August 21, 2017 – This post was written by Cailey Stevens and Josh Ashkinaze
This blog is part of a a 7-part update series on FSG’s 2017 Events to Watch. Additional updates can be found below:
In December 2016, FSG released the report Events to Watch for 2017, which profiled the major disruptors that multinational companies should evaluate to ensure the resiliency of their strategic plans. As part of a series of blogposts, we seek to review and update FSG’s view on the likelihood, impact, and signposts to monitor for each of the seven disruptors we profiled in the report. This post will evaluate the downside disruptor “RIP Pax Americana.”
Events to Watch for 2017: RIP Pax Americana
In certain regions of the world, like Eastern Europe and East Asia, the presence of the United States’ military provides an implicit guarantee of protection should regional tensions flare up. This implicit guarantee reduces risks and frictions that raise the cost of doing business. In this scenario, FSG envisioned a removal of this guarantee as President Trump ignored longstanding alliances. The retrenchment of the US as regional security guarantor would transform the business environment, allow China and Russia to assume more dominant positions, and cause US allies to boost defense spending at the expense of investments in infrastructure, health, and education.
Impacts on the operating and market environment:
- Aversion to long-term investment: Russian and Chinese military exercises would increase the perception of risk and deter investment in their respective regions
- Military-spending boom: former US allies would divert government spending to defense and invest in independent nuclear deterrents
- Uneven playing field: Russian and Chinese companies would gain preference over western MNCs as emerging-market governments catered to assertive regional powers
- Flashpoints of insecurity: Costs would increase when persistent tensions flared up in the Baltics, Caucuses, Middle East, and the South China Sea
- Pressure on channel partners: local channel partners would face rising costs from supply disruptions or direct government intervention, and could suffer reputational damage for working with American MNCs
Signposts to Monitor Revisions
In our “Events to Watch for 2017” report, FSG singled out the following set of signposts for the “RIP Pax Americana” event:
- Acknowledgment of Russian regional hegemony: While the US has not fully acknowledged Russia’s regional hegemony, the Executive branch has been hesitant to censure Russia’s activities and is unlikely to do so in the future. Congress passed legislation strengthening sanctions on Russia for its annexation of Crimea, interference in the US presidential election, and involvement in Syria. Importantly, the bill includes a clause blocking President Trump from lifting the sanctions without the consent of Congress; signaling that lawmakers thought there was a significant probability he would try. The Administration has also failed to responded to recent Russian military activities. On July 12, Russia deployed antisubmarine helicopters to carry out drills off the coast of Kaliningrad, a territory between Lithuania and Poland (both NATO members). And on July 25, China and Russia held joint military exercises in the Baltic Sea. The passage of the Russia sanctions bill demonstrates that although President Trump may not be committed to countering Russian bravado, Congress certainly is. As long as this is the case, President Trump’s disregard for existing security alliances in Eastern Europe will be tempered by the Legislative branch
- US military pullback from East Asia: The US has pulled back from East Asia. In response, China has been assuming more economic and military leadership in the region. President Trump’s withdrawal from the Trans-Pacific Partnership (TPP) shifted trade leadership to China and the Association of Southeast Asian Nations (ASEAN). Indeed, talks around the ASEAN-led Regional Comprehensive Economic Partnership (RCEP), which has China’s support, have accelerated in the wake of TPP’s dissolution. President Trump has also been hesitant to maintain US military guarantees in the region, having suggested that South Korea and Japan develop their own nuclear capacity. Perhaps sensing American reticence, India and Pakistan joined the Shanghai Co-operation (SCO), a China-led forum for military and economic support. On July 11, China sent troops to establish its first overseas base in Djibouti, foreshadowing a stronger global security role. US retrenchment has also encouraged other countries to move towards military self-sufficiency. Shinzo Abe of Japan suggested amending the constitution to give legal standing to the Self-Defense Forces (SDF), a military barred from being called such by US-imposed conditions after WWII. Possibly expecting an emboldened China, Taiwan is also planning a military expenditure increase. President Trump has attempted to work with China to defuse North Korean nuclear tensions. In a context of escalating threats from North Korea, it is possible that the US and China could work together to ensure greater security in East Asia. However, it is also possible that a unilateral action by the US against North Korea would estrange US allies and cause security in the region to deteriorate further
RIP Pax Americana was originally considered to have a likelihood of 10% during 2017. This event was assigned a low probability because the dissolution of longstanding alliances is rare. While events associated with the signposts have materialized, it has become evident that the retrenchment of US military presence will not be uniform across regions. RIP Pax Americana is becoming more likely, but the specific likelihood varies by region. How the US and NATO engage with Russia’s attempts to reestablish its sphere of influence will differ from how the US and its Asian allies engage with China and North Korea. Apart from President Trump’s policy decisions, the dissolution of Pax Americana may be a byproduct of the evolution of the international system. In its focus on the US as the global security guarantor, Pax Americana is a remnant of the cold war. As emerging markets build momentum and regional hegemons gain power, it is increasingly unlikely that Pax Americana will continue in its current form.
Actions to Take
Considering the increase in the likelihood of the “RIP Pax Americana” event, multinationals should ensure channel flexibility and evaluate downside effects of reduced B2B spending across East Asia and former soviet countries. FSG’s Events to Watch for 2017 report provides in-depth scenarios, expected impact on business performance and operations, as well as recommended frameworks for contingency planning and effective market monitoring.