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Trump’s likely foreign policy: selective engagement, and helping those who help themselves

In his second term, Donald Trump will be determined to pursue a foreign policy that more closely resembles how the US engaged with the world for the first 170 years of the republic: pursuing abundance at home and selective engagement abroad.

He will do so not because the US is weak and in decline but because it is powerful. Its power is a function of its economic size, military superiority, cultural influence, energy security, business innovation and productivity, labour flexibility, growing population, deep capital markets and immense private wealth, and the omnipresence of the US dollar and US Treasury bonds. US power will give Trump greater freedom to act, including by asking more of allies and partners who seek to benefit from the application or deterrent effect of that power.

True, US power faces several structural challenges. Compared with the Cold War era, America’s industrial base is weaker, as evidenced by its current inability to build nuclear-powered attack submarines at a fast enough replacement rate, which will likely compromise Australia’s ability to acquire Virginia-class submarines in the 2030s.

There will be a reckoning in relation to US public debt, which will rise to 122 percent of GDP by 2034 and already requires more to be spent on public debt interest than defence. Trump will need to better balance America’s commitments and its power if his foreign policy is to command domestic support.

However, these and other structural problems are reversible. They do not qualify as the great power killers that have led to the decline and fall of more conventional powers throughout history.

By virtue of its power, the US is able to shape world order to an extent no other actor is able to, China included. Trump is a power politician. He understands that foreign relationships and transactions are an unsentimental function of power relativities and not abstract global rules that seek to fetter the exercise of sovereign power by nation-states. (On this, his speeches to the UN General Assembly are worth re-reading.)

Trump will be prepared to continue to extend US security to those who are prepared to do more to defend themselves, so long as doing so is also in the interest of the US. Those who spend less on defence than the US (at least 3 percent of GDP) will have to lift their spending or make commensurate in-kind contributions to their own security.

Australia is well placed to make or extend mutually beneficial deals with the second Trump administration, especially in relation to critical minerals, the production of nuclear-powered attack submarines at a faster rate, advanced military technology and further access to our geographically crucial facilities and infrastructure.

However, our weak levels of defence spending will become a point of contention if it is judged that we are not doing more to ensure the self-reliant defence of Australia.

We should not assume, however, that a return to this older style of US foreign policy will result in a withdrawn and isolated US. The world is today too interconnected and closer than was the case in the early 1940s, when isolationists held significant sway in US politics. On the contrary, the US is likely to remain very active in the world, but under different terms and in pursuit of more focused objectives. When it is in the US national interest, Trump will take resolute action—as he did in his first term against Iran, including by way of imposing oppressive sanctions, withdrawing from the Obama-era nuclear deal and ordering the assassination of Qassem Soleimani.

As a disrupter, Trump may strike a grand bargain between the US, Israel, Saudi Arabia and others, whereby Israel would be secure, Palestinians would be able to live in peace and Iran would be contained. That deal would be worthy of the Nobel Peace Prize.

The US will be a powerful actor under and after Trump. For it to be great again, there is one challenge it will have to meet. Trump will have to intensify efforts to ensure that China does not establish itself as the hegemon of Eurasia.

Were it to do so, across time it would gain dominance over the resources, markets and economic power of the world’s strategic heartland. This would undercut the strategic and commercial interests of the US.

A hegemonic China would grow in strength and eventually threaten the US in its hemispheric citadel. It will be in the interests of the US to prevail in this struggle for mastery in Eurasia.

Trump will prefer to do this by way of aggressive trade, investment, technology decoupling and strategic deterrence, avoiding a military clash if possible. Intrinsic to this approach will be the maintenance of forward-deployed US forces in the western Pacific and the strengthening of the latticework of US-centred regional security partnerships that has emerged across the past decade.

Still, he will need to be convinced to defend Taiwan. The arguments for doing so would have to be framed within this counter-hegemonic strategy. Taiwan will need to show it is willing to do much more to defend itself, including by way of an extensive rearmament program.

There is a prospect of a golden age of American power, where a self-interested US, working with equally self-interested allies and partners, and not embarrassed to wield that power, accomplishes a world-changing quadrella: to thwart China, flip Russia, contain Iran and isolate North Korea. If it can accomplish this sweep of the grand chessboard of Eurasia, the US will be not just powerful but great again. Motivated by America-first instincts that are deeply rooted in US strategic culture, Trump has the opportunity to bring about a transformation of the world order that would rival the earlier achievements of Harry Truman and Ronald Reagan at the bookends of the Cold War.

International trade is dividing between blocs. Australia could be in the middle

Australia risks being caught in no man’s land as the world divides into rival economic blocs in what the International Monetary Fund describes as a new cold war.

Trade has been falling everywhere since Russia’s invasion of Ukraine, but it has been falling twice as fast between the blocs of nations centred on the United States and China as it has between nations within those blocs.

The IMF’s latest World Economic Outlook shows that trade between the rival blocs of nations is falling faster than was the case between the US and Soviet blocs in the late 1940s.

The US presidential election victory of Donald Trump, who has vowed to impose steep increases in tariffs on China and its proxies, will deepen the cleavage in both global trade and foreign direct investment.

IMF Deputy Managing Director Gita Gopinath has warned, ‘Policymakers need to get ready to navigate a more volatile world whose key features are increasingly being shaped by fragmentation and conflict.’

Australia’s political leaders, like most of their regional counterparts, reject the notion that they face a choice between the two superpowers and instead emphasise opportunities that await in commerce with counterparts across the Indo-Pacific and beyond.

