Gunboats and Dollar Diplomacy

The Geopolitics of the Mar-a-Lago Accords

Trade, war, and diplomacy have been inextricably linked since the first armed merchant travelled from one city-state to another. As of 2024, global trade totals nearly $33 trillion annually. Given that the Trump administration is attempting the most significant overhaul of trade in half a century, it behooves soldiers, sailors, and diplomats to consider what this means for them. To properly evaluate the strategic implications of Trump’s policy, one must first understand the current global trade system and the proposed changes. The potential strategic consequences can then be considered. This exercise suggests that the president’s diplomatic and military policies are not supportive of his goals. It also implies that Eurasia, rather than the Pacific, will be the key to future conflict with China.

A New Global Architecture

For economists “comparative advantage” is the arbiter of trade, but that term often conceals an ugly reality. The success of many exporters is not due to some native genius for manufacturing, but to interventionist government policies. For example, China’s state banks pour cheap loans while the hukou system controls labor costs. The result is an economy that produces more than it can consume, so foreign demand becomes essential to maintain employment. Because global capital accounts must balance, countries that create artificial trade surpluses effectively force other countries to run trade deficits. America has absorbed this surplus as the world’s “consumer of last resort” for decades by selling capital assets, notably debt. By this means, America’s trading partners have become its creditors.

President Trump seeks to alter the current global architecture by creating conditions in which the country can resume trading manufactured goods for imports. Tariffs have been introduced as a bargaining tool. The president’s critics have rightly argued that tariffs only impact bilateral trade while trade occurs in a global context. Therefore, to achieve Trump’s goals a comprehensive restructuring of global trade is necessary (“the Mar-a-Lago Accords”). Whatever the final agreement, it will fundamentally require foreign central banks to allow their currencies to appreciate against the dollar.

China – the main target of the new diplomacy

China is obviously Trump’s main target. No country has done more to warp the global economy to its own advantage. Cheap credit and labor provided by Beijing have enabled China to dominate global manufacturing, but at the expense of domestic demand. Xi has doubled down on the policy of Chinese industrial dominance, which makes it imperative for China to secure foreign markets for its surplus output. Increasing domestic demand would be a better solution, as America’s more democratic trading partners will do. However, the political threat of an empowered Chinese citizenry is considered too great for the CCP.^[i] A neo-imperialist policy of establishing trade vassals is clearly emerging from Beijing.

For Latin America and Africa, the Mar-a-Lago Accords will force difficult political decisions about developmental sovereignty. They will be the obvious destination for Chinese exporters looking to replace US demand. However, a flood of cheap Chinese goods means that domestic industries will be crushed. These countries will surrender the value-added elements of their economy to China. Low-margin commodities will be sold to China to fund the purchase of high-margin manufactured goods from China. Addicted to Chinese imports, these countries risk becoming mere resource colonies to a Beijing in need of captive foreign buyers. This will also be a direct challenge to the Monroe Doctrine’s original intent.

Russia

Regarding Russia, Trump seems to believe that he can woo Putin with re-integration into the global economy. There are significant hurdles. The biggest is Russia’s political economy. Russia’s economy exists primarily as a source of patronage, in the form of corruption, for the regime’s supporters.^[ii] This puts a premium on exploiting natural resources, which are easily controlled (intellectual property can leave the country, a coal mine cannot). So, developing other industries is less compelling. Moreover, rapid economic growth can empower politically undesirable elements. The Russian economy’s secondary function is to fund Putin’s grandiose goal of re-establishing the Russian mir. Given this, does China or the West make a better partner for Russia?

The industrial titans of Europe and China all have need of Russian commodities. However, the Ukraine war has greatly diminished Europe’s desire to fund Putin’s ambitions. European companies have spent years building alternative supply chains around Russia, investments which they are unlikely to abandon. The absence of the rule of law in Russia also makes it difficult to attract foreign investment. For Putin, selling to the West means accumulating foreign reserves in western banks. The western banking system has already been weaponized against him, so he is unlikely to risk a repeat. Similar issues exist with western technology imports.

