[SCMP Column] Khashoggi, trade and trust

October 20, 2018

Baron de Montesquieu observed more than 250 years ago that "Peace is the natural effect of trade. Two nations who differ with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling; and thus their union is founded on their mutual necessities."

One has to wonder what spin Donald Trump and Saudi Arabia’s Mohammed Bin Salman can provide for this ancient truism at the end of two appallingly mesmerizing weeks focused on Jamil Khashoggi and the Saudi consulate in Istanbul.

With the full facts of the final hours of Mr Khashoggi still ghoulishly unclear, the grisly snippets suggest a barbaric and unforgivable disregard by Saudi’s autocratic leader-in-waiting for the niceties of diplomatic civility. They also reveal the embarrassing haste of Trump and the White House to concoct alibis on Bin Salman’s behalf that might whitewash such brazen uncivilized murderousness.

It was surreal to watch Donald Trump complain that his good Saudi friend was – like his recently appointed Supreme Court justice Bruce Kavanaugh – being treated as guilty unless proven innocent, and then leaping to assure US workers that he would not willingly renege on orders to sell US$110bn of arms to Saudi Arabia. Montesquieu would have clearly understood: here is a union “founded on mutual necessities”.

Barak Barfi, at the New America think tank, captured well President Trump’s Faustian dilemma in a Project Syndicate column this week: “Saudi Arabia wears too many hats for America to abandon it easily. Though the US no longer needs Saudi oil, thanks to its shale reserves, it does need the Kingdom to regulate production and thereby stabilize markets.

“American defense contractors are dependent on the billions the Kingdom spends on military hardware. Intelligence cooperation is crucial to ferreting out jihadists and thwarting their plots. But, most important, Saudi Arabia is the leading Arab bulwark against Iranian expansionism.

“In the wake of Khashoggi’s disappearance, common interests and mutual dependence will almost certainly prevail over the desire to hold the Saudis to the standards expected of other close US allies.”

While for most of the world’s economies, Montesquieu’s view that people who trade with each other don’t fight wars with each other holds true, it seems that Saudi Arabia provides a special case.

Most relevant may be fascinating research by Prof Erik Gartzke at the University of Southern California, San Diego, on armed conflicts between 1816 and 2000. He found that countries with low levels of economic freedom were 14 times more likely to fight wars than those with high levels of economic freedom. Perhaps the concentration of economic and political power in a country like Saudi, and its reliance on a single strategically crucial commodity – it is the world’s leader exporter of crude oil – diffuses the normally-reliable linkage between trade and peacefulness.

The bizarre and embarrassing events in Istanbul, and the clear obsequiousness of Trump toward his Saudi friend, contrasts starkly with the trade war now recklessly engaged by the US administration against China (and in a less inflammatory fashion with numerous other trading partners). It is a worrying reminder of how easily trade war can deteriorate into fully-fledged armed conflict.

It is also a troubling reminder that trade cannot easily be engaged without trust – and that the US President’s willful disregard for the need for trust is a much deeper challenge to the foundations of our global trading system than any economic harm the tariff war might inflict.

As Trump has trampled underfoot commitments made in good faith by his predecessors – like withdrawing from the Trans-Pacific Partnership, or the Paris Climate Accord – he has undermined the US’s long-standing reputation as a reliable trading partner and investor.

By attacking the trade policies of long-standing allies like Canada, Japan or the EU as threats to national security, Trump has profoundly shaken the trust of the US’s closest trading partners.

By abandoning a carefully-developed system of compromise at the heart of hundreds of trade agreements forged both bilaterally and multilaterally, and putting in its place a blatantly beggar-thy-neighbour zero-sum strategy befitting a playground bully, he has taken a wrecking ball to the US’s reputation for reliability and trustworthiness.

It would be wrong to claim that the US’s reputation has yet been irreversibly harmed. Research by the Pew Foundation late in September showed clearly that if forced to choose, most people across the world would still trust the US over China. We all must hope that we will never be forced to choose, even though some recent provocations have made me wonder.

One obvious casualty of the collapse of trust must surely be contraction of the long and often complex manufacturing supply chains built (in particular by US multinationals) across the world. For manufacturers who need absolute faith in the strength of each link along such supply chains, the erosion of trust must be fatal – in particular if the links involve critical materials or technologies.

We will see very soon a shortening of supply chains, and keen concentration on speedy domestic development of all technologically critical components. Note the European Union’s recent alarums over European car manufacturers’ heavy reliance on batteries being made in Asia. With trust, such a reliance is unproblematic. Without trust, it is impossible.

If China is to deal successfully with the onslaught from the US, then in key meetings in coming months it needs to build trust in its reliability. Its talk of liberalization needs the support of real change. The coming month may be crucial – from Abe’s Beijing visit and the Shanghai import fair, to ASEAN and APEC leaders’ meetings and the G20 meetings in Argentina.

One can cynically say that with friends like Mohamed Bin Salman, Trump hardly has need of enemies, but the reality is that US reliability over past decades has built a store of goodwill and “soft power” with many economies that will not easily erode. Yuval Harari wrote in his recent book “Sapiens” that “trade cannot exist without trust, and it is very difficult to trust strangers.” For many China is still a stranger, and this needs to change.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

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