However, Australia’s dependence on China as its principal market and supplier is both an economic and geopolitical fact.

The tension in Australia’s position is shown by the different attitudes towards trade, where the government has sought to rebuild Chinese exports, and foreign investment, where national security concerns are now paramount.

Where Australia sits in a division of the world between rival blocs is not clear. An IMF analysis of the impact of global fragmentation on commodity markets earlier this year assigned Australia to the ‘China-Russia’ bloc, rather than the ‘US-Europe’ bloc.

The IMF estimates that trade between blocs aligned with either the United States and China has fallen 5 percent since 2022, or twice the 2.5 percent decline of trade among nations within those blocs.  A similar dynamic is evident in foreign direct investment.

US and Chinese companies have been shifting supply chains away from each other.  One result has been a surge in the trade of what the IMF terms ‘connector countries’ such as Vietnam and Mexico. Trump has said he will impose punitive tariffs on imports that attempt to evade his restrictions on China by being routed through third countries.

A study by the Organisation for Economic Cooperation and Development, exploring the impact of a hypothetical 10 percent fall in trade between advanced and emerging nations, found that Australia and South Korea would be the most severely affected, facing falls in GDP as much as 1.4 percent.

It is not simply a matter of geopolitical forces upsetting otherwise mutually profitable trading arrangements. Depending on other nations for traded goods and services can carry intrinsic geopolitical implications. The OECD comments:

Up until recently, interdependence was generally seen in a positive light, principally involving mutually beneficial commercial exchanges, allowing better specialisation and bringing higher productivity and access to a wider pool of capabilities and ideas. However, recent global events disrupting international markets and supply chains have increased concerns about the supply chain resilience and the risks that might be transmitted through international trade linkages.

Global production of products has become increasingly concentrated, and it tends to be increasingly clustered around some countries and regions, notably China and Asia. This is not only due to natural or organic economic factors, such as natural endowments, comparative advantage, economies of scale, or global value chain fragmentation, but also policies.

There is a growing interest in identifying commercial links that could cause high economic or societal damage in case of unexpected disruptions, or those that could be used as a tool of coercion or might create national security risks or weigh on countries’ sovereignty.

Countries are dependent on a trading partner when it accounts for a large share of exports or imports of a particular product or service and there are few alternative suppliers or markets.

When China blocked Australian coal imports, mining companies could divert their exports to other markets. But there was no such remedy for lobster producers, because China accounted for 90 percent of Australia’s exports and a large share of global imports.

The OECD says that many products that appear on lists of ‘critical’ or ‘strategic’ goods are not particularly concentrated. Strategic sectors where OECD countries do have high dependence on China include manufacturing refractory and ceramic products, tools for cutting stone (essential for quarries), pharmaceuticals, lifting and handling equipment and electronic components.

An important conclusion from the OECD study is that China is much more dependent on advanced countries than vice versa. ‘Trade dependencies of OECD economies on China also need to be put in the context of China’s dependencies on OECD economies, which appear even larger.’

While the tensions may become more acute, both US and Chinese blocs retain strong vested interests in each other.

Trump vs China, round two

In August 2019, amid an escalating trade war with China, then-US president Donald Trump fired off a series of tweets directing US companies to ‘immediately start looking for … alternative[s] to China’ and shift their manufacturing back to the United States. The demand sent stock markets into a tailspin and alarmed US businesses with exposure to China.

While Trump ultimately softened his stance, the threat underscored a disturbing reality that the world must face now that he is returning to the White House: the president has the power to sever ties with the world’s second-largest economy and can do so on a whim.

With Trump’s resounding victory over Kamala Harris, the spectre of his impulsive, heavy-handed approach to diplomacy looms large. If his past actions are any indication, corporate America might soon be bracing for another round of erratic, high-stakes manoeuvres—or worse—against China.

The US constitution delegates authority over foreign relations to both the president and congress, a structure designed to temper executive discretion with legislative oversight. But this balance has shifted dramatically in recent decades. Foreign policy is now overwhelmingly concentrated in the executive branch and goes largely unchecked, a trend that political scientists attribute to a rise in partisanship and a decline in congressional expertise. With both parties favouring a hardline approach toward China, Trump will have even more freedom to lash out at the country.

Meanwhile, national security has proven to be remarkably pliable, extending far beyond traditional concerns such as homeland defense and cybersecurity. It now covers everything from cross-border data flows and supply chain vulnerabilities to protecting industries deemed too critical to be dominated by foreign competitors.

This broadened definition has enabled presidential actions that would have been unimaginable only a decade ago. Consider some of the measures taken by Trump and his successor, Joe Biden: sanctioning Huawei and ZTE; banning TikTok; blocking Chinese investment in a dating app; launching the controversial China Initiative, which disproportionately targeted Chinese scientists working in the US; imposing a semiconductor embargo on China; restricting US investment in Chinese artificial intelligence and quantum computers; and, most recently, slapping 100 percent tariffs on Chinese electric vehicles and batteries.

Many of these aggressive policies should be implemented only in emergencies. But what constitutes an emergency has also expanded considerably and now includes curbing China’s rise. And when Trump takes office in 2025, the executive branch’s capacity and willingness to declare an emergency and impose extraordinary measures under the banner of national security could increase substantially.