The problem: China is the better partner for Russia

Given the current environment, China is the better partner for Russia. China offers Putin the possibility of achieving his goals, whereas the West offers only golden shackles. The complimentary nature of the Chinese and Russian economies is undeniable. Past grievances can be set aside in a spirit of “coopetition” (a business strategy whereby competitors cooperate to eliminate mutual rivals). In contrast to the West, China will gladly accommodate itself to Russian domestic politics with the sweetener of advanced surveillance technologies.

Furthermore, the Ukraine conflict has already warped the Russian economy towards China. Chinese dual-use technologies underwrite Russia’s military effort. China dominates Russian machine tool and microelectronics imports. Russia has accumulated large reserves of yuan, which will naturally tilt its future purchases towards China. Finally, for its own sake, China must seize this opportunity to yoke Russian demand to China’s industrial overcapacity. China also needs Russian commodities if maritime trade is threatened. Trump may hope to win Russia, but Xi cannot afford to lose it.

Misaligned Policies

Trump’s diplomatic strategy is based on the Wall Street adage: “If you owe the bank a little money, then you’re in trouble. If you owe the bank a lot of money, then they’re in trouble.” Tactically, it gives the debtor leverage as a creditor cannot afford to have the value of a large loan impaired. Trump’s theatricality and risk-tolerance have served him well, in this regard. However, bilateral business negotiations are not the same as multilateral diplomacy.

The externalities and risks are infinitely greater. Trump’s approach makes sense in the commercial world in which one bank can easily be exchanged for another. However, allies and trading partners are not so fungible. His approach also raises questions of trust, which is much more important in diplomacy than business. Money is a substitute for trust in business. If you put up enough collateral, your bank does not have to trust you. There is no similar mechanism in diplomacy.

Diplomacy requires military power, especially naval power, to succeed

If there is a diplomatic surety, it is military power, particularly naval power. Global trade moves by sea, and naval power keeps the world’s economic lifeblood flowing. This is relevant to the dollar’s status as a reserve currency. The world’s dollar holdings are not simply the product of economic necessity. Rather, an unwritten promise of the dollar is the support of American military power.^[iii] This ranges from simple maritime patrols to formal alliances, but the dollar’s implicit guarantee is valuable. Here, Trump’s military strategy fails to match his policy objectives.

Maintaining the defense budget gives the administration more diplomatic leverage. The president is likely thinking of the bond market as his audience for defense cuts. Yet, his true audience are the major central banks, and their calculus will be more geopolitical. American dollars without tangible American power will be decidedly less attractive. From this perspective, Trump’s defense cuts are penny-wise and pound-foolish.

A suggestion

This shortsighted approach to defense is critical as a change in world trade entails a change in global defense. The emerging China-Russia-Iran-North Korea axis means that war with China will ultimately be a war for Eurasia. It is difficult to see how the Trump administration’s diplomatic stance is conducive to forming the alliances necessary for such a conflict. Ukraine is a flashpoint in this regard. It will either be a bulwark of the west, or a jumping-off position for its enemies. Given Ukraine’s abundant natural resources (including rare earth minerals), and its possession of the world’s most valuable database for military AI, good relations between Kyiv and Washington are imperative. Globally, Trump is asking our trade partners to face pain and uncertainty as part of his plan. Reassuring them with quiet diplomacy and reliable military power would greatly ease the process.

This article was originally published by RealClearDefense and made available via RealClearWire.

Notes:

[i] Joe Leahy, “Why Xi Jinping Is Afraid to Unleash China’s Consumer” The Financial Times April 30, 2024 https://www.ft.com/content/35471cfb-79a6-42c1-8e41-447bfaad2c36

[ii] See Chapter Seven: Russia, Putin, and the Future of Kleptocratic Authoritarianism in Karen Dawisha, Putin’s Kleptocracy: Who Owns Russia? (New York: Simon & Schuster, 2014)

[iii] Pierre Yared, “US Military Strength Secures Financial Dominance” (Dec. 20, 2024) The Center for European Policy Research, https://cepr.org/voxeu/columns/us-military-strength-secures-financial-dominance