American Gangsterism plus other ways to make China Great Again

Thoughts on Trump's Ukraine mineral heist, Merz's fighting talk, the flawed logic of "reverse Nixon", are we heading back to the 1930s, and what America would lose by exiting the IMF and World Bank

Photo by engin akyurt on Unsplash

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In this newsletter:

• Trump’s Ukraine Fund: American Gangsterism

• Merz Talks the Talk: But does he have the numbers?

• A Reverse Nixon? Making China Great Again

• Trashing the Global Trading System: Back to the 1930s

• Bye-bye Bretton Woods: Make America Weak Again

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1. American Gangsterism

Today marks the third anniversary of Russia’s full-scale invasion of Ukraine. It is a grim milestone in a savage war that has cost hundreds of thousands of lives, many more wounded and millions displaced. A just and lasting peace cannot come soon enough. But that is not what appears to be on the cards. Instead, we have the spectacle of Donald Trump trying to impose what looks like a grotesquely one-sided deal on its desperate erstwhile ally.

Based on the draft agreement obtained by The New York Times, it is not hard to see why Volodomyr Zelenksy has so far refused to sign a $500 billion mineral rights deal that Trump is demanding to enable America to recoup the cost of past financial support:

The new draft agreement reiterated a U.S. demand that Ukraine relinquish half of its revenues from natural resource extraction, including minerals, gas and oil, as well as earnings from ports and other infrastructure.

Under the proposed deal, those revenues would be directed to a fund in which the United States would hold 100 percent financial interest, and Ukraine should contribute to the fund until it reaches $500 billion. That sum is more than four times as much as the value of U.S. aid committed to Ukraine so far.

The agreement does not commit the United States to security guarantees for Ukraine, or promise further military support for Kyiv. The word “security” was even deleted from a formulation contained in a previous version of the deal, dated Feb. 14 and reviewed by The Times, which stated that both countries aimed to achieve “lasting peace and security in Ukraine.”

Most egregiously:

The document suggests the United States may send more aid to Ukraine in the future — but at a high price. It states that Ukraine will be required to contribute to the fund a sum equal to twice the amount the United States might give to Ukraine after the deal is signed.

For his part, Zelensky said yesterday that he is not “signing something that 10 generations of Ukrainians will repay”. But the longer he holds out, the more menacing Trump’s language becomes. “We’re going to either sign a deal, or there’s going to be a lot of problems with them,” he said on Friday.

The impression that this is a shakedown was hardly diminished by Marco Rubio’s defence of his boss’s approach: "We want to be in joint venture with you not because we want to steal from your country but because we think that is actually a security guarantee," the secretary of state said, sounding like every mobster ever.

On the other hand, Scott Bessent, the Treasury secretary dispatched to Kyiv last week to try to strong-arm Zelensky into signing a deal that he had been presented with just four hours earlier, provided a more nuanced defence in this oped for the Financial Times. He insisted that some of the proceeds of the fund would be reinvested into the Ukrainian economy to finance its reconstruction and development. More broadly, handing America an economic stake in the country was itself a security guarantee that would deter Russia from future aggression:

President Trump’s proposed partnership aligns the interest of the American people with those of the people of Ukraine… This economic partnership would lay the foundations for a durable peace by sending a clear signal to the American people, the people of Ukraine, and the government of Russia about the importance of Ukraine’s future sovereignty and success to the US.

Who to believe? Trump or Bessent? As the Centre for Strategic & International Studies notes, there is no US precedent for such a resource-for-aid swap - but it’s a tried and tested tool out of China’s playbook. Whether the administration is behaving honourably or has become a gangster state matters not only for Ukraine but for America’s global reputation, moral authority and standing among allies. Meanwhile Bessent’s oped raises more questions than answers:

• Any deal is not going to make any money for America for a very long time. It will take years if not decades to adequately assess whether these minerals are commercially viable and put in place the investment needed to exploit them. At the very least, potential investors would need to be very confident in the country’s long-term stability before they put money into the country. Why would they do that without robust security guarantees?

• Does an economic partnership really count as a security guarantee? What Trump may have in mind is some form of Finlandisation, under which Ukraine would retain its domestic autonomy but give up its right to an independent foreign policy - with the perverse difference that unlike Finland after the Second World War, Ukraine must pay reparations not to its adversaries but its ally. Yet Russia has been clear from the outset that its goal is to control Ukraine’s domestic affairs too. Why would it give that up now?

• Bessent claimed last week that a deal would allow America to hit Russia with new sanctions to bring Moscow to the negotiating table. Yet there is no sign that America is planning new sanctions. Instead, Trump and Rubio have talked of easing sanctions and striking deals with Moscow. Having extracted what he wanted from Zelensky, what would stop Trump effectively handing Ukraine to Putin in return for a commitment to honour the deal?