While US courts have the authority to check presidential powers—as they did in blocking Trump’s attempts to ban TikTok and WeChat—they have limited oversight of foreign policy. On matters of national security in particular, federal courts have historically been very deferential—even more so when congress and the president are aligned. The recent passage of the TikTok legislation illustrates how congress can quickly restore executive power after a judicial ruling constrains it. As a result, TikTok and other Chinese companies are constantly contending with renewed hostility from the executive, like an endless game of whac-a-mole.

Ironically, this concentration of power in the US presidency mirrors the Chinese governance model that US leaders criticise so sharply. As I show in my book, High Wire: How China regulates Big Tech and governs its economy, the consolidation of political power in China over the past decade has often led to dramatic policy swings that undermine investor confidence and dampen entrepreneurship. The Chinese government’s recent missteps—from mismanaging the Covid-19 pandemic to crackdowns on the tech and property sectors and now a sluggish response to mounting deflation risks—should serve as a cautionary tale.

The US is likewise beginning to feel the unintended consequences of its own hostile approach toward China. The China Initiative has led to an exodus of talented Chinese scientists, many of whom have returned home. Meanwhile, the effectiveness of tough US sanctions and export controls is waning. Huawei, which initially struggled under these measures, has grown stronger of late, invigorated by state support and a firm resolve to achieve self-sufficiency. In its efforts to contain China, the US risks creating a more resilient rival—one strengthened by the very pressures meant to suppress it.

But instead of reassessing the efficacy of its hardline tactics, US agencies are doubling down on sanctions and restrictions. Even the notorious China Initiative, despite being ‘discontinued’, persists in a barely concealed form.

So far, much of the discussion about the Sino-American rivalry has framed China’s rise as the primary catalyst for US policy shifts. But this misses a crucial point: the conflict can also be traced back to a democratic deficit in US foreign policymaking. If the US takes increasingly extreme measures to contain China, as it likely will during Trump’s second administration, it risks widening that deficit—and becoming defined by what it opposes.

America under Donald Trump: views from ASPI analysts

Foreign policy

Greg Brown, senior analyst, ASPI DC—If personnel is policy, we have a fair idea of the Trump foreign policy. The voices competing for the president’s ear all emphasise peace through strength and agree that China is the first order of concern. The debate to watch is between advisers arguing that confronting China is an imperative for maintaining US global primacy and others calling for a narrower strategy that prioritises US attention in the Indo-Pacific.

Nishank Motwani, senior analyst, ASPI DC—As president, Trump will likely reinforce foreign policy unpredictability. This could undermine US commitments to NATO and Indo-Pacific allies, including Australia. This in turn could embolden Russia, China, Iran, and North Korea to act aggressively. Trump views alliances transactionally, favouring financial returns over strategic interests. This could prompt him to scrutinise AUKUS, perceiving missed financial gains and seeking to renegotiate for greater Australian contributions—a move in line with his art-of-the-deal approach.

Raji Pillai Rajagopalan, resident senior fellow—Trump’s presidency brings uncertainty, as he is unlikely to have a steady policy. It is more likely that each issue will be taken in isolation rather than as part of a strategic whole. Such unpredictability will likely scare adversaries such as China and Iran, as it did in Trump’s first term. But US partners will also be concerned by Trump’s shotgun approach, particularly on issues such as trade and economic security partnerships, if he does not distinguish between friends and foes. For this reason, minilateral groups, especially the Quad, may need to play more of a leading role than bilateral relationships, with Australia, Japan and India working together to ensure Indo-Pacific principles and interests are met.

 

China

Bethany Allen, head of China investigations and analysis—Trump is a wild card on foreign policy, including towards China. On the campaign trail he promised increased tariffs on China but criticised Taiwan. Anti-China sentiment runs deep in the Republican Party, but so does its opposition to US support for Ukraine. A Russian win in Ukraine would be a major foreign policy victory for Xi Jinping, Putin’s top supporter, and would make the world safer for revisionist authoritarians such as Xi.

 

Defence

Alex Bristow, senior analyst—Although Trump will probably abandon the term ‘integrated deterrence’, because of its association with Biden, he could retain and more forcibly assert the expectation that allies must step up and share risk if they want US nuclear protection. Elbridge Colby, who is tipped for a senior national security role in the new Trump administration, has said ‘all options are on the table’ for shoring up the nuclear umbrella in the Indo-Pacific. That may hint at stationing or sharing US nuclear weapons on allied territory, which would test legal barriers in Australia. Trump’s dismissive approach to multilateral non-proliferation regimes could fuel disinformation about AUKUS, but Trump may also help pressure Australia’s Labor government to disavow the counterproductive Treaty on the Prohibition of Nuclear Weapons. The prospects for nuclear arms control look bleak as long as Beijing, Moscow and Pyongyang keep seeking leverage by expanding their nuclear forces.

 

Southeast Asia

Fitriani, senior analyst—Trump’s re-election may diminish US engagement with Southeast Asia, given his transactional engagement with the region during his first term. One point to focus on is whether the US will uphold its commitment under the 1951 Mutual Defense Treaty and stand by with the Philippines when tensions with China over the South China Sea flare. As Southeast Asian countries are small to medium in power and size, Trump will care about them only when he can use them to counter a bigger bully: China.

 

Climate

Mike Copage, head of the Climate and Security Policy Centre—Trump will weaken climate policy and international engagement, with deeper and longer-lasting effect than in his first term. If his administration follows the Heritage Foundation’s Project 2025 recommendations, US national security institutions will be prevented from addressing climate resilience, and world-leading US agencies may see their climate science programs disrupted. This would damage climate resilience and momentum among key allies and weaken important relationships with Pacific island countries.

