The economic consequences of the peace

By now you've probably heard about the tumultuous White House meeting between Zelensky, Trump, and Vance. If not, here's the full video:

Basically, they had a deal – Ukraine gives up a share of mineral rights as part of some reconstruction investment scheme in exchange for a US-brokered peace treaty with Russia – until Zelensky asked Vance why this ceasefire would be any different to the one signed by Putin, Merkel and Macron, that Putin subsequently breached.

Vance then lashed out, accusing Zelensky of "disrespecting" the Oval Office and not thanking him (despite already having done so in that very meeting, plus on at least 33 other occasions), Zelensky pushed back, they all started talking over each other, and Trump eventually put an end to it—"I think we've seen enough".

No one knows what this means for US involvement in the war going forward. Zelensky promptly flew to the UK and secured a £2.26bn loan for military supplies, and proceeded to individually thank the global leaders that had expressed support following the meeting—including Anthony Albanese.

So, the war continues and Trump has 60 days left on his self-imposed 'end the conflict in 100 days' promise to win the Nobel Peace Prize that he supposedly covets.

But there's also a deeper lesson in all of this. Even if Trump's deal had been signed, it was entirely one-sided: the victim of the war, Ukraine, must effectively pay concessions for peace with some kind of mineral rights agreement. Meanwhile the aggressor, Russia, keeps the territory it acquired and may even see US sanctions lifted.

That will have long-lasting consequences.

First, it undermines the peace itself. Writing in 1919 after quitting his government position in protest of the Versailles Treaty, John Maynard Keynes argued that a peace that prioritised reconstruction and stability over retribution should be the goal. Instead, the Allies sought to "crush the economic life" of the Germans:

"The Treaty includes no provisions for the economic rehabilitation of Europe—nothing to make the defeated Central Empires into good neighbours, nothing to stabilise the new States of Europe, nothing to reclaim Russia; nor does it promote in any way a compact of economic solidarity amongst the Allies themselves."

We all know how that panned out, and while Trump's proposed deal is nowhere as extreme, it would still have weakened a war-torn Ukraine while leaving Russia unscathed. Not only does that risk destabilising security by breeding disillusionment with the West (how dare they exploit us amidst our struggle for survival!), but it also sets a dangerous precedent where weaker nations are stripped of assets under duress.

Mistreating your allies has has long-term consequences for trust and alliances, and the US is actively demonstrating that it's not a reliable, predictable partner. It would appear that, as it has done throughout its history, the US is once again swinging back towards isolationism. The rest of the world will take notice.

Second, such a one-sided deal emboldens potential aggressors eyeing up territories, and erodes whatever credibility the US had as a fair broker. We've now seen a response from China, with Shen Yi – "a highly popular nationalist opinion leader (+ propagandist)" – remarking that the meeting exposed Trump's weaknesses:

"If even Zelensky can go head-to-head with Trump both in person and on social media, how will Russia and America perceive Trump?"

Yi listed the following three lessons:

"First, clinging to America's leg comes with significant risks—deadly risks—and can result in a disgraceful demise. Second, strength, strength and more strength. Doing what needs to be done, achieving effective development, enhancing [national] power and securing safety—this is the hard truth for China. Third, if you think the United States is risky and have no interest in, then there is still another path in the world that, once pursued, can lead to achievements at the level of 'clear winds over hills, bright moon over great rivers' [i.e. one provided by China]".

Or, in meme form:

For Australia, it's a warning about how quickly the US can turn from ally to bully. While Trump appears to be committed to the AUKUS submarine deal, who knows how he might feel about it in 6, 12, or 24 months from now?

Trump's trade wars are also costly

That applies to trade just as much as it does to security. Just the threats of tariffs are having very real economic consequences, because they increase policy uncertainty and alter market expectations:

"Wall Street investors have spent the last six weeks trying to decipher whether President Donald Trump's tariff threats are negotiating tactics or the beginning salvos in a new trade war.

But the threats alone are already reverberating throughout the US.

