Donald Trump has signaled his interest in using America’s ‘One China’ policy as a bargaining chip in negotiations with China over economic policy (including currency manipulation). While this ‘instinct’ of his isn’t without merit, it could represent a threat to peace for which Australia must be fully prepared.

In brief, the ‘One China’ policy for Australia and most countries, but not the US, has meant formal diplomatic acceptance of the view that there’s only one China and that the People’s Republic of China (PRC) is recognised as the government of China. Since the declaration of the PRC government in 1949, after its defeat of the forces of the Republic of China (ROC) in the civil war on the mainland, the PRC and ROC have been locked in a complex military, political and diplomatic confrontation.

When the US conducted its negotiations with the PRC on normalisation of diplomatic relations—to switch formal diplomatic recognition from the ROC on Taiwan to the PRC on the mainland—Washington didn’t go as far as almost all other countries. Instead, it took note of China’s position to that effect. It refused to recognise Beijing’s entire formula for the ‘One China’ policy because China refused to formally commit to an exclusively peaceful solution to the stand-off. The US has maintained official representation in Taipei, along with a military alliance, ever since the switch of recognition in 1979.

In the very year that US recognised Beijing, China began its first serious peace overture to Taiwan, though the move didn’t bear fruit until the two warring parties met in 1992 and agreed themselves that there’s only one China—the mainland and Taiwan. But they didn’t address the question of which government was in charge. At that time, the ROC maintained the formal diplomatic fiction that it ruled all of China, including the entire Spratly Island group in the South China Sea.

Much has changed since then. Taiwan has become a democracy and China has become the island’s main investor and main trade partner. Economic integration has continued apace and China’s policy has been to bind Taiwan to China ‘with economic ropes.’ The significance and subtlety of many of the political and military maneuvering has changed over time.

The military threat from the PRC to Taiwan hasn’t disappeared but it has been pushed very far to the back burner. Taiwan has even resisted Washington’s efforts to push weapons purchases on it that its armed forces don’t want. But it values highly the US ‘alliance’ because China’s armed forces have become so powerful in the past two decades.

Since June 2016, Taiwan has again been under the Presidency of the pro-independence party, the Democratic Progressive Party (DPP). When it last held the presidency (2000–08), there was no major breach with China and, in fact, relations improved steadily. The Bush administration even enhanced its military exchanges with Taiwan, as did Japan, without serious impact on relations with China.

January 2017 presents us with a very different scenario. The Bush mantra on this issue was ‘I want good relations with China,’ no matter what we do with Taiwan. Trump, by contrast, appears to believe that he can use US recognition policy on Taiwan as a bargaining chip to gain concessions from Beijing in economic policy.

We can credit his instincts. The issue is so important to China that one might expect it would be prepared to make concessions to preserve the current US positions. But he’s misreading China’s leadership and national sentiment in that country, especially its armed forces.

When China agreed to the current US diplomatic position in 1972 and 1978, it did so from a position of severe relative weakness. That was four decades ago. While China today has some economic and military vulnerabilities that the United States could exploit in a Taiwan-related negotiation, the leaders in Beijing sees the country as powerful enough to get its way on Taiwan issues. They also see themselves as well within their rights to use all forms of state power to do so. Moreover, the US position established in the 1970s leaves that country almost no room for maneuver except outright recognition of Taiwan independence.

Australia’s response to any move by Trump away from the One China policy will include a calculation of siding with our major ally, and with the democratically-elected government of Taiwan. But we need a clear-eyed view of just how China, and Taiwan itself, might react to a threat of unravelling strategic stability in the Taiwan Strait. It’s that stability, forged in 1972, that brought a sort-of peace to all of East Asia and helped contain Soviet power until the USSR collapsed.

Modern China will use force when threatened. In the very year that the US granted it formal diplomatic recognition, China invaded Vietnam. Its armed forces currently train for an invasion of Taiwan. But China has many economic levers it can pull, to devastating effect, before it needs to consider use of armed force. China also has cyber warfare options against Taiwan and the US that didn’t exist until quite recently.