However, Trump’s close circle includes major private sector proponents of clean energy technology, such as Elon Musk. Their influence may moderate his effect on climate policy.

 

Space

Malcolm Davis, senior analyst—Trump is likely to take a much bolder approach to space, in part driven by a need for personal prestige. This could see him try to get US astronauts back to the lunar surface before the end of his four-year term. He will also confront the growing risks presented by Chinese and Russian counterspace capabilities by promoting the role of the US Space Force. He’s likely to shrug aside notions of international cooperation on space and de-emphasise international diplomatic efforts to maintain norms of responsible behaviour.

Trump’s relationship with Elon Musk, CEO of SpaceX, will also prioritise space policy. The administration is likely to demand a greater effort by allies such as Australia to step up and share the burden of military space capability, including space control. It may also encourage Australia to more rapidly open its launch sites for US space launches and returns, potentially including SpaceX’s fully reusable Starship rocket.

Demonstrated destruction is deterrence

US and Israeli air strikes in the last month underlined the unrivalled ability of sophisticated air forces to reach and destroy sensitive targets.

The devastating attacks contrasted sharply with ineffectual Iranian and Houthi missile and drone attacks. Critically, the demonstrated power of the strikes strengthened deterrence.

Australia should pay attention as it develops strike capabilities for its strategy of deterrence by denial. The key capability implication for the ADF is the centrality of sophisticated air forces in degrading and penetrating air defences and delivering the firepower needed destroy hard targets. The critical policy insight is that a proven ability to destroy sensitive targets at will is a far more compelling deterrent than visions of future capability.

On 27 September Israel killed Hassan Nasrallah, Hezbollah’s secretary-general, as he met with senior Hezbollah leaders in a bunker buried nearly 20 metres under four high-rise buildings in southern Beirut. Israeli aircraft reportedly dropped 80 precision-guided penetrating weapons with 900kg-class warheads. The weapons were dropped at precise angles and the warheads were fuzed to detonate at specific heights to collapse the high-rise buildings and penetrate Nasrallah’s bunker. While there are questions about the strike’s proportionality, its sophistication and effectiveness are unquestioned.

On 16 October, US aircraft including two B-2A bombers destroyed five buried and hardened weapons storage locations in Houthi-controlled areas of Yemen. The mission reportedly used airspace and airbases in Australia, so the bombers flew at least 10,000km to the targets. The B-2A’s participation suggests GBU-57 Massive Ordnance Penetrators of around 13 tonnes destroyed at least some of the hardened and buried targets, as only B-2As can employ those weapons. In the words of the US defense secretary the strikes demonstrated America’s capacity to ‘target facilities that our adversaries seek to keep out of reach, no matter how deeply buried underground, hardened, or fortified … anytime, anywhere.’

Finally, in the early hours of 26 October more than 100 Israeli aircraft struck air defence, missile production and other military targets in Iran. The assault came in three waves in less than four hours and employed a variety of weapons, including air-launched ballistic missiles from Iraqi airspace. The first wave degraded Iranian air defences, including destroying Iran’s last remaining Russian-made S-300 surface-to-air missile batteries, which were its most advanced. This gave succeeding waves greater flexibility and leaves Iran vulnerable to further attacks. The strikes hit a limited number of sensitive military targets across Iran, including in the capital Tehran, to demonstrate Israel’s restraint while underscoring its ability to strike at will.

By contrast, the more than 500 Iranian missiles and drones targeting Israel in separate attacks in April and October overwhelmingly failed to reach their targets or do more than minor damage to the two Israeli airbases that they did hit. The same is true for Houthi attacks on more than 90 ships in the Red Sea over the last year, with just two ships sunk. This is not to diminish the seriousness of the threat posed by the missiles and drones or the cost exchange problem of using expensive air defence missiles to stop cheap drones. But it does serve to highlight the contrast in effectiveness, and that cost exchange perhaps should also consider the value of targets protected.

Sophisticated Israeli and US air forces, operating as integrated packages including drones and using stand-off missiles, have devastated hardened and defended targets over long range and at will in the past few weeks. Meanwhile, Iranian and Houthi missiles and drones have done little more than harass to the point of prompting retaliatory strikes that underlined their vulnerability.

The ADF should heed the relative effectiveness of these attacks as it develops strike capabilities. Investment in new surface-launched stand-off missiles should not obscure the enduring centrality of air striking forces for two reasons illustrated by events in the Middle East in the last month. First, missiles and drones alone struggle to penetrate capable air defences—especially over long ranges. They need to be integrated with broader strike packages, including crewed aircraft (for now), to reach their targets. Second, stand-in weapons carried by large aircraft remain the only way to effectively deliver the concentrated weight of firepower needed to destroy buried and hardened targets.

Finally, the Israeli and US strikes are a stark reminder that the most effective deterrent is a proven ability to devastate, not simply disrupt, targets at will.

Boeing’s woes and the state of the US defence industry

Boeing is one of the Pentagon’s biggest contractors and therefore a heavyweight supplier for US allies. So its alarming financial condition is much more than investment news.

The company has got itself into loss-making defence programs by overestimating the potential for production profits to cover research-and-development losses. Expect it to be wary in future.