Ahead of fresh inflation data out this morning, our Victoria Guida reports that while Trump has only made one major move on tariff policy since returning to the White House — another 10 percent tax on all imports from China — the self-described 'Tariff Man' has threatened plenty of other new levies. And that's beginning to rattle investors, businesses and, of course, voters."

Exactly as economic theory and empirical evidence suggested it would!

Imports are now surging as people race to front-run possible tariffs, which along with a slowdown in real personal consumption expenditures has sent the March quarter GDP forecast deeply negative:

To be clear, imports don't reduce GDP. They're netted out of the accounting identity because they represent goods and services produced abroad, not domestically, and GDP measures domestic production. So, to the extent that those imports are later sold for consumption or used by businesses to produce something (e.g. in the case of raw materials), they'll add to GDP in a future quarter.

That is unless tariffs actually kick in and raise costs and uncertainty even more than they already have, further reducing real consumption and investment, in which case the initial fall may never be fully offset. But regardless, just the threats of Trump's tariffs are clearly having very real economic consequences.

So, what should Australia do in the face of such damaging geopolitical and economic uncertainty? In a recent Senate committee testimony, Treasury Secretary Steven Kennedy laid it out:

"It is important that, should trade tensions escalate around the world, Australia's response is responsible, rigorous and effective, even if tariffs are applied to our exports. It will seem counter intuitive to many but responding to tariffs or trade restrictions with similar measures will only make matters worse.

Australia has already shown how to respond successfully to trade restrictions. We took a well calibrated approach when China imposed restrictions on Australian exports of barley, coal, wine, and lobster, among other goods. Producers in the targeted industries were adversely affected, but governments did not compound the economic cost by implementing retaliatory tariffs or barriers that would have harmed Australian consumers and businesses.

And in many cases our exporters found alternative markets. In the case of barley, by 2022, Australia accounted for 95 per cent of Mexico's imports of barley. We also increased our exports of barley with other parts of Latin America, and coal exports with Southeast Asia."

Couldn't have said it better myself. As Henry George observed, imposing tariffs "is to do to ourselves in time of peace what enemies seek to do to us in time of war".

While the threat of targeted retaliation can help deter a would-be protectionist, it is still self-destructive. So for an open, economically small country like Australia, the best move is often to just let it go and—if necessary—assist local businesses in finding new, more reliable trading partners.

How Biden and Trump have put Taiwan at risk

It's not just Europe that's at risk from Trump's zero-sum diplomacy. In trying to thwart China's advances in AI, Trump – who has continued the Biden administration's policy of fighting China by depriving it of technology and hardware (e.g. the chip ban) – may have increased the likelihood of a future invasion of Taiwan:

"Chips undergird every aspect of the modern economy; the rise of AI, and the promise of the massive gains that might result, only make this need even more pressing. And, as long as China needs TSMC chips, they have a powerful incentive to leave Taiwan alone.

Anyone who has been following the news for the last few years, however, can surely see the problem: the various iterations of the chip ban, going back to the initial action against ZTE in 2018, have the perhaps-unintended effect of making China less dependent on TSMC."

There are costs to going to war. If your economy is heavily integrated with that of the territory in question, you're less likely to invade because one of the main costs – economic damage – would be greater.

Indeed, there's "strong evidence that countries that trade with each other are less likely to fight each other", and "the fundamental factor in causing bilateral cooperation is trade":

"Countries seek to protect wealth gained through international trade, therefore trading partners are less combative than nontrading nations."

So, by forcing China and Taiwan to trade less and be less dependent on each other, Biden and now Trump have changed the calculus of war:

"Now you can see the fly in Goldilocks' porridge! China would certainly like the best chips from TSMC, but they are figuring out how to manage with SMIC and the Ascend and surprisingly efficient state-of-the-art models; the entire AI economy in the U.S., on the other hand — the one that is developing so nicely, with private funding pursuing the frontier, and competition and innovation up-and-down the stack — is completely dependent on TSMC and Taiwan. We have created a situation where China is less dependent on Taiwan, even while we are more dependent on the island."

A more isolationist, protectionist America is not good for those who value democracy and freedom, both in the US and across the rest of the free world.

Have a great day.