A new era is being defined, in which trade is weaponised and globalisation is reversed. Finbarr Bermingham reports.

In 2014, US Treasury Secretary Jack Lew spoke with boyish wonder of “a new battleground for the United States, one that enables us to go after those who wish us harm, without putting our troops in harm’s way”.

He wasn’t talking about a new stealth bomber, nor the latest drone technology. He was referring to US sanctions regimes, which for years have been used to cut off the financial oxygen to those perceived to wish ill on America.

Let’s not be fooled into thinking that economic, financial or trade sanctions are new tools in the US’ armoury: they’ve been around for centuries. In the early part of the 19th century, Napoleon issued the Berlin Decree, which effectively barred British products from a European market spanning the Iberian coast of Portugal to Siberia in Russia’s north.

With the US dollar being used to settle 80% of global trade, America has been able to penalise those who conduct dollar trade with sanctioned individuals, companies or states, doling out huge “settlement” fines to banks doing business in Cuba, Sudan and other pariah states for decades.

These days though, we’re seeing other elements of trade policy being used for geopolitical gain, with trade increasingly becoming an adjunct of foreign policy, beyond the realms of sanctions and “most-favoured nation” rules of the WTO, which allow for preferential terms to be given to allies. The president of the Eurasia Group Ian Bremmer talks of the “weaponisation of finance”, an analogy which can be neatly extrapolated for trade.

The system within which trade takes place is shifting and fragmenting too. The freewheeling globalisation of the 20th century is being replaced with suspicion, protectionism and regionalism. We’re evolving towards a polarised system, with the US and China at either end. The great remould is underway. Welcome to Trade 2.0.

Pivot to Asia

In 2011, President Barack Obama embarked on a nine-day tour of Asia Pacific, signing a military alliance with Australia and making it clear to anyone who would listen that after the disastrous escapades in Afghanistan and Iraq, US foreign policy was now going to be redirected towards Asia. In announcing this so-called “pivot to Asia”, administration officials made no effort to disguise the fact that it was designed to counterbalance the growing influence of China.

At the centre of the strategy was the fledgling Trans-Pacific Partnership (TPP), an ambitious 12-nation free trade agreement that excluded China and of which Beijing was extremely wary. In addition to the economic arguments – removing trade tariffs, harmonising customs and regulation – were clear goals on the modification of Chinese trade policies on currency, state-owned enterprises and intellectual property.

“The TPP was a reaction to China, that’s undeniable,” says Deborah Elms, CEO of the Asia Trade Centre. “The US looked at the landscape when negotiations started in 2008 and said: ‘Wow, if we don’t continue to stay engaged in Asia we run the risk of getting cut out.’ The consequences of that would be significant.”

The difficulties the TPP has faced in the Senate and Congress are documented elsewhere within these pages. But as the negotiations have rumbled on, the rhetoric emanating from the US has been increasingly roughneck and militaristic, which raises the question of whether the TPP is being pursued for economic or for strategic, geopolitical reasons. Is its potential to expand economic activity secondary to the opportunity to contain China? In Japan, Shinzo Abe has frequently engaged in such language in his efforts to garner local support for the TPP. In the US, it has become even more commonplace.

In his State of the Union address in January, Obama said: “Today, our businesses export more than ever, and exporters tend to pay their workers higher wages. But as we speak, China wants to write the rules for the world’s fastest-growing region. That would put our workers and businesses at a disadvantage. Why would we let that happen? We should write those rules.”

It’s a line he has revisited as his efforts to secure a deal on the fast-track authority that would allow for the eventual passing of TPP have floundered. “President Obama frequently makes the appeal, unfortunately, that the US must write the rules before China does. This argument for TPP has been used since the outset of the negotiations, before greater emphasis was placed on economics,” Dan Ikenson of the Cato Institute tells GTR.

But Obama’s words have been mild in comparison to others. In April, the US Defence Secretary Ash Carter said that TPP “is as important to me as another aircraft carrier”, saying it would “help us promote a global order that reflects both our interest and our values”.

