Podcast - Trump, Putin, Xi and World Politics

Welcome to Beyond the Benchmark, the EFG podcast with Moz Afzal.

Moz Afzal:

We have a special podcast today, a presentation from our investment summit, very interesting presentations. And we thought that for those of you who weren't there, we give you an excellent opportunity to listen into some of the best minds in financial markets, economies, geopolitics.

Daniel Murray:

I'm very pleased to introduce to you Mr. Gideon Rachman, who is the Chief Foreign Affairs correspondent at the Financial Times, had a very long and impressive career as a journalist, both at the FT and at The Economist. His most recent book, which I think was written in 2022, entitled The Age of the Strong Man, is I think particularly prescient in a world in which Trump is about to be inaugurated. So without further ado, I hand over to, thank you. Thank you.

Gideon Rachman:

Well, thank you very much Daniel, and good to be here. And as you say, yeah, I wrote Age of the Strong Man during the pandemic. So many books produced during the pandemic, but I think more or less its themes still hold very strong. And in fact, the book came out about a month before Putin invaded Ukraine, which I thought was as dramatic an illustration of what this age of hyper-personalized politics, where each superpower now seems to have a leader who exercises a remarkable degree of control, even by the standards of pretty centralised countries like Russia, China, and now perhaps the United States.

That's why actually I said Trump Xi Putin and world politics. I think those three leaders will do a great deal to shape the world over the next four years. The scenarios I'm going to present to you, and I think unfortunately I can't give you certainties, I can only tell you how things might develop, will be mainly based on what Trump might do, because I think America remains the sole superpower. China's clearly a rising superpower, the centre of the world's largest market, the reserve currency, all of that. And also in an unpredictable world, probably the least predictable now of those three big powers, simply because it's so hard to tell which direction Trump is going to take things, how much it meant to take seriously, how much we're meant to take literally. And that's a lot of what I'll be talking about, but I think it is important to remember simply because Trump is such a news machine, and the previous speaker was talking about Elon Musk's endless Twitter feed. Well, Trump too. It suddenly reminded me of what it was like when he was president, this constant barrage of news and the sense that reacting that America could absorb all of our attention. And it's one in danger of forgetting that there are other actors in the world with whom the US will be interacting and which are also capable of driving events. And really it's the interaction between those powers as well as the eu, the other medium powers that is where the complexity of world affairs lies.

And before I get onto the scenarios, I think there've been many moments. I think we've all had them over recent years where you've thought, wow, something really extraordinary has happened for British people in the audience. Maybe it was Brexit or Americans or indeed the world, the first election of Trump. And then the second one for me, the moment I've really thought, okay, the world is changing in a very sort of personal way, was the week before the Russian invasion of Ukraine. Because suddenly it became clear to me that we were about to have a major land war in Europe. And that was partly because the Western Intelligence Services had made a conscious decision to start briefing people like me in, as it turned out, a vain attempt to prevent the war. They hoped that if they could somehow flush out Putin's intentions, it might throw some sand in the wheel.

So I remember probably a week before the tank started rolling, being suddenly asked to go to an office block in the middle of London, where I met two British government employees I've never seen before or since, who both kind of laid out exactly what was happening around Ukraine. The troops massing on the borders, the blood supplies being put into place, all the preparations for an invasion. And of course, one remembered that the intelligence services had got things wrong ahead of the Iraq war. So we pushed back a bit and said, how certain can you be? And I remember one of the analysts, there was a woman said, well, ahead of Iraq, we were under pressure to provide, there was a confirmation bias. They wanted to be told there was WMD, but nobody wants to see this. This is completely horrifying. And we made a list at the beginning of the year of what Russia would have to have in place before it invaded, and we can now see it's all there.

And then that weekend I flew to the Munich Security Conference, which takes place next month. It's probably the kind of main gathering of Western security people. And again, it was a very peculiar atmosphere because the British and the Americans were briefing very heavily that this invasion was going to take place, but not everybody believed them. So I remember my first meeting was with the EU ambassador to Moscow who'd just flown in from Moscow. He's a former head of the German foreign ministry, so a very smart guy. And even he didn't really believe it. He said, look, Putin, if he goes all the way to Kiev, he'll unite the whole of the west against him, and he must know that. So he's bluffing. He'll do something in Eastern Ukraine, but he won't do the full scale invasion. And there were actually even at that stage, still a couple of Russians there.

