Can the World De-Americanize?

The world has just been hit with a raft of non-sensical US trade tariffs that prove both the idiocy of Trump and the futility of being a US ally. Can the world de-Americanize itself to prosper again?

A quick perusal of the list of Trumps new tariffs is a stupefying example of economic ignorance supported by hypocritical untruths about trade barriers to excuse the global carnage that has just been unleashed. From placing tariffs on uninhabited islands to interpreting unbiased sales taxes as US targeted import tariffs, both the underlying trade strategy and its execution are deeply flawed. Only an archaic, dishonest mind would calculate trade balances in terms of physical goods alone - without even including Americas largest export industries that are digital and financial services. Chaos has ensued, stock markets have plunged, and every business in the world is readjusting, recalculating and restructuring to this sudden de-globalization of international trade. However, instead of simply accepting de-globalization … perhaps Europe, Asia and the rest of the world need to de-Americanize themselves in order to prosper out of the chaos. In other words, they should forget about the now heavily protected and unstable US market to focus on building new alliances with each other.

No doubt some of the biggest losers will ultimately be US consumers and American political influence around the world. The two largest economic and military superpowers have now entered a tit-for-tat trade war that neither will benefit from. Moreover, the lofty heights of world respect and envy that America enjoyed a few decades ago has now all but evaporated. Nonetheless the rest of the world still needs to navigate its way out of this chaotic mess. Trumps recent abandonment of every US ally and the introduction of his delusionary tariff policy means two irreversible consequences for the world - the global realignment of both security and trade policies for every nation. In my previous article titled “Position Vacant: Leader of the Free World” I proposed that the liberal democracies of the world should unite as a new security and trading bloc called the Liberal Democracy Alliance or LDA. Regardless of the name or acronym, it is time for the EU, UK, Canada, Australia, New Zealand, Japan and South Korea to stand up for shared liberal democratic values.

Prime Ministers, Presidents, Chancellors and Parliamentarians around the world urgently need to get talking and stop wasting time reacting or pandering to America’s bullying tactics. Simultaneous action together from a multi-lateral security and trade alliance will be much more effective and powerful than any individual country acting alone in a piecemeal bi-lateral manner. Nations will always be stronger standing together than alone - just as long as common principles and values are shared and adopted by all. And as we all know, military and economic power go hand in hand so an equally strong and united pledge needs to be made from a security point of view. I will now elaborate on my reasoning for a global democratic alliance called the LDA using a standard SWOT analysis. To this end I will propose some strategic and tactical solutions to mitigate the obvious challenges ahead for such an alliance.

1. Strengths:

   A global free trade and security alliance that includes the EU, UK, Canada, Australia, Japan, South Korea and New Zealand brings together numerous unique and powerful strengths. In basic economic terms the combined GDP would account for $31.2 trillion or 29.4% of the global economy. This is larger than the $27.4 trillion US economy (25.8%) and the $17.8 trillion Chinese economy (16.8%). Moreover, in terms of GDP adjusted for Purchasing Power Parity (PPP) the LDA would account for 30.3% of the world economy compared to 21.3% for China and a meagre 17.9% for the USA. The PPP adjusted GDP figures are a direct reflection of the high demand for Europe’s premium products and the relatively minor reliance of US exports to the American economy.
   
   In terms of potential military size the LDA alliance would comprise a population of over 830 million democracy believing consumers. This is 2.4 times Americas population and almost 58% of Chinas supposed 1.4 billion people (the real number of Chinese is likely to be considerably less). If all LDA member states can commit to a military spending of 4% - 5% of GDP this alliance could certainly evolve into a force that could project power across all four corners of the globe. The EU also benefits from having 4 out of the top 10 defense companies in the world (and yes the US has the other 6). Moreover, France and the UK both have nuclear weapons that could be deployed from any member states location as the ultimate deterrent against nuclear attacks on LDA members. Who needs aircraft carriers when you can have land bases built in member states to cover most of the world? This is a solid starting foundation and sufficient springboard for a new 21st century military industrial complex that can ultimately grow into a third global power that rivals the ambitions of both the US and China.
   