Australia’s planning must include a view on whether the risk of unravelling Asian strategic stability is worth followership of our major ally if it threatens the Taiwan consensus on which that stability is built.

Donald Trump will stress test America’s alliance with Australia. He’s going to pressure lots of other areas—the alliance will get its share. Australia will strive to confine disagreements. Canberra wants differences to be matters of degree, not division. Heaven forbid clashing core interests test alliance fundamentals. As ever, Australia will cling to the alliance. But Trumpism will push limits and unbalance assumptions. The 45th President promises to test purposes, and that might just go to questions of principle. Heaven forbid.

As the roller coaster is inaugurated, this is the perfect moment for a book entitled Australia’s American Alliance, the second in MUP’s Defence series from the ANU’s Strategic and Defence Studies Centre. The blurbage is strong with this one. John Howard calls it a ‘detailed analysis of a relationship of enduring importance’. One of Canberra’s wise owls, Allan Gyngell, goes bigger: ‘No book I know comes closer to illuminating the mysteries and identifying the challenges of Australia’s most important external relationship.’

Based on a treaty that had its 66th birthday in September, the alliance’s endurance is built on adaptability. Trump will test that resilience. Australia, though, has worried about US reliability and commitment for all 66 years. As Stephan Fruhling notes, Australia learned to live with a great ally that was ‘often fickle in its strategic attentions’. Today, the US focuses on where Australia lives. We got what we wished for. Fruhling summarises the new era’s challenges:

• Can Australia be more successful than in the past in using its geographic position to influence the US?
• Must Australia embrace greater political-military institutionalisation of the alliance?
• Does Australia want to bind itself ever-closer to US strategic commitments in the region?

Australia once fretted that ANZUS didn’t match the commitments of NATO. The change in Canberra thinking long preceded Trump’s blasts at NATO free riders. Andrew Carr sees an alliance role reversal. The ‘open and informal structure of ANZUS’ was ‘created to preserve US freedom of action’. Today, it’s Australia that worries about ‘burdens and entanglement’.

The obsessive gaze Australia long bestowed on the US—the bilateral blinkers—broadens. Now, Canberra worries about what the alliance means for Australia in Asia. The endurance of the alliance, Carr states, will rest on Australia’s ‘ultimate judgement’ about the US as a ‘long-term Asia-Pacific power’.

Trump’s trashing of the Trans-Pacific Partnership shows the clashing orbits of economic world and security world—Ecworld versus SecWorld. Looking from EcWorld, Amy King starts with the insight of another Canberra wise owl, Stuart Harris. Since WW2 the US and Oz have agreed on the principles of the international economic order; in practice, they’ve ‘frequent bilateral conflict within those principles’. Hello, Donald!

King concludes that Australia can’t run an economic policy narrowly based on its alliance, and must seek EcWorld-SecWorld alignment:

• Keeping the US engaged in Asia
• Managing the ‘order transition’ of China’s economic rise
• Maintaining the open, liberal, non-discriminatory order that most benefits Australian trade

These are among the six chapters in the book’s first two sections on strategic policy. Part III on ‘Mechanics of alliance cooperation’ illuminates the entrails, with John Blaxland (military cooperation), James Goldrick (interoperability), Michael Wesley (intelligence), and Richard Brabin-Smith (kit and capability).

Wesley on the ‘unprecedented intelligence intimacy’—intelligence as the ‘strategic essence’ of the alliance, as Des Ball put it—and Brab Smith on ‘the US command of the application of science and technology to warfare’, offer rich accounts of what Australia gets from the alliance. The science and the gear and the intelligence are as important as the Marines. The ties bind in myriad ways.

The final chapters—Part IV on ‘Managing trade-offs’—consist of Kim Beazley (what the alliance means for Oz sovereignty), Peter Dean (Oz strategic culture and way of war), and Brendan Taylor (Australia and the US in Asia). Each is strong; Beazley hits it out of the park.

Beazley starts with the paradox that the alliance today ‘involves a more intense relationship than it did when the Berlin Wall came down and the Cold War ended’. He believes that ‘depth and robustness’ is based on a calculation of the alliance’s value to Australia’s ultimate security. Beazley’s analysis suggests the alliance is Trump-proof (my term, not his).