Meanwhile, the other two big US military aircraft builders, Lockheed Martin and Northrop Grumman, look more interested in defending current business, such as the F-35 (Joint Strike Fighter) and B-21 programs, than moving on new and riskier ones.

Boeing’s Defense & Space division on 23 October posted a US$5.5 billion loss for the third quarter of 2024. Most of the drag came from write-offs of future losses on current programs, mainly the T-7A Redhawk trainer and the KC-46 Pegasus tanker. And the company’s civil division, which makes airliners, has its own enormous problems.

Boeing’s profit estimate at completion (EAC) for the KC-47 and T-7 programs is negative. Quite likely, the MQ-25 carrier-based tanker drone and VC-25B presidential transport programs are no longer expected to make money, either.

‘Our EAC process needs to get better,’ CEO Kelly Ortberg said. Advisedly so: after bidding low to get the tanker job, Boeing tried to save money by building the basic airframe at its civil plant at Everett, Washington, rather than setting up a military line in Wichita, which was needed.

Boeing’s rock-bottom bid on the T-7 was influenced by its partnership with Sweden’s Saab, which offered new and cheaper process. But as far back as 2019, Saab people were quietly saying that Boeing didn’t seem to understand those processes.

In 2018, Boeing agreed with then president Donald Trump to cut costs of the two new presidential aircraft by adapting surplus 747-8 airliners it had already built. An independent VIP conversion specialist, GDC Technics, was supposed to convert them, but it went bust and Boeing had to take the work in-house.

As well as being stuck with loss-making aircraft projects, Boeing Defence and Space is under pressure from SpaceX and other newcomers in the space industry.

The result is that the division is losing money, hard to sell, and hard to grow. One analyst asked Ortberg about ‘the potential of just exiting some programs or some contracts where you’ve got absolutely no path to profitability’. Not viable, Ortberg said. ‘These are our core customers that need this capability. We’ve got long-term commitments.’

Well, that, at least, was reassurance the Pentagon wanted to hear.

But are things better in the rest of the US industry? Its structure was established by the Last Supper, the 1993 meeting where deputy defence secretary Bill Perry advised bosses of aerospace prime contractors who still considered their businesses viable to look to their left and their right, ‘because one of you will be out of business in five years.’

It triggered a wave of mergers and acquisitions.

But from the end of 1996, when JSF program kicked off, there was a long drought of major combat aircraft programs (imagine no new projects between the P-80 of 1944 and the F-111 of 1967), because of the Pentagon’s focus on counter-insurgent war in the Middle East.

Next, the Pentagon focused on squeezing the industry on initial acquisition cost, through projects such as Better Buying Power.

Finally, we saw the shift of business emphasis towards maximising shareholder value. What is good for that is cash profit. What is less good is low- or negative-margin research and development, and what is even worse is spending money competing for programs that you don’t win or might win only to see them cancelled or delayed.

For US defence prime contractors today, the path to prosperity is to defend your existing programs and the future support business that goes with them. With few new starts for suppliers to bid on, the primes can demand lower prices from them by threatening to look elsewhere. They can squeeze suppliers until the pips squeak, raiding them for their best-performing people, and then complaining about late deliveries and quality problems.

New programs? Well there is one for fighter-like drones, the Collaborative Combat Aircraft (CCA), but it doesn’t look anything like the sort of big-money effort that the air force’s stalled Next Generation Air Dominance (NGAD) was supposed to be, fielding a so-called sixth-generation fighter.

 

Lockheed Martin CEO Jim Taiclet could have been more enthusiastic about prospects. At Lockheed Martin’s earnings call, he said, ‘We have to be able to meet the J-20 with enough numbers in the Pacific. F-35 and F-22 now are the only really competitive jets against the J-20, one to one. We have to field enough of those aircraft in a short enough timeframe to maintain an effective deterrent in the Pacific. We need to be able to bring autonomy in the Collaborative Combat Aircraft concept into fifth gen—and sixth gen, if there is one.’

If there is one?

Northrop Grumman CEO Kathy Warden had a similar message when an analyst asked, ‘With the Air Force reevaluating at least the manned part of NGAD, could that free up to get your funding for the Air Force to get to that desired B-21 inventory of 150 units?’

Warden responded, ‘I think that’s exactly what the air force is looking at. They are undertaking a force structure design review, and we know that B-21 is in the mix.’

There’s common sense to this approach. The walls are going up around the major programs, and the case is being made that the CCA or other capabilities can augment them but cannot be allowed to replace them.

And if any money is freed up by postponing a new generation of fighters, Taiclet and Warden will happily take it. (And don’t forget that Northrop Grumman has a very large stake in F-35.) They’re betting, not unreasonably, that CCA money going to other, smaller aircraft suppliers will not come out of their pockets.

China sharpens the BRI with better risk management, ESG focus

China’s Belt and Road Initiative (BRI) for investment abroad has been revamped with a greater focus on risk management and governance, and it is on the cusp of winning important new members.

Brazil is expected to announce it will join the program when China’s President Xi Jinping makes a state visit to the country following a G20 summit in Rio de Janeiro in late November. Colombian officials, meanwhile, have confirmed their government’s intent to join.

US Trade Representative Katherine Tai warned last week that Brazil should be ‘objective’ about the risks of joining and consider how best to protect its economic resilience.  But Brazilian President Luiz Inacio Lula da Silva has declared his interest in the scheme, as have several ministers.