• Bessent’s appointment was widely welcomed in the markets as evidence that there would be at least one grown-up in the room in Trump 2.0, so his intervention could be seen as offering some reassurance. But if it turns out that he is party to a hit job on an erstwhile ally, then it is not just Wall Street that will need to revisit its assumptions about how effective a restraint he will be; all of America’s allies will need to draw the appropriate lessons.

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2. Merz Talks the Talk

Emmanuel Macron and Sir Keir Starmer will both travel to Washington DC this week to plead with Trump to provide meaningful security guarantees to Ukraine and to grant Europeans a seat at the negotiating table in any peace deal. Unfortunately, their offer to commit a puny “tripwire” force to Ukraine but only if America agrees to provide a backstop is likely only to highlight Europe’s lack of hard power and therefore geopolitical irrelevance.

Unfortunately, the outcome of Germany’s election on Sunday hardly fills one with confidence that Europe will quickly address this deficiency. That is despite the strong words of support for Ukraine by Friederich Merz, the leader of the Christian Democratic Union, following his election win. He may have insisted that his "absolute priority" would be to "strengthen Europe as quickly as possible so that we can achieve real independence from the US step by step". But his immediate priority is to form a coalition government with the Social Democrats.

That won’t be easy given the deep divisions between the parties over migration policy and the fact that the SPD have just suffered their worst election result in history. From a European perspective, only two questions matter:

• Will the new government have the two thirds majority in the Bundestag that would allow them to block the relaxation of the debt brake that is essential for any meaningful rise in defence spending? Based on the preliminary result, that seems unlikely. The far right, pro-Russian AfD, which opposes raising the debt brake, and the far left Die Linke, which is against increased defence spending, will have 216 seats or 34.3 percent of the seats. As a reminder, German defence spending has only met the NATO 2 percent target in recent years due to a special fund that expires in 2027. Three years after chancellor Olaf Scholz promised it, Germany is still awaiting a real Zeitendwende.

• Will the new government open the door to wider European defence spending? There are two ways Germany could do this: it can either agree to a new round of common borrowing to fund common defence, taking advantage of the market appetite for EU bonds. Or it could back a relaxation of the EU’s fiscal rules to exempt defence spending. That would ensure that defence spending remains entirely on national government balance sheets, but would increase the risk of a eurozone debt crisis that could ultimately cost Germany. For all Merz’s hawkish words this morning, he made no attempt to prepare the public for this necessary choice during the campaign.

Of course, raising defence spending is only one part of the European security picture. As Suzanne Raine of Cambridge University’s Centre for Geopolitics (and newly-appointed Master of Selwyn College) noted in response to last week’s newsletter that when it comes to hard power, the most important military capability is the ability to take good decisions, and to act first.

This is something that both Russia and America are very good at. NATO, on the other hand, is a defensive alliance which takes collective decisions. Europeans could spend all the money in the world on defence but if we don't develop a decision-taking capability (or even an initiative-taking capability) it will still be weak.

Suzanne wrote a terrific essay on this a couple of years ago for Engelsberg Ideas. As we enter this new world of imperialism, it is even more relevant today. It will require a complete revolution in mindset for Europeans to develop such a capability. I doubt even the shock of the last month is enough to bring it about.

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3. A Reverse Nixon?

Could there be method in Trump’s apparent madness? The US president’s decision to embrace Vladimir Putin is partly driven, we are told, by a desire to do a “reverse Nixon”. The goal is to break up the “no limits friendship” between Russia and China, just as Richard Nixon’s outreach to China helped deepen the divide between Mao Zedong and the Soviet Union.

This idea was given credence by Keith Kellogg, Trump’s Ukraine war envoy, who told the recent Munich Security Conference America will try to “break” Putin’s alliances with China, Iran, and North Korea— by offering Russia a deal better than anything it can get from them.

This idea seems deeply flawed, as Christian Caryl notes in Foreign Policy:

Nixon’s visit took place at a time when Beijing and Moscow were already enemies, three years after a deadly exchange of fire over a disputed island on the Ussuri river had brought the two close to all-out war. Today, in contrast, Russia and China are closer allies than ever.

Russia is deeply dependent on China in just about every way that matters. China is the biggest customer for Russia’s coal and crude oil—a market that Putin would be ill-advised to jettison at a time when his economy is struggling. Western sanctions and the spiraling war costs have hit the Russian economy hard, driving up inflation, which in turn is fueling predictions of a devastating wave of corporate bankruptcies). The two countries share an often-contested border where they resolved long-standing disputes through a complex series of negotiations in the 1980s and 1990s; neither has any desire to relitigate the issue, or to have to use troops and money to refortify their frontiers.