   Another strength of the LDA would include preferred access to the energy and mineral resources of both Australia and Canada. Their combined natural gas, oil and coal resources account for around 13% of total global energy reserves. In terms of mineral resources the picture is even rosier. Australia and Canada account for over 30% of all critical minerals including iron ore, bauxite, gold, nickel, zinc, lead and uranium. Most notably Australia alone accounts for over 50% of the worlds lithium that is so essential for future green energy technologies.
   
   Member states would also benefit from preferred access to the hi-end manufacturing power of Germany, Japan and South Korea. Everything from luxury cars to industrial equipment, medical devices, electronics, pharmaceuticals and smartphones can be provided by these high-product-value industrial behemoths. Furthermore, the high quality assurance standards that all member states already adhere to is a true economic advantage and natural trade barrier (yes Trump is correct on this issue). European, Australian, Canadian and other producers should combine their existing standards into a bigger, more easily adopted set of international manufacturing and product quality standards. The LDA’s superior quality standards to both the US and China will reinforce the premium quality of the LDA’s food produce and manufactured consumer goods. Over time this may see a global migration from Apple to Samsung and from Boeing to Airbus. Ultimately higher quality products always result in greater purchasing parity power for the manufacturing nation. If America wants to return to low-value products to compete against heavily taxed Chinese products then just let it. It will only create massive inflation for American consumers. The LDA should focus on high value products that adhere to the strictest standards of product quality, supply-chain transparency and environmental sustainability.
   
   

2. Weaknesses
   Obviously building a democratic global alliance comprising 830 million people living in 34 countries on 4 continents speaking 24 different languages will not be an easy feat to organize and manage. Pragmatically thinking, the EU should represent all 28 European member states to simplify organizational structure, logistics and execution of decisions. A seven member alliance with the EU as only one member could function well and with sufficient speed under certain democratic principles. To avoid the disasters of either Brexit-like democratic flippancy requiring a 51% vote, or NATO-like intransigence requiring a 100% consensus, I propose that 5 out of 7 votes is required to pass the authorization of any official action by the alliance. Irrespective of the efficiency of any democratic procedures implemented, the complexity and operational bureaucracy of such an organization remains a potential weakness to overcome. The LDA cannot hope to be as decisive as its autocratic competitors in the US and China. However it must at least try to be effective and decisive as possible. No doubt it must make some concessions to long held beliefs in order to compete with these two big bullies.

   
   A bigger potential weakness than the bureaucratic complexity of such a multi-lateral organization is the question of inherent cultural ambition, and the ability for political and economic leaders to embrace capital risk in order to succeed. In comparison to the Americans and Chinese, citizens of all LDA member states are generally observed to be both socially and economically reserved, pragmatic, polite, conservative and risk averse in their basic nature. While I will return to this subject later when discussing technology strategies, it is essential for all LDA leaders to have courage and take risks. The embracement and clever management of capital risk is essential for creating both the long term economic growth and the military might necessary to compete with the super-powers.
   

3. Opportunities
   The current trade war is indeed a rare opportunity for a new democratic security and trading bloc on multiple levels. While the obvious prime target of this global tariff war is China, Trump has also effectively declared a trade war on every other country. The lack of a targeted focused tariff war on China alone is indeed a colossal strategic mistake by America as the US empire cannot survive by itself. It has not only incensed the entire world but has revealed to all the true nature of American hegemony and exceptionalism. Moreover it has unwittingly revealed some fundamental weaknesses in both the American and Chinese economies, driven primarily by the aggressive over-confident nature of their autocratic rulers. Ultimately Presidents Trump and Xi are both limited in their options due to a misplaced sense of national pride. Neither country is undefeatable nor immune from targeted attacks that take advantage of their inherent weaknesses.

   
   While the world can watch the US and China battle it out in a tit-for-tat tariff war, the LDA should keep their powder dry until they can strike in a combined, targeted, well-timed manner at both major powers when they least expect it. No doubt the biggest weakness of both super powers is their economic reliance on each other. Given the complexity of global supply chains for almost every product, neither country can ultimately win this battle. Moreover the involvement of every other country in this mess can only serve to hurt both China and America further. Confusion reigns which is always the key ingredient to geo-political opportunity. The key to seizing these opportunities while mitigating potential threats is to act in a strong combined manner as a global alliance, and to specifically focus on key markets and industries that are of most relevance to the LDAs prosperity. While China and the US battle it out the LDA could subtly restructure its security posture and trade barriers for its members advantage with a minimum of angst.