Once Brazil and Colombia join, the only significant emerging nations outside the BRI will be Mexico, which would face a conflict with its trade agreement with the United States and Canada, and India, which has a difficult relationship with China and objects to the BRI project for a Pakistani economic corridor passing through contested territory in Kashmir.

The scheme’s membership of approximately 150 nations also includes several developed economies, including South Korea, Singapore, Saudi Arabia and 17 of the European Union’s 27 members. (G7 member Italy withdrew last December.)

China’s lending to developing countries now exceeds US$1.3 trillion (A$2 trillion). This makes it a larger official creditor to the developing world than the World Bank, the International Monetary Fund or the combined advanced nations, according to AidData, a research institute attached to the William & Mary university in the United States, which has the most comprehensive database of Chinese lending.

AidData says the scheme has significantly tightened its financial risk management and its environmental, society and governance (ESG) performance after its first five years of lending left at least 57 nations overdue on repayments or at risk of default.  There was also community and political backlash in many countries following poorly conceived and executed projects.

New lending reached a peak of US$142 billion in 2016 but had dived to US$74 billion by 2020. There was a small increase to US$79 billion in 2021.

The scheme has cut lending to the highest-risk countries and increasingly supports private rather than public projects. It is participating in syndicated loans with private lenders to spread risk and has begun lending to multilateral institutions, such as the African Export-Import Bank and the Africa Finance Corporation.  BRI loans now need to be backed with collateral, and they carry penalty interest rates for late payments. Most deals now have legally enforceable ESG safeguards.

Motivated by the number of borrowers in financial difficulty, China has been providing emergency balance-of-payments lending, most of which is denominated in yuan rather than US dollars.

‘It is learning from its mistakes and becoming an increasingly adept international crisis manager,’ AidData researchers commented, arguing that Western critics had failed to understand the extent to which the BRI had been reworked, and risked devising policies to compete with a version of the BRI that no longer existed.

The West was slow to respond to the BRI.  It was only in 2021 that US President Joe Biden announced a program, initially branded as Build Back Better World but then renamed the Partnership for Global Infrastructure and Investment (PGII), to combine G7 lending to developing countries.

The US contribution over a five-year period was to be US$200 billion, with a further US$400 billion to come from the other G7 members and the private sector. ‘We’re showing democracies can deliver,’ Biden said.

The PGII has a number of major projects, led by a transcontinental rail link from Angola’s Lobito port to the Katanga province in the Democratic Republic of Congo and the Copperbelt in Zambia on the east of the continent.  A less advanced plan would develop a Trans-Caspian transport corridor linking central Asian nations with Europe, while plans for an India–Middle East–Europe Economic Corridor were announced in late 2023.

China was lending up to three times as much as the United States until recently, but the margin has narrowed. US loans to the developing world reached US$60 billion last year, compared with just under US$80 billion from China.

However, China still appears to be winning the hearts and minds of the governments, if not necessarily the people, of the emerging world.  According to an AidData study, governments of developing countries aligned their voting in the United Nations General Assembly with China 75 percent of the time and with the United States just 23 percent between 2000 and 2023.  A government that increases its UN voting alignment with China by 10 percentage points can expect to see a near-tripling of aid and credit flows.

Protectionism is not the way to protect workers

In both the United Kingdom and the United States, political parties on the left and the right are competing to show voters that they are on the side of working people. The question is whether prevailing approaches to protecting workers—which focus on a combination of industrial policy and restrictions on trade, investment and immigration—are actually in workers’ interest.

Protecting workers has become practically synonymous with protectionism. In recent years, voters in many countries, concerned about their economic well-being, have turned against free trade, immigration and inward foreign direct investment, and have rejected the leaders and parties who long promoted such policies.

Europe is a case in point. After the 2007-2008 global financial crisis plunged even middle-class households into economic insecurity, voters began to look beyond mainstream political parties in search of greater support and protection and were often attracted by those blaming immigration for their struggles. The COVID-19 pandemic, and the cost-of-living crisis that followed, reinforced this trend. Recent elections in Austria, Germany, Italy, and the Netherlands saw surging support for anti-immigration parties.

In the US, new political parties did not emerge, but a new kind of leader did. Donald Trump won the US presidency in 2016 partly by blaming free trade (particularly with China) for decimating jobs and investment in America’s Rust Belt. While criticising free markets and capitalism used to be the preserve of the left, even The American Conservative now runs articles pillorying trade, immigration, and the free movement of capital for the ravages of deindustrialisation.

One answer to such ‘carnage’ is tariffs, which Trump eagerly introduced while in office. But Joe Biden—who defeated Trump in the 2020 election—maintained and even built upon those tariffs. Earlier this year, Biden imposed a 100 percent tariff on Chinese-made electric cars—a very high rate, though it affects a very small percentage of US imports from China. Trump promises that, if re-elected, he will implement 60-100 percent tariffs on all Chinese imports.

The protectionist message is clearly one that workers want to hear. But tariffs are unlikely to work. For starters, they lead to retaliation and distrust among trading partners, as we saw in 2018, when Trump imposed tariffs on steel and aluminium from Canada, Europe, and Mexico. They thus reduce a country’s access to overseas markets, while driving up prices. Because they disrupt supply chains providing vital components for domestic manufacturing, they might also lead to employment losses.

Those losses would not be offset by the ‘reshored’ jobs the protectionists promise, as previously offshored (low-wage) jobs are increasingly filled by machines, not workers. This is already happening in China, where ‘smart manufacturing’ is carried out in ‘dark factories’ run entirely by robots. Protecting manufacturing jobs is thus no more a solution to China’s high youth unemployment rates than reshoring such jobs is a realistic means of revitalising the Rust Belt.

