The World is Flat, but Trump is slicing it!

Thomas Friedman wrote an international best selling book, ‘The World is Flat’, in 2005, which talks about the benefits of globalisation, especially to the poorer countries. Thanks to tremendous improvements in communication and information technologies, everyone had an equal chance to do things, such as becoming your own publisher of articles (blogs), or of music (remember Napster?), or almost any disruptive business.

Globalisation, and an ecostysem of free trade, provided impetus to countries such as China, which understood the change and took full advantage of it. By 2010 its GDP had reached $5.2 trillion, making it the third-largest, after Japan (slightly higher), and the US ($14.5 trillion).

By 2017, China’s GDP had grown to $12 trillion, narrowing the gap with the US, whose GDP had grown to $19.5 trillion.

The US has always been concerned when other nations play catch up. In 1995, Japan had narrowed the gap; its GDP then was $5.1 trillion to the US’ $7.4 trillion. By 2010, Japan’s GDP had grown only to $5.3 trillion, whilst the US grew to $14.5 trillion. Then China assumed the second spot. Too close for comfort, it is now the target of President Trump’s wrath. So Trump is busy slicing the world that is flat, in a bid to contain others, and retain the economic dominance of the US. He is doing this in a number of ways.

He has ‘renegotiated’ NAFTA, arm-twisting Canada and Mexico, two countries with which it has the largest borders.

He has walked out of the Joint Comprehensive Plan of Action (JCPOA) signed in 2015 by the five permanent members of the UN Security Council, plus Germany, with Iran. By all counts, JCPOA was working and Iran was abiding by its obligations; Trump walked out nonetheless, alleging (without evidence) non-compliance by Iran. The other signatories stayed committed to the deal.

Isaac Newton’s third law of motion states that for every action there is an equal and opposite reaction. Though Newton had also discovered gravity, Trump did not analyse the gravity of the situation. He unilaterally imposed sanctions on Iran.

One of the reasons the US is able to impose unilateral sanctions, at will, is its ability to control Society for Worldwide Interbank Financial Telecommunications (SWIFT). All payments pass through the SWIFT gateway and if a nation can control what passes through the gateway, it basically prevents, or slows down, the economy of those being stopped.

The equal and opposite reaction is that Russia, also a victim of unilaterally imposed sanctions, has developed an alternative system called the System for Transfer of Financial Messages (SPFS) and China has introduced the Cross-Border Interbank Payment System (CIPS).

The equal and opposite reaction to Trump’s slicing of the world and walking out of treaties is that there is a move to de-dollarise trading. Russia and China trade, inter-se, in renminbi (Chinese currency). The oil futures mentioned above, have an additional carrot for those not confident enough of the renminbi; they have the alternative option of gold payment instead.

After Iran came under threat of sanctions, the price of crude oil rose sharply. This threatened all economies, including America’s, which has been performing well lately. But with Presidential elections due in 2020, Trump could not afford further increases.

So he ‘exempted’ five countries, including India, from the ban on purchasing Iranian oil.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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