Trade wonks are divided on whether such rhetoric is helpful. On one hand, it is language that Congressmen and women are familiar with and which they are able to sell to their constituents, at a time in which the effects of globalisation and free trade are subject to intense scrutiny in the press.

Many of the proponents of the agreement are content for it to play out as such, so long as it leads to the TPP’s conclusion. “If trade was easier, you wouldn’t have to make those sayings,” the head of the US Chamber of Commerce in Australia, Niels Marquardt, tells this publication.

Harsh words

The other side of the coin is less forgiving: such blatant anti-China bombast is dangerous and potentially damaging to the future of trade relations in Asia Pacific. Peter Whish Wilson, a Tasmanian senator, says in a phone interview that he has raised the aircraft carrier metaphor in a debate in the chamber, and that the Australian government is extremely uncomfortable with it.

In June, Australia’s free trade agreement with China was finalised and signed in Canberra, with trade minister Andrew Robb adding his squiggle to the document. On the same day, GTR understands that Robb cancelled an appearance at an event, also in Canberra, marking the 10th anniversary of the US-Australia free trade agreement, citing illness. “The geopolitical irony was extreme,” says one official who attended the event, and in the days after, the Australian press ran articles that were much more favourable to Chafta than they were to TPP. On the same day, Prime Minister Tony Abbott described China’s leader Xi Jinping as “a friend of Australia”.

The message is clear: while the US is drawing out the battle-lines at home, many of the other TPP nations enjoy close and fruitful relations with China. “Its [the US stance] makes it harder for other TPP members to participate,” says Elms, from her Singapore office. “The Singaporeans already face a challenging balancing act between the demands of the US and China, on many issues. There’s an enormous amount of investment in and out of China from here and a lot of linkages to the US. The Singaporeans like to view themselves as pragmatic and being friends with both sides, but if you paint the TPP as an anti-China vehicle, it becomes challenging for countries like Singapore to be involved.”

In China too, the words will not have gone unnoticed. While much of the content of TPP remains secret, we do know that there are points about the operation of state-owned enterprises within the area, and that some US politicians have been pushing for the inclusion of guidelines on currency manipulation. With all due respect to Communist Vietnam, it’s unlikely that these provisions are being debated with it in mind. More likely is the potential inclusion of China in a future, expanded TPP. Anti-China statements are unlikely to be the kind of carrot needed to draw Beijing to the negotiating table. But we may need to get used to them, for now.

As we move towards a US election, China will be a key component of the political debate. “The issue of China as an economic power, and what to do with China, is a huge topic of debate,” Tim Keeler, chief of staff to the US Trade Representative under the Bush administration tells GTR. “In the presidential campaign, how the US should grab a hold of China economically and politically will be a huge debate.”

In May, a paper by the University of Lancaster entitled Suspiciously Timed Trade Disputes found that in the run-up to election campaigns, US governments are more likely to launch complaints at the WTO, and that these are often “targeted at industries that are important to swing states, which play a crucial role in presidential elections”. Less than two months before his 2012 re-election, Obama launched a WTO dispute against China which would benefit the automobile industry in the “crucial swing state” of Ohio. As we move towards the 2016 edition, who would bet against US-China trade relations being weaponised in a similar way?

Enter the dragon

China, meanwhile, has been embarking on its own trade and investment initiatives which are clearly designed to grow its sphere of influence in Asia Pacific. These initiatives combined inarguably set China up as a direct rival to the US in the region and in global trade terms. Furthermore, their inception can be viewed as direct responses to China’s continued exclusion from US-backed trade architecture such as TPP and the Bretton Woods institutions.

The main tenets of Beijing’s external initiatives are the Asian Infrastructure Investment Bank (AIIB) – of which China is the founder, majority shareholder and veto-holder – the One Belt, One Road project, which will create a new economic and maritime Silk Road stretching from Oceania to Western Europe – and the continued internationalisation of China’s currency, the renminbi. It is an active participant in the negotiations for Asean’s Regional Comprehensive Economic Partnership (RCEP), viewed as a regional rival to TPP. In addition to this is China’s continued direct investment in the economies of strategic partners such as Brazil and Pakistan, each of which have been pledged tens of billions of dollars from the Chinese purse this year.