And I remember one of them came up to me and said, well, what are you hearing? Because everyone was speculating. And I said, well, I've heard that there's going to be an invasion next week. And I remember this guy looked horror struck and said, no, that's completely crazy. And blink in a meeting next week, they'll sort it out. But then on the way out, I then ran into one of these western intel types and I could see he'd sort of heard something and he said, it's happening. It's happening next week. He's going to go all the way to Kiev. It was a very, very weird week. And almost the last appointment I had was with a bunch of Ukrainian mps. And even they didn't believe it. They were saying, well, can you please stop talking about this invasion because it's nobody's investing, it's killing the economy and so on.

And you had to say, well, I hope we're wrong, but it doesn't look like it. And the reason I dwelled on that partly is it was just a very dramatic week for me and for the world, but also it felt to me like a moment that the world changed very fundamentally, because up until that point, we exist in what I would've called the Davos world, which is a world where for about 20 years, economic globalisation seemed to me to be a much more powerful force than geopolitical rivalries. That for all the kind of latent antagonisms between big powers between the US, Russia, the EU, all the big powers were also bought into a world in which they were expanding trade. They were trying to court the same foreign investors. That's why I called it the Davos world, because you could go to that meeting, which takes place in a couple of weeks time, and people like Putin went, Xi went, Trump went, and they were talking to the same sorts of people, investment bankers, potential foreign direct investors. And you felt, well, as long as this world operates, these guys aren't going to overturn the apple cart because they're basically trying to do the same thing. They're trying to make their countries more prosperous, attract investment, attract trade. And then with Putin's invasion, you saw a leader of a major country say, you know what?

Strategic concerns my vision of the country's national grandeur. All of that is more important than potential sanctions ostracism by the west. Now, it's true that Putin miscalculated, he thought he would win within a week. And also because the West had so underreact to Crimea and to other things, he probably thought we'd again. But as happened, we then saw a major effort to help Ukraine fight back, but also to sanction Russia. And that has had a big impact on our economies. And that is just with Russia, which is a big economy, but not in the world's top 10, a major energy supplier. If you were to replicate that with the conflict with China, the impact on the global economy would be absolutely enormous. I mean, the world economy would be unrecognisable. Now we have to factor in the new question, which is Donald Trump who's come in and as I say, it startles us on a sort of daily basis, what is he up to with all the talk of tariffs and now of making Canada the 51st state or possibly invading Greenland?

I see people smiling and it is funny, but it's also quite shocking that you have today the French defence minister saying, the EU will defend its territory and not against Russia, but against the United States. That really is quite remarkable. But we don't know, as I say, which way Trump is going to take all of this and which way the people around him are going to take all this. Because I mean Trump, I think he has centralised power. He is, as George W. Bush one said, of himself, the decider. But around him, he has people who actually disagree about quite a lot. And one of them said to me, well, I think Obama talked about having a team of rivals, but around him, Trump's going to have a nest of vipers because they're really not gentle with each other. In fact, I was talking to a member of the Trump transition team last time I was in Washington, and I said, are you going to try and take a job in the White House? And he said, no. And I said, why not? And he said, because I've seen too many people destroyed by working around Trump. He said, I support the project, but a lot of the people around Trump, you don't want to be around because it's very, very cutthroat world. So that adds an extra layer of unpredictability.

So option one, I'm going to talk you through five scenarios, and I haven't really ranked them in order of probability, but actually I would say this is, if I had to bet on one, I would say this is the likeliest. None of these scenarios will be a hundred percent, there'll be mixes of some of them, but a new great power bargain. So what do I mean by that? First of all, that Russia and China tacitly granted spheres of influence and the US focuses on its own backyard. That would be a big change because what Biden has been attempting to do is very much in line with traditional American policy, which is to say, we want to push back against Russia's ambitions in Ukraine and perhaps in the rest of Europe.

