Implications of the US receding as the "global policeman"
Updated: Sep 9
Uncle Sam is increasingly retreating. Expect consequences.
Source: Toward Freedom
A new landscape
Under the Biden administration, there has been a significant shift by the US away from global conflict in which they are a third party aiming to maintain stability rather than directly involved. This is despite the inflammatory actions of both China and Russia threatening invasions and Iran actively pursuing nuclear weapons. Whilst Biden is much less confrontational than Trump, he may be inadvertently opening the door for greater global conflict by allowing other superpowers to gradually push the boundaries of what is acceptable, leaving Taiwan to be a playground for Chinese fighter jets and the Ukrainian border a tense environment. In part, the move away from foreign intervention is brought about by a shift in the views of the electorate who recognise that the US no longer holds as much weight as it did a few decades ago having seen the events in both Afghanistan and Iraq. Therefore, the likelihood is that in the coming years, smaller economies will have to find other ways to defend themselves whilst the US looks to find unity and cohesion on domestic issues. This insular approach is in keeping with much of the world as countries look inward to build themselves up again during the COVID pandemic whilst putting foreign policies on the back burner.
With the role of the US diminishing, one way in which economies can protect themselves is to restructure their budgets with a heavier weighting toward defense to deter any possible attacks. Possibly more important than throwing money at the issue is for these countries to draw on their alliances for support in terms of both manpower and intelligence by pushing aside long-running squabbles in favour of protecting their futures. Whilst many criticise the US government for their withdrawal, it was inevitable as the Afghan war drew on that eventually the US would decide to leave, and so other countries should take note and prepare themselves as best they can. Globalisation is a wonderful feature of the modern economy, but security is the one key aspect that cannot have interdependence because everyone will prioritise themselves in a crisis.
As the US shrinks there is unlikely to be any single country to fulfil its role as no others have both the size and appetite to do so, which means that the global political landscape will change and with it so will markets. The major implication for emerging markets is that instability will ensue over fears regarding political stability and the interests of governments will be questioned. The risks of corruption will rise, and investors may shy away due to the sharp rise of ESG investing and concerns about the responsibility of companies and the government itself. The US acted to an extent as a guarantor for the actions and governance of these nations and so other countries were more likely to treat them favourably, but now these markets will be free and in particular, key macroeconomic indicators may fluctuate wildly if dictators act freely as seen in by Venezuelan hyperinflation last year. One thing which many of these economies lack is the correct infrastructure to use the natural resources and so many may follow in the steps of African nations and join into exploitative partnerships with rich nations whereby in return for basic infrastructure, they give up the rights to their resources. So, commodity trading in these economies will fall as the US fade from their nations due to alternative partners acting in a much more malign manner and abusing power as opposed to offering help.
America receding from the role of peacekeeper has the potential to leave many power vacuums within governments which can lead to precarious economic conditions as instability drives away investors. Those still willing to partner with such nations in their transitory phase will likely have bad intentions of exploitation and so the US must withdraw carefully and ensure that countries have good enough frameworks in place to adequately support themselves. Countries should prepare by forming alliances and inflating defense budgets as the independent security of nations is tested with others waiting to pick up the pieces if they fail. The debate as to whether the US is morally correct to remove itself is now irrelevant for these countries as they should prepare to have their physical and economic stability stress-tested to an extent not seen for decades.