Beijing has been giving the Russians vital military and technological support; by one estimate, China supplies roughly 90 percent of the computer chips currently used in Russian industry. Moscow and Beijing have developed overlapping interests in a variety of diplomatic and political realms, motivated by their deeply held desire to oppose the U.S. wherever they can. Russian and Chinese propagandists promote each other’s disinformation narratives across the world.

What seems far more likely is that Trump’s embrace of Putin and throwing into doubt America’s commitment to European security and the global rules-based order will do nothing to prise Russia away from China, since Putin will simply pocket any concessions and play both sides. But it will strengthen the position of China. Not only has it sown division among America’s western allies, by legitimising Russia’s aggression against Ukraine, it signals to Beijing that it could have a more open hand with its own territorial disputes.

Indeed, the WSJ reports that the sudden change in US foreign policy is already unsettling allies in Asia that similarly rely on US security guarantees:

In public, officials from Taiwan, the Philippines, Japan and South Korea, which rely on the U.S. for their defense, have expressed confidence that Washington will stand by them in case of aggression from China or North Korea. The U.S. has mutual defense pacts with Japan, the Philippines, South Korea and, as part of a wider agreement, Thailand.

But privately, some officials have expressed concern that Trump could pursue some kind of bargain with Chinese leader Xi Jinping over disputed territories in Asia or allow North Korea’s nuclear program to remain a threat.

Meanwhile China has been quick to seize the opportunity to present itself as a beacon of stability, not least in this speech by Wang Yi at the Munich Security Conference. The Chinese foreign minister’s attempt to present Beijing as a defender of international law and the multilateral rules-based system may have been hypocritical given its support for Russia in Ukraine and its subversion of the global trading system with its extravagant subsidies, but there’s no doubt that his overture to work with Europe will have resonated in parts of the continent.

China, of course, has compelling economic reasons to want to maintain an open trading system. Its economy is caught in a deflationary trap as a result of its burst property bubble and excessive investment in manufacturing. It needs access to global markets to offload its excess industrial inventory. At a time when the US and Europe should be working together to confront China’s unfair trade practices, Trump’s attacks on allies and disregard for international law and the rules-based system is more likely to bring Europe and China closer.

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4. Back to the 1930s

One thing that could bring China and Europe closer together is Trump’s plan to impose reciprocal tariffs on all America’s trading partners. I have written before about how dangerous this plan could be. But what was announced on February 13 went well beyond even what had been anticipated, since it is targeting much more than just tariffs. As the Council for Foreign Relations noted:

The White House is seeking a more ambitious approach in which the tariff rate would also take into account foreign-government subsidies, exchange-rate depreciations, and the export-promoting effects of value-added taxes like those used in Europe. Calculating reciprocal tariffs based on such a stew of inputs is more or less impossible, though U.S. officials will presumably make best-guess estimates. And if other countries retaliate on a similar basis, it could produce a global spiral of tariff increases.

Whether and how Trump’s plan could work is unclear. There is some doubt as to whether there is even a legal basis for it under US law. Meanwhile the practical hurdles are perhaps bigger than the legal ones, reckons the CfR:

If the tariffs are set to mirror precisely those charged by U.S. trading partners, it would mean that U.S. Customs and Border Protection would require different tariff schedules for each country—close to impossible for a short-staffed agency. Already, the Trump administration was forced to delay the immediate elimination of the de minimis exception for goods from China, which allows shipments of less than $800 to enter tariff-free under a truncated process, because Customs could not handle the volume of work associated with reviewing import documents and assessing duties on so many shipments.

What is certain is that if the plan is carried out, it would drive a coach and horses through international law and pose an existential threat to the rule-based trading system, says Ignacio Garcia Bercero, the EU’s former chief trade negotiator, argues in a new paper for Bruegel, the Brussels-based think-tank. That’s because international trade rules require all members of the World Trade Organisation to offer the same trading terms to all other members, the so-called Most Favoured Nation rule, whereas Trump is proposing setting all tariffs bilaterally.

Much would then depend on how the rest of the world responded:

If the European Union and other major trading partners were to decide to abandon WTO principles, the result would be total disruption of international trade and investment and an escalation of tensions that could lead to war.

A similarly stark assessment of where the world might be heading as a result of Trump’s decision to turn away from open markets was offered by Robin Harding in this excellent column in the Financial Times. He cited the financial historian Charles Kindleberger who argued that the absence of an economic hegemon in the 1930s - a leader willing to take some cost and risk for the sake of the whole - turned the Great Depression into an international catastrophe:

Without an economic hegemon in the 1930s, wrote Kindleberger, there was nobody to provide three crucial functions: to maintain a relatively open market where countries in distress could sell their goods; to provide long-term loans to countries in trouble; or to act as a global central bank, and offer short-term credit against collateral in times of crisis. The result was protectionism, currency devaluations, wrangling over war debts and contagious financial crises that swept from one centre to the next.