Beazley emphasises the 21st Century ‘development of a seamless interconnection’ between Australia–US military and intelligence services: ‘The depth of that connection has the capacity to endure through potentially sharp shifts in the orientation of future administrations. It is our version of a “deep state” without the sinister attributes applicable to the military and intelligence establishment in authoritarian regimes.’

Serving the deep state as Australia’s previous ambassador to Washington, Beazley records how the embassy manages 400 military purchase projects. Each working day Australia spends $13 million on American defence industry products. What that buys is displayed in the air defence system for Australia’s approaches: ‘the best we have had,’ Beazley argues, ‘and it is regionally decisive’.

Australia used to think about interoperability. Now, Beazley writes, the US talks force integration: ‘The trajectory of our mutual military collaboration will challenge thinking about Australian sovereignty.’

The challenge now has a president. Trump will force Australia to look hard at our prized possession.

The Australian Naval Institute recently published the inaugural edition of its Australian Naval Review. I was pleased to be asked to contribute to the first issue, and subscribers to the Institute will be able to read my paper Australia’s naval shipbuilding plans: guided by strategy or industry? I set out to examine the stated rationale for the government’s ambitious program of naval ship and submarine building, and to test that against the timeframes we’ve been told to expect from the nation’s shipyards.

The central idea in the paper—that there’s a mismatch between Australia’s strategic and defence industry timeframes—won’t be much of a surprise to dedicated Strategist readers. I’ve made the point before, and Mark and I have made the same point about the future submarines.

To see why there’s a problem, have a look at these excerpts from the 2000, 2009 and 2016 Defence White Papers:

DWP 2000

‘China, as the country with the fastest growing security influence in the region, is an increasingly important strategic interlocutor for Australia.’

DWP 2009

‘In Northeast Asia, China is likely to … continue … its foreshadowed core military modernisation. Over the long term, this could affect the strategic reach and global postures of the major powers. …Any future that might see a potential contraction of US strategic presence in the Asia-Pacific region, with a requirement for allies and friends to do more in their own regions, would adversely affect Australian interests, regional stability and global security.’

DWP 2016

‘While China will not match the global strategic weight of the United States, the growth of China’s national power, including its military modernisation, means China’s policies and actions will have a major impact on the stability of the Indo-Pacific to 2035. China’s Navy is now the largest in Asia. By 2020 China’s submarine force is likely to grow to more than 70 submarines.’

In the 15 years between the 2000 and 2016 white papers, the Australian government’s assessment of China’s increasing capabilities went from being almost incidental to having ‘a major impact’ on the region’s stability in the next two decades. Consistent with that, last year’s White Paper worried about the stability of the Indo–Pacific in 2035.

But on current plans, the first of Australia’s future submarines won’t be commissioned much before 2035. And it’ll be ‘around 2050’ before the RAN submarine fleet will reach 12 boats. Meanwhile, the PLA-N will likely have ‘more than 70 submarines’ just four years from now. If the Australian government’s taking the intelligence agencies’ strategic assessments which underpin white paper discussions seriously, it’s not obvious from those plans.

If there’s a strategic shock of some kind, such as escalation of the current territorial disputes in the South or East China Seas, or a conflict sparked by North Korea, we could find ourselves wanting more defence capability much sooner than is currently planned. In that case, we’d have two broad options. We could try to increase the local production rate, with all the challenges of suddenly finding the required skills and capacity in a local industry that’d been gearing up for a long steady production run. Or we could supplement local production with purchases from overseas suppliers, but at a time when other nations will presumably also be in the market for equipment coming off their production lines. Either way, we’d struggle to acquire capability quickly enough for it to play a role in whatever contingency played out.

Or we could be lucky, and the region’s strategic shifts could play out benignly. It might be, for example, that the ‘nine-dash line’ in the South China Sea is the limit of China’s ambition. When the area’s secured to China’s satisfaction, perhaps it’ll get on with business and a ‘new normal’ strategic equilibrium will emerge. In that case, our leisurely timetable for fleet recapitalisation will be acceptable—and future governments could even find ourselves revising our plans for fleet expansion downwards.