And we're certainly not going to allow China to establish a sphere of influence in Asia. And Biden has said four times that the US would fight to defend Taiwan. Trump noticeably has never said that. And another noticeable thing about Trump is that he has at various times heaped praise on both Putin and Xo, I mean, praise of a slightly kind of specific sort, how tough they are, how smart they are. But while he's perfectly prepared to humiliate or attempt to humiliate people like Justin Trudeau or Angela Merkel who are nominally allies, he's never actually talked in that way about Putin or Xi. And that's I think because he sees them as in a sense, his peers, leaders of other great powers, they can't be as great as the United States, but they are kind of his equals. I don't think he sees the leaders of Canada or Denmark in that light.

But also I think that Trump, one of the things he said throughout the campaign, and I think he probably means it, is that he sees himself as the peace candidate, as the candidate who will keep America out of needless wars. And in fact, the guy I referred to in the Trump transition team when I'd said to him, why are you with Trump? He's a US veteran. And his basic take is that America has been involved in far too many wars. He's served in some of them that they had weakened the country, that they hadn't achieved their aims, no more wars. And so I think in pursuit of no more wars, Trump may be inclined to try to make a deal with Putin and with Xi, he has talked about settling Ukraine within a day. Now I think they're beginning to back off that one. Maybe they'll even take a week or a month.

But I think that the outline of the deal, I mean, there's a big question about whether Russia actually will consent to talks at all. And one of the things I think the Ukrainians are hoping is that Putin will stiff Trump and just refuse to take part in talks and that will then get angry and up his backing for Ukraine. But I think that Putin probably will agree to some sort of talks. And the fear for the Ukrainians is that there will be no European or American or NATO security guarantees for Ukraine that they will just freeze the lines in place and there'll be a ceasefire. Russia will stop fighting. But there won't be any really credible guarantee for Ukraine, which obviously opens the possibility that once Russia has had the opportunity to re-arm, they'll come right back at Ukraine. But I suspect that is going to be what a deal might look like because I'm not sure that, I think Trump just wants a deal. He wants to be able to say, I've settled this.

 And then I think the next question is, is there relaxtion of sanctions on Russia? And there may be voices in Europe pushing for that as well because the European energy prices are extremely high. And if Russian gas were to come back on the market, maybe there will be people who would want that. But equally, there'll be a big divide in Europe because the Eastern Europeans will say absolutely no way. But that's certainly an argument to look at China. Again, I think I talked about the tensions within Trump's inner circle, and I think this is a big one because I think around Trump, there are real China hawks. I mean the Biden people were pretty hawkish on China. And indeed a central focus of their foreign policy was to try to build up a network of alliances in Asia to contain Chinese power and also to essentially impose trade sanctions on key technologies to prevent China getting them particularly indeed in AI, which we were just hearing about.

So it's not like America hasn't been really since the first Trump administration in the tar, he imposed that Biden did not repeal, and now Biden's tech, war America has been getting steadily more hostile to China. But the real China hawks tend to be in the Republican camp and around Trump. However, I'm not sure that Trump agrees with them. It's never clear that Trump, who Trump really is listening to what he himself really thinks, but Trump seems to be particularly focused on the trade deficit and hence the threat to impose tariffs of up to 60% on China and so on. And if I were the Chinese, I would at least be thinking of what can I offer Trump as a deal? And I think that they will try to offer some kind of favourable trade deal that we will, what that could be they'll be thinking about right now.

But obvious things would be big purchases of American food sweetheart deals for American companies in China, Tesla perhaps, which is already there. And indeed, Elon Musk has a massive conflict of interest if America were indeed to get tough with China in the way that some of the people around Trump want them to because of the enormous Tesla factory in Shanghai, which produces I think something like 40% of the Teslas made in the world. So that would be that deal. But if that deal happened, the people who would be most alarmed would be America's allies in the region. You would have the Europeans some suddenly, and this is taking off the table possible threats to Greenland and Denmark and all of that or indeed demands that. Trump made explicit yesterday that NATO, NATO members increase military spending to 5% of GDP, but you would have the Europeans scrambling to look after their own defence.

And I think that the Europeans are now looking at a very toxic potential combination for the European Union, which is a Russia that will look like it's achieved a lot of its aims in Ukraine and is very angry and clearly has as the NATO Secretary General said in his speech last December, goals beyond Ukraine, a US that's withdrawing its security guarantee from Europe, maybe not explicitly, but Trump doesn't have to explicitly pull America out of NATO. He can just say things like he's already said, I wouldn't necessarily defend NATO allies if they're dissing me or they're not paying the 5% or whatever it is. And indeed, one of little noticed comment, JD Vance during the campaign said, if the EU discriminate against American companies, for example, American tech companies, if they impose censorship on them, and we can see that debate coming up with X and now with what Facebook said yesterday and Zuckerberg saying that the Europeans were a problem because they censor too much, that I think it's entirely possible the Americans will link the treatment of companies like X Tesla, maybe even Facebook with security guarantees to Europe.