But, as US President Franklin D. Roosevelt’s administration showed in the 1930s, there is a better way to protect workers: domestic labour legislation that supports unionisation. Beyond ensuring a decent standard of living for workers, such legislation in the US and the UK gave greater political voice to working people, enabling them to rise through the labour movement into politics.

That changed when traditional labour parties came to be dominated by urban liberal professionals, rather than representatives of the working class. For example, the proportion of working-class members of Parliament representing the UK’s Labour Party plummeted from nearly 30 percent in 1987 to only 10 percent in 2010.

Fortunately, policymakers in the UK and the US increasingly seem to recognise the role of domestic labour legislation in protecting workers. In the UK, the new Labour government has put forward an Employment Rights Bill, which would extend workers’ rights in areas like sick pay, flexible schedules and protection against unfair dismissal. The bill paves the way for reviving trade unions, removing restrictions on workers’ right to strike, addressing the gender pay gap and strengthening protections against sexual harassment in the workplace. Predictably, employer reactions have been mixed, and the government will now engage in extensive consultations as it works to turn the bill into legislation.

In the US, the Biden administration sought to include incentives for supporting unionisation in the Build Back Better Act, which aimed to create ‘millions of good-paying jobs’. But industry lobbyists pressed the US Congress to eliminate the bill’s proposed incentives for manufacturers to base their assembly plants in the US and to use unionised labour. Ultimately, the act’s passage came down to one vote—that of Democratic Senator Joe Manchin, who insisted that the support for unionised labour be removed.

Trade policy can also be used to protect labour—if we look beyond tariffs. The US-Mexico-Canada Agreement, which the Trump administration negotiated as a successor to NAFTA in 2018, has the strongest and farthest-reaching labour provisions of any US free trade agreement. Beyond placing labour obligations at the core of the agreement, and making them fully enforceable, the USMCA provides that countries can help workers adapt through domestic programs, such as the US Trade Adjustment Assistance programs that have been helping workers transition away from jobs lost to import competition since 1962. The USMCA proves that worker protections are compatible with international competitiveness.

Political support for protectionist trade policies is easy to explain. A growing share of working people in industrialised democracies feel—and, in fact, are—less represented and less protected than previous generations, and both Chinese factories and immigrant workers are easy targets. So, when politicians acknowledge these voters’ frustration and promise to improve their lives with tariffs and immigration controls, they are easily convinced. Ultimately, however, this approach will do little for workers—or for the political leaders who embrace it.

From the bookshelf: ‘At War with Ourselves’

The American president’s national security advisor is second only to the secretary of state in the United States’ foreign policy establishment. The position provides the president with independent advice on foreign policy decisions. It has been held by such luminaries as Henry Kissinger, who was in the job for nearly six years, and Bent Scowcroft, who held the job twice, for more than five years. The incumbent, Jake Sullivan, is near the end of his fourth year.

In stark contrast, under Donald Trump the position fell victim to the president’s impetuous hiring and firing of senior staff. Trump’s first national security advisor, Mike Flynn, lasted 24 days. He was followed by H R McMaster, who served from February 2017 until April 2018, John Bolton, who served 17 months, and Robert O’Brien who served the remaining 16 months of the president’s term.

In At War with Ourselves: My Tour of Duty in the Trump White House, McMaster provides a no-holds-barred account of his own 13 months at the heart of global decision-making, and of the functioning, and dysfunctionality, of Trump’s White House. His account complements John Bolton’s memoir, which was published in 2020.

McMaster served in the US Army for 34 years, including long tours in Iraq and Afghanistan, established himself as an accomplished historian and retired as lieutenant general following his assignment at the White House. He is now a senior fellow at the Hoover Institution at Stanford University and Arizona State University.

Once on board the White House staff, McMaster quickly realised that his new environment was rife with rivalries and in-fighting. Policy differences and competing egos are part of any administration, but under Trump these reached new heights, mainly because the president enjoyed playing off cabinet members and advisors against each other. In this inflamed and uncertain environment, positions were constantly being revised and briefs rewritten. Consistency was often an afterthought. The inefficiency irked McMaster, who was accustomed to military discipline. ‘Everything was harder than it needed to be’.

In a chapter titled ‘Knives out’, McMaster details his turf battles with secretary of state Rex Tillerson and defense secretary James Mattis, who were intent on elbowing the security advisor aside. He also describes his struggles with Reince Priebus, the chief of staff, and the far-right chief strategist Steve Bannon and his acolytes, whom he likens to the three witches in Shakespeare’s Macbeth. Following one particularly strong pro-Moscow outburst from Bannon at an Oval Office meeting, McMaster bluntly asked him whether he was an apologist for the Kremlin.

Trump fired Priebus and Bannon within seven months of taking up office. Tillerson lasted half a year longer but was sacked shortly after a leaked report that he had made disparaging remarks about Trump. He was also the first cabinet member ever to be sacked on Twitter. McMaster lasted only a week longer, with Trump’s favourable attitude to Russian president Vladimir Putin the main bone of contention.

Just a few days after Russian agents poisoned the retired Russian military operative Sergei Skripal and his daughter in Britain, Trump, against the counsel of his advisers, insisted on congratulating Putin on his recent election victory. At home, McMaster confided to his wife: ‘After over a year in the job, I cannot understand Putin’s hold on Trump’.