“I think those initiatives – TPP and the Silk Road – go hand in hand,” Moritz Rudolf of the Mercator Institute for China Studies tells GTR. “With TPP as well as TTIP the US aims to set the standard for world trade law in the 21st century. China is the world’s largest trading nation and not part of the negotiations. This gives Washington a significant advantage over Beijing. China’s Silk Road Initiative is to some extent a reaction to this. Beijing wants to take a proactive part in creating a multipolar world order. Since the US has been unable to engage China in reforming the international system, Beijing has been establishing parallel structures. The AIIB and the One Belt, One Road Initiative are prime examples for China-led parallel structures.”

Much has been made of the US’ perceived snub of the AIIB. The US was invited to join as a founding member, but failed to do so. It also encouraged its closest allies to decline the invitation, but the likes of Germany, Australia and the UK ignored these pleas. “We ended up looking silly,” says one US trade official, while Tim Keeler describes it as a “fumbled ball”. The US had the opportunity to co-operate with China on its rival institutions, from the inside, but did not.

China’s manoeuvres on these fronts are as overtly geopolitical as those of the US. “There’s money to be made if you can increase infrastructure, in both delivering and using infrastructure,” says Elms. “But there is a political part too, saying: ‘we want to show that we can play a role since we’ve been so cut out of leadership positions in things like the Asian Development Bank, IMF, World Bank. We’ll just make our own, thank you very much.’”

The continued push to internationalise the Rmb, too, is a clear move to break free of the dollar hegemony which has allowed the US to dictate the rules of global trade for more than half a century. However, most analysts doubt whether it will ever replace the dollar, rather supplement it. “The world is moving towards a multipolar system; it is unlikely to see the Rmb play the dominant role in international finance the US dollar did,” says Nicholas Kwan of the Hong Kong Trade and Development Council.

In tandem with these more benign power plays are aggressive Chinese policies, which are ratcheting up tensions around Asia Pacific. Since the beginning of 2014, China has reclaimed 2,000 acres of land in the South China Sea, constructing islands with military infrastructure across territories also claimed by the Philippines, Malaysia, Vietnam and Brunei. Earlier this year, China ordered a US aircraft to leave the airspace above a reclaimed island, leading the Financial Times to run an editorial asking whether we’re headed for a “new Cold War”.

While delivering a keynote speech at the mealy-mouthed Conference on Interaction and Confidence Building Measures in Asia last year, Xi Jinping called for “Asia for Asians”. He said: “It is for the people of Asia to run the affairs of Asia, solve the problems of Asia, and uphold the security of Asia.” It is wording that’s been trotted out by multiple Chinese officials since, and mirrors what’s being said on a constant basis on the other side of the Pacific.

The great deglobalising

The fact that the two largest trading powers in the world are pursuing their own agendas, while failing to collaborate in any significant manner is worrying politically, and damaging economically. It is reflective of a wider trend in global trade, in which the globalisation of the 20th century has given way to protectionism and fragmentation, manifested in the “noodle soup” of trade agreements under negotiation in Asia and elsewhere in the world, which are replacing the failed Doha Round of the WTO.

Joshua Kurlantzick at the Council on Foreign Relations calls it the “great deglobalising”, pointing out that since the financial crisis, global trade growth has fallen exponentially, cross-border lending is dissolving and investors have packed up and headed home. Protectionism, he says, is up almost a quarter in developed nations, while migration is down – despite what you might read in certain areas of the press.

The politics of trade are once again filled with paranoia and fear of the other, stalked by boogeymen and being reconstructed in shadowy, secret negotiations that are redrawing the lines of global commerce. Fears of a new Cold War are premature and – hopefully – far-fetched, but it is hard not to draw comparisons with the dark days of Russian-US superpower rivalry that dominated the half century after World War II. The era of globalisation is being replaced by one of regionalism and polarity, one in which trade is a weapon at each side’s disposal. How deep the fissures will go depends on the willingness of both sides to see the bigger picture.