Even in good economic times, the US is no longer willing to offer these services, or only at a price. Donald Trump’s love of tariffs is becoming institutionalised. His attitude to supportive long-term lending is well-exhibited by the curious suggestion that American aid to Ukraine was actually an investment, and demands a financial return: a new war debt in the making.

Americans might well retort: why should we do this for the world? Reasonable enough, but if not America then who? And if the answer is “nobody” then we are back to the 1930s and should prepare for the challenges of that era.

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5. Make America Weak Again

Trump’s assault on the sources of American power extend well beyond throwing over allies and blowing up the global trading system. It also extends to torching the sources of American soft power. Two examples: the dismantling of USAID by Elon Musk’s Department for Government Efficiency, and Trump’s threat to withdraw America from multilateral institutions, notably the World Bank and International Monetary Fund. Both risk ceding global advantage to China.

For more than 60 years, USAID has been considered core to American soft power, providing humanitarian assistance to developing countries and promoting US interests. But the Trump administration announced on Sunday that it will eliminate 1,600 jobs at the U.S. Agency for International Development and place all but a small number of remaining employees on leave. Musk had previously promised that the agency would be the first “into the wood chipper”.

Musk’s “slash-and-burn” campaign will compromise America’s ability to compete with China for global influence, warns Larry Garber, a former senior USAID official under Barrack Obama, in a paper for the Council for Foreign Relations:

In Africa, for example, USAID programs enhance relationships between U.S. and African governments, which are necessary for maintaining access to critical minerals needed for the growth of a digital economy. Meanwhile, the destruction of a well-established aid industry are devastating to the image of the United States and a gift to adversaries.

Just as damaging to America’s soft power would be a US withdrawal from IMF and World Bank. Like the dismantling of USAID, the plan to exit the institutions established to help stabilise the global economy at the Bretton Woods conference in the 1940s was first floated in Project 2025, the Heritage Foundation’s detailed blueprint for the second Trump term. It has now been eagerly taken up by Musk’s DOGE. According to a primer on its website:

The US has more than $70 billion in appropriated and expended donations to these institutions. Withdrawing from all of them would return to the US Treasury vast sums to make room for President Trump’s tax cuts. A second important issue to clarify is the fact that the [multilateral development banks] have failed at all aspects of their ever-evolving missions.”

But this is astonishingly short-sighted, as Ngaire Woods, the Dean of the Blavatnik School of Government at Oxford University, explains in this piece for Project Syndicate. There is a reason why the IMF and World Bank offices are so close to the US State Department, Treasury, and Congress:

The US has consistently maintained tight control over these institutions, shaping their policies and leadership to advance its national interests. The US has always appointed the World Bank’s president, approved Europe’s choice to lead the IMF, and selected the Fund’s deputy managing director. It remains the only member country with the power to block major decisions unilaterally, as both the IMF and World Bank require an 85% majority.

The US been able to wield enormous leverage over these institutions to ensure that they follow its priorities, not least when Trump in his first term leant on the IMF to provide his “longtime” friend, the then-President of Argentina Mauricio Macri, with a $57 billion IMF program – the largest of its kind in the Fund’s history. Similarly, the US has used the World Bank to bolster security and economic alliances, address terrorism threats, and support the postwar reconstruction of countries like Iraq and Afghanistan following US-led invasions.

Perhaps most importantly, says Woods, the actual cost of US participation in the IMF and World Bank is far lower than many assume.

Every year, the Treasury Department evaluates the financial impact of the country’s contributions to the IMF. In the 2023 fiscal year, it reported an unrealized gain of $407 million.

Meanwhile the World Bank is funded by not by the US but its borrowers whose loan repayments cover its running costs. Nor does it rely on country donations but effectively finances itself by raising bonds. Although its bonds are backed by guarantees from member countries, it has never tapped its callable capital.

Consequently, each shareholder provides a small portion of its committed share as “paid-in capital.” For the US, that amounts to $3.7 billion– about 19% of the $20 billion in subsidies the federal government has given Elon Musk’s SpaceX over the past 15 years.

There is a strong argument that both institutions need reform, not least because they have strayed too far from their core missions. But a US withdrawal would not lead to the collapse of these institutions, because they provide global public goods. Instead, it would hand greater influence to China. It’s almost as if Trump and Musk are determined to Make America Weak Again.