produced, where, and by who completely in the hands of Mr Market really would be flying blind.