   
   The most immediate and direct consequence of this trade war will be the massive dumping of cheap Chinese products on the rest of the world. China's immense manufacturing base needs somewhere for all its products to be sold, even if it cannot profit from them. After all, revenues with no profit are better than no revenues at all. Hence there is an immediate opportunity for the consumers of all other countries to take advantage of very cheap products that they do not make themselves. While consumer prices in the US sky-rocket the rest of the world may experience a deflationary period for imports for a year or two. While this import bonanza should not apply to all of Chinas products without tariffs (most notably for electric vehicles) the cost of many low value products is likely to significantly drop in the short term. It will take several years for China to scale back production and reduce stockpiles to meet the reduced economic demands of this new world. All the while President Xi is pre-occupied with the timing of a costly invasion of Taiwan that only the US could hope to prevent. China has a lot of economic pain to absorb and it is not prepared for it either politically, socially or demographically. China’s main weakness is its inherent inability to restructure its economy, society and national ambitions to meet these challenges without major political turmoil. We all know the Chinese Communist Party would rather its citizens be financially hurt than risk losing its control of the nation. It will keep on carrying on and distorting the true reality to its citizens for as long as it can. Until this self-administered social illusion disappears the rest of the world can take advantage of China’s inherent structural constraints. China now needs new customers more than any other country in the world.

   
   Regardless of China’s economic and demographic weaknesses, the biggest opportunity for the LDA lies in a major fundamental strength of the US economy. Trump conveniently neglected to account for American digital and financial services when calculating trade imbalances for his tariff strategy. America holds a dominant position in both areas accounting for up to 40% of all services globally, with technology driven digital services the most omnipresent. Ironically this position of US economic dominance represents a real opportunity for the LDA to generate massive tax revenues with minimal risk. This is because digital services are generally only taxed in the EU at a rate of between 2% and 4%. When compared to the European VAT rates of 17% to 27% on all physical products, digital services are treated very lightly. Only Australia taxes all goods and services equally at the same rate of 10%. If EU members apply the VAT equally to digital services and physical goods it generate hundreds of billions of dollars in tax. And it could do this without applying targeted tariffs at the US because the US already controls most of the digital services in the EU. While European tech companies would also be disadvantaged, American tech companies would pay the vast majority of this tax.

   
   Most importantly, replacing digital services taxes with an unbiased VAT would not mean higher costs for European consumers. The vast majority of the cost to build digital services such as software-as-a-service (SaaS) and video streaming lies in the initial design and development. Hence the pricing of digital services is largely independent of the cost of their operation. Pricing is based on what tech companies think consumers will actually pay for them … and this will not change. Hence implementing a 20% VAT should not result in any major increase in prices. For example a Netflix streaming service for $10 a month will still be $10 a month. The only difference would be that the LDA or its member states would be making $2 a month from each account that would effectively be paid for by the US vendor in reduced margins. This ethical response to Trumps 20% tariffs on the EU would be both a proportional and relatively risk-free solution that does not specifically target US tech companies with a reciprocal tariff. The Australian approach to treat services the same as physical goods should be adopted by all to loosen the grip of the US tech giants.
   

4. Threats
   The biggest threat to the prosperity of the LDA alliance would be in its ability to compete in terms of technology with the US and China. The dearth of technology companies in Europe, UK, Canada and Australia is an obvious and glaring weakness derived from their financial conservatism. The rest of the world desperately needs its own hi-technology base if it is to compete effectively with the current super-powers. However, as touched on earlier, building a strong, rapidly growing and innovative technology ecosystem requires the adoption of significant capital risk. In America tech investors operate on the simple principle that only one in five tech companies will succeed and 80% will ultimately fail. Nonetheless, Americans run to invest in technology opportunities by embracing the inherent capital risk and managing this risk by diversifying their investments. If they make 10 investments a year they only expect that 2 will succeed after 3-4 years. They do this because they know those 2 successes will usually deliver 10x to 100x returns on their investment and wipe out any loses incurred by the 8 failures. And to execute on this investment strategy, American tech investors act quickly and decisively. When evaluating potential investments, due diligence typically only takes 1 to 2 months - even if the target is a massive billion dollar company.
   