And so Europe will be in a problem and Asia will have the same problem because China, we don't fully know its intentions, but we can see there's a massive military buildup been going on in China for the last 20 years. New capabilities coming online all the time, a lot of it looking like it's aimed at a potential invasion of Taiwan, even if that invasion doesn't happen, a sense that America is less committed to the defence of Japan or South Korea. I think we heard a bit about nuclear in the last talk, but this wouldn't be civilian nuclear. I think South Korea is already having a debate about whether to acquire nuclear weapons for Japan for obvious reasons. That's a very fraught decision, but I think they may go there as well. So that would be the new great power bargain. The second even lesser is war by accident, and that's the sort of variant of that, by which I mean that you have Trump attempting some of this, but it kind of goes wrong because firstly, the Western Alliance breaks down in such a messy way that it looks like an open invitation to Russia and China.

When I put that slide together, I was thinking primarily about a trade war, and that is possible. Obviously we don't know what Trump's tariff strategy is actually going to be, but he's talked about this big external tariff. He's talked about imposing large tariffs on Denmark to try to force them to hand over Greenland, but Denmark's a member of the EU, you can see all sorts of ways in which the EU and the US gets sucked into a tit for tat trade war. And then if you add the security element on top of that, suddenly the Western Alliance, which looked like a really coherent block, albeit one that accounted for a diminishing share of the world economy, but nonetheless committed to similar values with the NATO alliance at its core, with advanced technology with the G7 as what Biden called the coordinating committee of the free world.

All of that made some kind of sense, but that may begin to fall apart over the course of the Trump presidency. Meanwhile, you will have a growing political instability already to have it in Europe with the US in the form of Musk backing the extremist parties in Germany. He's doing this interview with the AFD. We have Marine Le Pen, her father just died, but she will be a strong candidate in the next campaign where even in Britain where some talk about well could Reform displace the Tories or as the major party of opposition in the next election. So populous forces are on the rise. The far right look like they're going to form the government in Austria. And a lot of the international implications of this are that a lot of these parties sympathise with Trump to some extent. When I was last in Germany, I made a point of going to see some AFD people, and one of them remarked that people are turning up at AFD rallies in MAGA hats.

So there is this sort of crossover or even before Musk identified it, but also they tend to be more either pro-Russian or at least buy into the idea that the war was kind of NATO's fault, which is the Russian line. And if that's the case, it will make it extremely hard to organise Europe in the way that I implied. They need to organise themselves to look after their own defence because you've already got enormous budgetary pressure. France is this budget deficit of 6% of GDP. The Germans are allergic to deficit spending. We know what's happening in this country. Throw in a fragmentation of politics, pressure, external pressure, so you've got the West falling apart as a group, but also domestically politics and Trump repeatedly raising doubt about America's defence commitments. Now at that point, I think the risk that China, Russia, or even North Korea begin to see an opportunity and gamble that, okay, well now's the time to go rises quite considerably.

I think one of the junctures in public debate is that if you look at what NATO people are saying actually in public, not even in private, they're warning really quite openly that they think that Russia has goals beyond Ukraine. The head of the Supreme Allied Commander Europe general Christopher Oli said that in April, and Mark Rutter said it in December. Well, the argument is that NATO still deters them, but if NATO is falling apart, if the West's falling apart, maybe Russia would take a risk. I alluded to China. I mean that is the even bigger question probably for the world because China is the second largest economy. It is a rising superpower. It has this military buildup. It has said repeatedly that it is prepared to use force to take back Taiwan. Might China attempt to blockade or even invasion. It's something that people have been talking about in the West for a very long time.