Whichever way you look at it, we’re in a nowhere situation at the moment. Australia’s strategic rhetoric is pro-ANZUS and pro-military expansion because we’re worried about the next 20 years. We also want a steady-state industrial base for our naval ship requirements. The trouble is that we can’t have it all. Something will have to give—either the industry cart has to go back behind the strategy horse, or we need to rethink our strategy.

Let me finish this piece with a new thought. One possible strategy change, which would alter our defence requirements significantly, would be rethinking ANZUS. DWP 2016 emphasised shoring up the alliance, and assessed that the US will be both willing and able to act in ways consonant with our interests. Up until recently Australian strategists have worried about a potential cooling of American commitment. But, like Goldilocks, we’re discovering that our porridge could also be too hot. We’ve already seen hints of that, with unhelpful American musings about unilaterally changing the decades-old ‘one China’ policy, or by implicitly threatening force in the South China Sea. If that continues, we need to think hard about how we position ourselves. The worst case is that the United States unnecessarily precipitates a conflict, either by design or by misadventure.

Like the rise of Soviet communism and both World Wars, the Western liberal order’s apparent collapse in 2016 could turn out to be yet another historic upheaval that began in Eastern Europe. Hungarian Prime Minister Viktor Orbán’s brand of ‘illiberal democracy’ was quickly adopted by Poland’s de facto ruler, Jarosław Kaczyński, and is now making inroads in the heart of the West—first with the United Kingdom’s ‘Brexit’ referendum, and then with Donald Trump’s victory in the United States’ presidential election.

Meanwhile, Turkey’s nascent democracy has already given way to Recep Tayyip Erdoğan’s strongman rule, and the Philippines is now led by a populist authoritarian, Rodrigo Duterte. As we head into 2017, something is clearly rotten in the state of democracy.

It may seem unlikely that Orbán and Kaczyński—who both trained as lawyers under their countries’ communist regimes—have become globally influential political entrepreneurs. But their political project has all the features of what management research recommends for a successful innovation strategy. Like many disruptive products and popular brands, illiberal democracy does not try to please everyone; rather, it targets a carefully selected segment of ‘voter-customers,’ and gives them exactly what they want.

When Hillary Clinton called Trump’s supporters a ‘basket of deplorables,’ she quite accurately described one segment of the political market that Orbán’s innovation targets. But the illiberal democrat speaks not only to reactionaries eager to restore traditional social hierarchies, but also to working-class voters fearful of unemployment and downward mobility. The rest of society—ethnic, religious, and ideological minorities, including the urban ‘creative class’—then forms the opposition.

Illiberal democracy subverts the idea—held by European social democrats and American Democrats since the Civil Rights era—that working-class and minority voters should forge a progressive alliance to counter conservatives. Intellectually, such a ‘stronger together’ alliance makes sense; but it has three major flaws that Orbán and Kaczyński have exploited.

First, the economic interests of white (or native) working-class voters and those of minorities are often not aligned, because they are competing with one another for jobs and social benefits. This is especially true when slow growth turns the division of the economic pie into a zero-sum game. When funds are limited, should the Hungarian government spend money on educating Roma children, or on retraining displaced ethnic Hungarian workers?

Second, working-class voters often adhere to traditional conservative values. While a farmer in Eastern Poland or a factory worker in Michigan might be persuaded to support gay rights or women’s empowerment in exchange for economic redistribution, working-class voters have not supported such causes in large numbers.

Illiberal democracy is effective because it disentangles desired goods from unwanted add-ons, which is the essence of modern business innovation. Just as Airbnb allows us to find lodging without unnecessary hotel frills, illiberal democrats offer working-class voters economic help with no civil-rights strings attached.

Third, in many electorates, members of a social majority seem to value vilification of minorities as an intrinsic good, irrespective of wealth transfers. And as Yale University’s Amy Chua and others have shown, targeting minorities can be a highly effective tool for political mobilisation.

