Ian Bremmer: What does the global power shift mean for the U.S. economy?
Expert political scientist says a major geopolitical shift is elevating risk in markets around the world. Should U.S. businesses and investors be worried?
In the nearly 20 years he's been analyzing major political events, political scientist Ian Bremmer has seen little lasting impact on global markets. That is, until now. Bremmer believes a major geopolitical shift is underway as the United States retreats from key alliances, and populist forces push for regime change in volatile parts of the globe. This trend could prompt a related pullback for companies with global ambitions, but those who rely on the U.S. economy may not even notice.
"China is the only country in the world with a global economic strategy today... and writing checks behind it."
Founder, Eurasia Group
At a recent Schwab event, Bremmer explained that the global power of the United States was largely unchallenged in the immediate aftermath of the Cold War. As a result, the world has been in a period of relative calm ever since the "geopolitical depression" that was World War II. This geopolitical stability has shrugged off a number of major events that should have roiled global markets but ultimately failed to do so. Today, though, we are entering a geopolitical 'recession,' an era in which political developments could present a genuine threat to growth prospects and financial markets around the world.
The seeds of discontent
There is little doubt that the ascendancy of Donald Trump to the U.S. presidency has had major implications for U.S. foreign policy and its key relationships. In six months in office, Trump has pushed for a renegotiation of the North American Free Trade Agreement, abandoned the Trans-Pacific Partnership, and proposed numerous "America first" policies that would protect U.S.-made goods and punish those made elsewhere.
But Trump's election and the support for the policies that put him in Washington are rooted in long-developing trends, Bremmer believes. He cited a growing belief among many Americans that free trade hasn't helped them and that U.S. military intervention around the globe has only hurt them. Not only that, they increasingly harbor a general distrust of the establishment—political leaders but also bankers, industry leaders, the mainstream media and public intellectuals. Technology is only going to exacerbate these trends as it fuels growing wealth inequality and "taking labor out of the equation in so many industries," Bremmer said.
This seismic shift isn't restricted to the United States. Bremmer pointed to the recent experience of Europe, which is being threatened by some of these very same forces. "For me, the U.S. election of Trump and Brexit were basically the same vote," he said.
While it was largely assumed that the rest of the world would come to emulate democracies in the West, Europe’s example shows a different reality. The European Union and the Eurozone now face an "existential crisis" because political leaders, in their efforts to extend membership to more countries in the region, failed to realize the scope of anti-immigration and anti-globalization sentiment.
"Here's the problem," he said. "If you look at Turkey in the last five years, today it looks a lot less like the rest of the West than it did before. How about Poland? Bulgaria? Romania? Greece? All of them? They look a little more like Russia, a little more like the Middle East. That's going to continue."
This bifurcation has made European leaders more politically susceptible to populist sentiment. German Chancellor Angela Merkel agreed to allow a million Syrian refugees to enter the country but was forced to recapitulate amid political pressure at home. She cut a deal with Turkey to take them in instead.
The rise of China
The transatlantic alliance between the United States and Europe is now at its weakest as a result of anti-immigration and anti-globalization, Bremmer said, and it comes at a time when ties are growing stronger in the East. According to Bremmer, China's remarkable growth has positioned it to take over as the world's largest economy, which could bring an end to a global free market. As an authoritarian state, China would decide who gets access to its market, and many multinational corporations would likely be left out.
Several American allies all over the world are "hedging significantly" in their relationships with the United States and pivoting to China, Bremmer said—and that dynamic was in play before Trump's election. In October 2016, for instance, Philippine President Rodrigo Duterte, who was extremely critical of President Barack Obama, announced his "separation" from the United States, declaring that his country was realigning with China.
A lot of attention was paid to President Trump's recent trip to Europe, but in Bremmer's view the most important meeting that happened during those two weeks didn't involve him. Chinese President Xi Jinping brought 29 heads of state together for the first "One Belt, One Road" summit to lay out what Bremmer called "the world's new Marshall Plan", a reference to the U.S.-led program to help rebuild Western Europe after World War II. At the meetings, Xi pledged $124 billion to support stronger ties between Asia, Africa and Europe.
China is "the only country in the world with a global economic strategy today and putting money and writing checks behind it," Bremmer said. "That's a different world order."
"I find it inconceivable that geopolitics does not affect the marketplace as we engage in a transition from a global free market to a hybrid global fragmented economy."
Less stable economies likely to bear the brunt
Much of the discord and upheaval is likely to occur in places where most people don't invest. That's because political risk tends to affect less stable economies the most, and that's where Bremmer sees cause for concern going forward. To the extent governments don’t address some of these societal ills in a meaningful way, people will rise up and there will be “more countries that look like Syria and Yemen in the next 10 years," he said.
Large companies in the West with global aspirations may increasingly find some foreign markets tougher to break into. More multinationals are also likely to lose their appetite for building global supply chains, particularly in countries where cost efficiencies are evaporating because of rising labor costs, such as China. "It's going to be much more fragmented serving local domestic markets, regional markets," Bremmer said.
Don't be surprised, though, if the U.S. economy remains largely unscathed by shifting geopolitics abroad. About a year ago, Bremmer asked an audience of chief executives from some of the largest U.S. companies how many would change their domestic investment strategy if Trump were elected. Nobody raised a hand. But hands shot up when he asked about the impact on their investment plans of regime change in places such as Russia, Turkey and Mexico.
"For those of you thinking about the U.S. markets, in my view Trump is largely irrelevant."
Trump "largely irrelevant" to U.S. markets
Despite concerns to the contrary, President Trump's policies are unlikely to affect the U.S. economy. For one, Bremmer doesn't believe that American presidents mean all that much to the domestic marketplace. Second, most of the policies Trump has promised, including infrastructure investment and tax reform, are likely to be "small ball" and take a long time to get passed into law. "For those of you thinking about the U.S. markets, in my view Trump is largely irrelevant," Bremmer said.
While growing wealth inequality and job dislocation will likely continue to be significant issues for large segments of the workforce, these trends are unlikely to lead to significant social unrest. Too many Americans remain disengaged from the political process, he said. Half of the country didn’t vote in the latest election, and the mass protests that have occurred have been short-lived.
"We don't have revolutionaries," Bremmer said. "This is not the Arab Spring. You don't have that level of urgency."
The exception to this outlook would be the case of a major military conflict involving the United States. "There is the real prospect of geopolitical risk becoming market-moving globally, but we're not there yet and hopefully we won't be," Bremmer said. "Short of that, the risks that we're talking about are heading lots of other places, not the United States."
This article is based on a Schwab event on June 15, 2017. Schwab events provide access to deep insights into industry trends and connect advisors from across the country with industry icons, entrepreneurs, leading academics, and analysts.
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