The US has said for a while now that Xi Jinping has told his military to be ready to invade by 2027 Western strategy is to try to make him get to that date and say, no, it's too risky. The west is too united. I'm not going to do it. But actually, if things are looking a bit different, maybe they would take the risk. And then there's the North Korean wild card with North Korean troops appearing in Europe, but also a growing anxiety about what exactly are North Korea's intentions and in the sort of small but important subfield of North Korea watches, the analysis is getting a lot darker about what Kim Jong-un is actually up to. But then if that were to happen, it's possible that these invasions or attacks would be unopposed. But I also think it's equally possible that if they were to gamble, you'd have a kind of repetition of the pattern of the 20th century where initially America doesn't get involved because Trump is harking back.

The America first slogan was the slogan of the 1930s, and if you remember, of course, America stayed out of the war until it was directly attacked itself. But in both the first and the second World Wars, America ended up being involved and I suspect they would again. But just again, to give you another flavour of discussion in Trump circles, when I was in Washington last month, I was talking to some of the Trump people about exactly this, and I said, don't you risk that a conflict breaks out? You think you can stay out of it, but look, you got involved in the first World War, you got involved in the Second World War. And one of the Trump guys said to me, yeah, but we should never have gotten involved in the first World War. That was a terrible mistake. It was an outrage, et cetera.

So all those, it didn't quite go that way about the second World War, but he said, that was not our conflict. Europe should have slugged it out. And so those ideas which really were fringe are now back in the kind of mainstream third option is actually a slightly more positive one than, although it doesn't sound it, it's kind of where we are now that you don't have a hot war between major powers, but you do have America less interested and less able to intervene around the world. Now, the high tide of intervention American interventionism was some time ago really since the Iraq war or maybe the Libyan intervention, which was pretty reluctant. America's been trying to stay out of getting involved in regional conflicts. Trump would be much more explicit about saying, this ain't any of our business. He might, however, also add a trade war if the tit for tat sanctions get going.

So you could have a stagnation of the global economy. And then these regional problems, Myanmar, Sudan are examples of wars that are going on right now where nobody really is able to intervene or that interested in intervening. But although it's easy enough to say, well, it's a long way away, why should we get involved? And we know we can't sort these things out actually as well as being tragedies for the countries involved, they would have effects on the rest of the world. I think something like a quarter of the refugees on the other side of the channel are from Sudan. Before that they were from Afghanistan, or a lot of 'em still are from Afghanistan. People move from countries if their cannot live there, if their homes are being burnt down or their children being forced into the military. So the more of these failed states you have, the backwash of destabilisation in the West would be very real.

And I think you would get a further boost to populism. And I think that one of the big debates we're going to be having, and again, Trump will influence the rest of the world about this, is, well, what do you do about immigrants? Basically, I think Trump will drive a more radical approach. Again, one of the big open questions is does he really go for mass deportation of people? Because that would have a very negative economic impact apart from anything else. It would also cause social chaos. But Trump has talked about deporting all the illegal immigrants in the United States, which would be up to 11 million people. I don't believe he'll do that, but even an attempt would be command headlines around the world and also change the debate around the world. The far right party that I mentioned in Austria has talked about remotion, not just deporting illegal immigrants, but trying to encourage people who currently have Austrian passports but have the wrong skin colour as far as they're concerned, to go back to where they came from.

Globalisation without America is I think a very interesting possibility, which is that in a sense, another way of putting it would be that America slightly overplays its hand, that it raises tariffs. It decides that it wants to be much more archic, and that is a possibility to some extent for the American economy, given its self-sufficiency in energy, it's huge internal market. It's much more of a possibility than it is for a country like the United Kingdom. Nonetheless, I think being a conventional fin, I don't think it would be good for America either. I think they would have higher inflation. They wouldn't have the best EVs because they wouldn't allow themselves access to the Chinese EVs, which are actually for world's best at the moment, and so on. America would remain a rich country, but it might suffer economically. But the rest of the world would respond by decoupling to some extent from the United States so that the EU would say, well, we're going to reverse what we were doing in the Biden era.

And to elaborate, I think there was a sort of high tide of transatlantic cooperation in the Biden – Von der Leyon era where the EU really tried to work with the Americans on decoupling from China. Indeed, the whole replacement of the word decoupling with a different slightly friendlier word about friend shoring and so on, was something that the EU de-risking was the word the EU came up with, which the Americans then grabbed onto. But there was a kind of common project there. But I think if the tariffs really get going and they're aimed at Europe, the temptation for the Europeans to say, well, screw you. Basically we're going to try and go and do deals with the rest of the world. We'll rise, the EU is signed a deal with Merck or after 10 years of negotiations that was signed in December, and that covers 20% of world GDP, and it potentially is a tariff free zone.