In the business world, it is widely understood that successful products are not just useful; they also provide customers with a distinct experience. In illiberal democracy, that experience relies on the spectacle of denigrating various ‘others.’ Indeed, many businesses, such as the companies that produce violent video games and reality-TV shows, have similarly exploited our basest instincts. Trump’s reality-TV show The Apprentice probably taught him how effective sowing division can be as a political-marketing tool.

Orbán’s insight, taken up by Kaczyński, was that an illiberal coalition comprising the working class and social reactionaries may be more viable than the old progressive project. Meanwhile, Hungary and Poland were ideal ‘early adopters’ of this innovation, because both countries are ethnically homogeneous, which makes minorities particularly weak and vulnerable.

But illiberal-democratic politics can also win elections in diverse societies such as the US. Like many successful products, illiberal democracy offers voters a fundamentally straightforward value proposition. Contrary to progressive agendas, the illiberal message is easy to understand, not only because it is often mendaciously simple, but also because its two target groups’ conservative cultural values inherently align.

Moreover, illiberal democracy can ignore issues that it considers to be non-essential, such as human rights and the rule of law: its only imperative is to satisfy its customers. More surprisingly, illiberal democrats also do not seem to be overly concerned about economic growth. Hungary had a relatively robust recovery after the 2008 recession, but its economy is now slowing; and in both Poland and post-Brexit UK, the high economic costs of illiberal democracy are already apparent. If Trump pursues his promised trade protectionism in 2017, he will likely push the entire world into recession.

This could be illiberal democrats’ fatal flaw, or it could represent their most daring political bet of all. Building a dynamic, creative economy in a closed society may not even be possible, but this does not matter if electorates in mid- and high-income countries no longer consider growth to be as important as identity.

Like a lousy seat on a low-cost airline, or the frustration of assembling IKEA furniture, illiberal-democratic electorates may regard economic stagnation as an acceptable price to pay for a more familiar world—one where the state guarantees the dominant in-group’s sense of belonging and dignity, at the expense of ‘others.’

Those of us who have lived in Orbán and Kaczyński’s world understand that illiberal democracy is no temporary aberration. It has all the hallmarks of a carefully conceived, innovative political strategy that may prove to be sustainable. Indeed, in a few decades we might look back and wonder how liberal democracy, with all its complexities and internal tensions, managed to hold on for so long—unless, that is, progressives treat 2016 as a wake-up call, and finally start to innovate, too.

On 20 January 2017, Donald Trump will be inaugurated as the 45th President of the United States. I would hate to say ‘I told you so,’ but his election should not have come as a surprise. As I explained in my 2002 book Globalization and its Discontents, the policies we have used to manage globalisation have sown the seeds of widespread disaffection. Ironically, a candidate from the same party that has pushed the hardest for international financial and trade integration won by promising to undo both.

Of course, there is no going back. China and India are now integrated into the global economy, and technological innovation is reducing the number of manufacturing jobs worldwide. Trump cannot recreate the well-paying manufacturing jobs of past decades; he can only push for advanced manufacturing, which requires higher skill sets and employs fewer people.

Rising inequality, meanwhile, will continue to contribute to widespread despair, especially among the white voters in Middle America who handed Trump his victory. As the economists Anne Case and Angus Deaton showed in their study published in December 2015, life expectancy among middle-age white Americans is declining, as rates of suicides, drug use, and alcoholism increase. A year later, the National Center for Health Statistics reported that life expectancy for the country as a whole has declined for the first time in more than 20 years.

In the first three years of the so-called recovery after the 2008 financial crisis, 91% of the gains went to the top 1% of earners. While Wall Street banks were bailed out with billions of dollars in taxpayer money, homeowners received only a pittance. US President Barack Obama saved not only the banks, but also the bankers, shareholders, and bondholders. His economic-policy team of Wall Street insiders broke the rules of capitalism to save the elite, confirming millions of Americans’ suspicion that the system is, as Trump would say, ‘rigged.’