McMaster is at his best describing how he and other advisers tried to rein in the impulsive Trump at meetings with foreign leaders. While visiting NATO headquarters in Brussels, they had to dissuade the president from threatening to pull out of the alliance if members didn’t ‘pay their dues’. McMaster had to remind Trump repeatedly that there were no dues but that members had committed to spend the equivalent of at least 2 percent of GDP on their own defence capabilities. At dinner, Trump surprised other NATO members by failing to reaffirm US commitment to Article 5, the mutual defence clause of the treaty, scolded them for failing to ‘pay what they owe’ and then abruptly walked out.

McMaster and his colleagues also tried to dissuade Trump from pulling the US out of the Paris climate accords, suggesting in vain that a threat to withdraw would be equally effective. Trump enjoyed making inflammatory statements and announced to the media that he ‘was elected to represent the citizens of Pittsburgh, not Paris’. And at the UN General Assembly, he insisted on matching North Korea’s vitriol by describing its leader, Kim Jong-un, as a ‘rocket man on a suicide mission’.

McMaster gives Trump credit for numerous foreign policy achievements, including taking a tougher stance on China and repairing frayed relations in the Middle East. Trump’s unpredictability was useful when dealing with adversaries but played havoc with discussions with allies. And Trump’s anxieties and insecurities left him vulnerable ‘to foreign counterparts who knew how to conjure his emotions’. In the balance, ‘rather than anchoring US policy, Trump often unmoored it’.

With the presidential elections around the corner, McMaster’s lucid account provides a timely reminder of the need for coherence and stability in American foreign policy. Depending on the outcome of the elections, it may also provide decision-makers with a guidebook for dealing with a second Trump presidency.

Trump flags US dollar dominance as national security priority

United States presidential candidate Donald Trump sees the continued dominance of the US dollar in international transactions as a matter of national security.

‘If we lost the dollar as the world currency, I think that would be the equivalent of losing a war,’ he told The Economic Club of New York earlier this month.

Trump has promised to impose 100 percent tariffs on imports from countries moving away from using the US dollar in their international transactions.  ‘You leave the dollar, you’re not doing business with the United States,’ he said.

How this would work is unclear. As Trump was talking, Saudi Arabian and Chinese officials were discussing the settlement of their bilateral trade in renminbi, as do others already, including Brazil and South Africa. The share of international trade settled in renminbi is still only 6 percent. It has risen from 2 percent since 2021, but this is mainly because western sanctions on Russia after its invasion of Ukraine have excluded Russian banks from the global payments network, Swift, which is used to settle international bank transfers. This has forced Russia to look for alternatives to the US dollar to settle its payments.

According to analysis by Bloomberg Economics, about 40 percent of Russian exports and imports are now settled in renminbi. This includes some non-Chinese trade, with Russia using the renminbi because of its difficulty in sourcing other foreign currencies.

Washington derives both significant coercive power and economic advantage from the US dollar’s status as the preeminent global currency, however the currency’s use in trade finance—the financial instruments used to smooth trade transactions between importers and exporters—where it is responsible for about 54 percent of transactions, is a side-issue.

Trade finance is only 1 percent of the size of the foreign exchange market, which turns over US$7.5 trillion every day. But the US dollar is on one side of 88 percent of all foreign exchange transactions. It is this role as the essential component of international transactions that gives the US government the power to impose financial sanctions on international financial institutions, including other central banks.

A bank that loses access to the US dollar market has its international operations strangled.  Bloomberg’s analysis shows that Russian access to the renminbi is starting to dry up because Chinese banks are fearful of US sanctions.

There has been no change in the US dollar’s share of foreign exchange markets in the last 20 years, according to the Bank for International Settlements.

The US dollar achieved that indispensable role because the depth and liquidity of US capital markets make it safe and stable in a way that no other currency can match. Unlike China, the US has no controls on capital flows and any volume of US dollars can be transacted instantly without it affecting the price. This also allows the US to run huge budget and current account deficits without fear of financial market reaction. There is always demand for US dollars.

The one area where the US dollar is losing ground is as a reserve currency, where, according to the IMF, the currency’s share has declined from over 70 percent in 2000 to 58 percent now.

The decline in the US dollar share of international reserves reflects a global shift to non-traditional currencies, including the Australian and Canadian dollars, the South Korean won and the renminbi. The latest data shows the Australian dollar is slightly ahead of the renminbi, accounting for 2.2 percent of international reserves.

The seizure of the US dollar portion of Russia’s foreign exchange reserves in 2022, after its invasion of Ukraine, encouraged China to reduce the share of its reserves in US dollars, although the scope for it to diversify is limited by the lack of similarly sized alternatives.

While the US has demonstrated its ability to sequester other nations’ US dollar reserves, it is not a coercive threat with the same impact as the sanctioning of bank transactions in the currency. Foreign exchange reserves are held passively as insurance and have little influence on a nation’s international payments, other than in a crisis.

The exclusion of Russian banks from Swift has contributed to a jump in the US dollar share of transactions in the network from 42 percent at the beginning of 2022 to 59 percent now.  The big loser has been the euro: its share has plunged from 37 percent to just 13 percent.  That reflects the collapse of Europe’s oil and gas trade with Russia and the requirement to pay US dollars for the alternative supplies coming from the United States.

It suggests the US dollar’s dominant role is in no danger—and it doesn’t need threats from Trump to keep this status.