   In contrast, member states of the LDA are strongly averse to such capital risk and investment strategies. When European investors do due diligence on technology companies they typically take 5 to 6 months before submitting their first offer or term sheet. More often than not they spend 3-4 months in evaluation before deciding against an investment. They want to ensure that every investment they make is a winner - and they look for any small minor potential problem to derail their investment interest. Unfortunately this approach almost always means that they miss out on the really big opportunities which is why European unicorns are very hard to find. This translates to a very difficult, slow, frustrating and usually futile capital raising process for EU technology startups. Ultimately the most talented and astute startup founders decide to move to the US to start chasing their dreams. For the LDA to become a hub of tech innovation and growth, it is the financial system of investment that needs a dramatic overhaul. As America has proven, there are no rewards without the adoption of risk. The key is to embrace risk and cleverly manage it so that startups can grow quickly, and can pivot nimbly to meet the challenges of a rapidly evolving tech environment. However if the Europe was ever to change its technology strategy to embrace risk now is definitely the time. The recent advent of AI in every single industry has dramatically reduced the time and cost required to develop products and build software. Hence it has never been easier or cheaper to build a new tech industry and the rest of the world needs to build its own technology infrastructure.

   Another obvious threat relates to defense issues and the current complexity of the entrenched US military industrial complex. Every single LDA member is deeply entwined with US defense manufacturers and it will likely take over a decade to create a new independent alternative. However this process should start as quickly as possible with the cancellation of orders for American made fighter jets, tanks guns and nuclear submarines. Preference of LDA defense spending should be given to European manufacturers whenever possible. As detailed above, 4 of the top 10 defense companies are in Europe and they need to work together in order to create a defense industry that is truly their own. Companies such as BAE Systems, Airbus, Thales and Rheinmetall need to work together to create new military standards and products that integrate and work together. Without this military industry transformation the proposed LDA cannot hope to become a true world power. It will certainly take time .. but inaction now will be felt in a decade.

Obviously each member of the proposed alliance has its own unique strengths, weaknesses, opportunities and threats to evaluate. The EU has its automotive industry to protect and the UK its financial services industry to manage through the chaos. Australia will now have to counter rapidly declining demand from its biggest trade partner in China. And Canada is already dealing with the same issue from its biggest trade partner in the US. There is still a lot to play out and every country has its own unique challenges to overcome. Nonetheless all liberal democracies are presented with a massive opportunity to unite for their common benefit.

This SWOT analysis on the viability of a new democratically aligned global alliance is only an initial study and obviously nowhere near complete. No doubt there are many strengths, weakness, opportunities and threats that have not been considered in this work. An obvious omission is how to disentangle the world from the US financial system and the US dollar as the worlds reserve currency. This is such a massive and consequential topic on its own that I have decided to leave this important discussion for another day. Perhaps it will be the topic of my next article if I can sufficiently grasp its full complexity in time ?

This article is not meant as a complete instruction set for de-Americanizing the world … it is only meant to start the conversation and promote discussion about potential ways forward in these chaotic times. Without doubt the implementation of a 20% VAT on all digital services is a potentially powerful strategy for the EU that could also help fund the development of a new global technology base. I find the idea of taxing American technology giants to fund semiconductor fabs, data storage centers and startup hubs in Europe an elegant, fitting and “proportional” response to the unfair US tariffs now placed on the entire world.

Recent events have proven to the rest of the democratic world that it urgently needs to de-Americanize itself in order to prosper in the future. Neither America nor China can be relied on to do the right thing by the rest of the world ever again …. not that either has ever seriously attempted to. However this transformation cannot hope to happen without the political and financial leaders of the democratic world finally stepping up and embracing risk with a shared vision for a better future for all.