Obama brought ‘change you can believe in’ on certain issues, such as climate policy; but with respect to the economy, he bolstered the status quo—the 30-year experiment with neoliberalism, which promised that the benefits of globalization and liberalisation would ‘trickle down’ to everyone. Instead, the benefits trickled up, partly owing to a political system that now seems to be based on the principle of ‘one dollar, one vote,’ rather than ‘one person, one vote.’

Rising inequality, an unfair political system, and a government that spoke as if it was working for the people while acting for the elites created ideal conditions for a candidate like Trump to exploit. Though wealthy, Trump is clearly not a member of the traditional elite, which lent credence to his promise of ‘real’ change. And yet it will be business as usual under Trump, who will adhere to Republican orthodoxy on taxation and, by appointing lobbyists and industry insiders to his administration, has already broken his promise to ‘drain the swamp’ in Washington, DC.

The rest of Trump’s economic agenda will depend largely on whether House Speaker Paul Ryan is a true fiscal conservative. Trump has proposed that large tax cuts for the rich be combined with massive infrastructure-spending programs, which would boost GDP and improve the government’s fiscal position somewhat, but not nearly as much as advocates of supply-side economics hope. If Ryan is not as concerned about the deficit as he says he is, he will rubberstamp Trump’s agenda, and the economy will receive the Keynesian fiscal stimulus that it has long needed.

Another uncertainty relates to monetary policy. Trump has already spoken out against low interest rates, and there are two vacancies on the US Federal Reserve’s Board of Governors. Add to that the large numbers of Fed officials itching normalise rates, and it is fair bet that they will do so—perhaps more than offsetting Trump’s Keynesian stimulus.

Trump’s pro-growth policies will also be undermined if he exacerbates inequality through his tax proposals, starts a trade war, or abandons America’s commitments to reduce greenhouse-gas emissions (especially if others retaliate with a cross-border tax). Now that Republicans control the White House and both houses of Congress, they will be relatively free to weaken workers’ bargaining power, deregulate Wall Street and other industries, and turn a blind eye to existing antitrust laws—all of which will create more inequality.

If Trump follows through on his campaign threat to impose tariffs on Chinese imports, America’s economy would probably suffer more damage than China’s. Under the existing World Trade Organization framework, for every ‘illegal’ tariff that the US imposes, China can retaliate anywhere it chooses, such as by using trade restrictions to target jobs in the congressional districts of those who support US tariffs.

To be sure, measures against China permitted under the WTO framework, such as anti-dumping tariffs, may be justified in some areas. But Trump has enunciated no guiding principles for trade policy, and the US—which directly subsidises its automobile and aircraft industries, and indirectly subsidises its banks through ultra-low interest rates—would be throwing stones from a glass house. And once this tit-for-tat game begins, it could very well end in the destruction of the open international order created since World War II.

Similarly, the international rule of law, which is enforced primarily through economic sanctions, could fare poorly under Trump. How will the new president respond if Russian-aligned troops escalate the conflict in Eastern Ukraine? America’s real power has always derived from its standing as an inclusive democracy. But people around the world have now lost confidence in democratic processes. Indeed, throughout Africa, I have heard remarks such as, ‘Trump makes our dictators look good.’ As American soft power continues to erode in 2017 and beyond, the future of the international order will become more uncertain.

Meanwhile, the Democratic Party will surely be conducting an election post mortem. Hillary Clinton undeniably lost because she failed to offer voters a convincing vision that was markedly different from the neoliberal agenda that Bill Clinton embraced in the 1990s. Having pursued a political strategy of ‘triangulation’—adopting versions of its opponents’ policies—for more than a generation, the party of the left could no longer present itself as a credible alternative to the party of the right.

The Democrats will have a future only if they reject neoliberalism, and adopt the progressive policies proposed by leaders such as Elizabeth Warren, Bernie Sanders, and Sherrod Brown. This will put them in a strong position against the Republicans, who will have to figure out how to manage a coalition of evangelical Christians, corporate executives, nativists, populists, and isolationists.

With the arrival of Trump, and with both major parties now redefining themselves, the coming year may well be remembered as a turning point in US and world history.