The good news is that today more people in the world live better than ever before. The global economy is more productive and creates more wealth than at any time in human history. This is no accident; it is the result of unceasing effort by governments, businesses and private citizens over many decades. During that time, highly integrated, infinitely complex systems of production, distribution and services were built and perfected. Growing knowledge (including technology) and resources (including financing) were harnessed to raise international living standards.
This remarkable achievement rested on multiple foundations:
1) A modicum of peace and security. Economic progress and improved living conditions cannot be sustained during major civil unrest, terrorist attacks or war.
2) International supply chains and markets. Even a large country that tries to be economically self-sufficient is destined to stagnate — witness the former Soviet Union. Modern high-tech corporations that epitomize 21st century economics (think Apple) rely on a vast chain of overseas suppliers for inputs and assembly — and overseas markets for sales. Without all that, Apple or Boeing would be small, almost unrecognizable, facsimiles of themselves.
3) Laws and regulations. International markets and supply chains require a legal/regulatory regime that provides predictable rules of the road — including tariffs and trade regulations of all kinds.
4) Secure transportation routes. Whether moving people, products, or money by air, land, sea or cyberspace, modern commerce depends on safe and reliable transport, travel or transmission.
These are the necessary preconditions for the functioning of our contemporary international economy. America has played a unique, and quite remarkable, role in building and sustaining these supports. The U.S. military has provided vital physical security — underwriting international stability. Europe’s impressive economic prosperity and Asia’s equally remarkable modernization were made possible by the presence of U.S. armed forces. That same military presence helped protect and secure the sea lanes and air routes that were the conduits of international commerce. If this can be viewed as the “hardware” of the international economy, the laws, institutions and processes that allow goods, money, people and ideas to move and interact can be viewed as “software.” Such software includes international agreements, regulations and institutions. American economic prosperity rests in part on international agreements that govern international trade (including the General Agreement on Tariffs and Trade) and institutions (like the IMF) that help keep governments solvent.
The United States plays another unique role in sustaining the international economic order. The U.S. dollar has long been accepted as the nearest thing we have to an international currency. America accounts for only 10 percent of global trade but fully half of international economic transactions are priced in dollars, as are two-thirds of securities issued by governments and corporations around the world. When nations or industries put away money for a rainy day, they do so in dollars.
It all adds up to an international economic system that is at once complex, effective and vulnerable. That vulnerability has been on full display in recent months and days. China has challenged the American security role in Asia by asserting its own military presence and has mounted a massively funded drive to assert China’s economic dominance in the region. The era of American economic and security primacy has served Asia very well. Overturning it will put the region and the world in a new, fraught and highly uncertain place. That said, it is a supreme irony that the greatest challenge to the international economic order built and sustained by the United States now comes from Washington.
For those on the front lines of international commerce — whether they are bankers, manufacturers, farmers or digital providers — their great nemesis is unpredictability. All require some degree of confidence that they know what to expect in terms of costs and profit margins before they can plan or invest. Tariffs and fees on goods and services directly affect those costs and margins. Tariffs are stable and predictable because they are codified in international agreements that change only through laborious international negotiations. Suddenly, all that has changed. A President who identifies himself as “tariff man” and who declares that “trade wars are easy to win” has raised or threatened to raise existing tariffs at a whim — or a tweet. Tariff agreements have always contained a “national security exception” that allow a president to override existing arrangements, but that authority is rarely invoked. No longer, as the Trump White House has effectively weaponized tariffs in the ongoing trade dispute with China.
At the same time, the President’s off-the-cuff statements have become ever more bizarre. After proclaiming himself “the chosen one” he announced that “my father is German … born in a wonderful place in Germany.” His father was born in the Bronx. Then there was his query to staff whether nuclear weapons could be used to stop hurricanes. Or his statement that the First Lady “has gotten to know Kim Jong Un” — when she has never met him. The unhinged volatility of the President’s behavior has unnerved foreign leaders. At the recent G-7 summit, they treated him as something between a live hand grenade and a petulant 4-year-old. All this has implications for the international economy, including the role of the dollar. As one central banker commented recently, “When the U.S. was viewed as a responsible leader of the world economy, there was less concern.”
Note that he spoke in the past tense.