It's still got to be ratified, and that'll be difficult because there are concessions the Europeans made on agriculture, which will be tough to get through in France and so on. But if it goes through, and frankly the French will see more of a geopolitical reason to get behind it. In the current climate, that will be a big example of two big trade blocks outside the major power system saying, well, we're going to carry on with the kind of forms of whatever America says, and I think the EU’s next attempt will be to do a deal with India. Now, I think India actually sees its future at the moment as a special relationship with the United States. Modi and Trump get on. Well, there is a lot of tech complementarity. There is a shared concern about China. But on the other hand, if America really starts cracking down on H one B visas making it harder for Indians to do business, to travel to the United States, then India may also look to the European Union and indeed to the UK to a deal.

China is a really interesting question. Does Europe decide actually we are going to go slow on this decoupling or de-risking with China if only partly for geopolitical reasons. We need the leverage with the United States. And I've had Europeans say to me, look, the only way we can deliver on our green agenda is with Chinese EVs. Chinese solar panels. There's no other way. So if we're serious about that, we've got to work with China and we can mitigate the jobs threat by just getting the Chinese to open factories in Europe. And the only way we can save the European car industry is rather than going head to head with the Chinese, getting them to work with our manufacturers. And if the Americans don't like it, well, the Americans aren't being that friendly to us right now anyway. So I think there's a real potential for a EU China Remo, but there has to be said, there are also big problems.

And above all, China's close relationship with Russia. And if the Chinese were clever about it, but I dunno whether they'll think of it that way, they would try to do a deal with the Europeans in which they put geopolitical pressure on Russia to dial down its threat to Europe, and in return, Europe relaxed. Some of its trade restrictions on China. I think that is possible. Meanwhile, I want to leave some time for questions, so I'll just go through it more quickly. I think the other thing to watch is the rise of the BRICS. The BRICS is probably more impressive in just in sheer numbers. Indonesia joined yesterday. Saudi Arabia has joined it's gathering adherence, but it doesn't yet have much of it doesn't do much other than meet. The thing to watch is are there moves to create a BRICS trade agreement, for example, or to promote more trade outside the dollar, which is something that I think Trump is very concerned about.

He has said that if the world stops using the dollar, that would be the equivalent of losing a world war. But some of the actions that he's taking, I think will promote exactly that to de dollarization, because people don't want to make themselves less to American pressure. Finally, I think we have to consider the not in considerable possibility that America first works, that America's lead in tech that we were talking about earlier, and in finance, the size of its markets mean that in the end, however much people object, they sort of have to buckle. I was talking to an American friend about the Greenland threats just a couple of days ago, and he said, no, Trump's not going to invade, but he is going to put such pressure on the Danes and the Greenlanders and the European Union that they'll give him a sort of shared sovereignty.

They'll say, okay, well, what do you want? You can have the deals, you can have the preferential access to the rare Earths, you can have bases, so he doesn't actually have to formally take it over, and that will be a model for the kind of very heavy handed American pressure. But that actually yields results. And as a result, Europe and Japan get the message. They ramp up defence spending, and they do it to a sufficient extent that Russia, which has suffered 700,000 casualties if we believe British estimates, and China, which still has a huge amount to risk if it goes to war in the end, decide, you know what? It's not worth it. And possibly Trump actually sends the Chinese system into crisis if they really impose these 60% tariffs that could have a huge impact on the Chinese economy have a big impact on the American economy as well.

But Chinese economists I've talked to said that they've been modelling it in Beijing and they think it could reduce growth by 2% a year, and if China's at 5% and already has a big youth unemployment problem that's socially and politically dangerous. And in fact, if you look at the headlines today, the RMB is falling against the dollar as people anticipate the impact of American trade sanctions and tariffs. So America does have a strong hand. It's possible that they will misplay the hand so badly that they'll end up damaging themselves in the world. But it's also possible that it may not be the most attractive foreign policy. It may not be great in soft power, but that American hard power will be deployed very effectively and achieve in a slightly chaotic and hazard way some of what Trump is intending. But I'll leave it there for now. Thank you very much.

 

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