A Painful Realignment: Peter Zeihan on Brexit Fallout


A Painful Realignment: Peter Zeihan on Brexit Fallout

Self-interest is the order of the day in foreign relations. That’s what Peter Zeihan is seeing in his role as a geopolitical strategist.

The relative stability that followed World War II was maintained through a tradeoff, he explained at the 72nd CFA Institute Annual Conference, hosted by CFA Society of the UK. The United States ceded economic benefits to other countries in exchange for their participation in a global defense network.

The international order that developed in the 1940s to contain the Soviet Union did not include contingency plans for anything other than a world dominated by two global superpowers. “It had never occurred to the Americans that the global system could ever go anywhere except for the logical endpoint of nuclear annihilation,” he said.

That global order no longer serves US interests. “Economically, it was never supposed to,” Zeihan said. “Then it wouldn’t be a bribe.”

Currently, we are in a geopolitical landscape where countries have spent decades developing economies that function in an interconnected, global trade network. Meanwhile, the United States has spent decades building a military force to defend that network, without a similar emphasis on trade.

Over the past few years, the priorities have realigned. Countries have been forced to deal directly with each other and try to determine how their defense capabilities can support their economic interests. “At this time of transition, who has the guns really matters,” Zeihan said.

He estimates that at the current rate of global naval buildout, the world’s combined forces will equal US naval power in 2240. “The United States is shifting from the greatest source of stability to the greatest source of disruption,” he said. “But it doesn’t have a policy to guide that at present.”

However, the United States does have a skilled negotiator guiding its trade policies. Zeihan explained that US Trade Representative Robert Lighthizer has the ruthlessness and expertise necessary to cut favorable deals. Zeihan summarized the current administration’s attitude: “We will use every tool we have to force whatever result we want on a tactical issue.”

This combination of factors is bad news for the United Kingdom. “There is no version of Brexit that will lead anywhere other than a hard divorce,” Zeihan said. He ultimately expects that the United Kingdom will lose its ability to negotiate in a position of strength with anyone outside of Europe.

Zeihan used the Destroyers-for-Bases deal during World War II to illustrate his point. At the time, the United States was negotiating from a position of strength and received eight UK military bases around the world in exchange for 50 destroyers. “Three centuries of imperial administration unwound in a day,” Zeihan said. “What the Trump administration is going to do to the UK will be at least that harsh.”

Why would the United States be willing to push so hard in negotiations with the United Kingdom? “This is how we treat family,” he joked. “Imagine how we treat countries we don’t like.”

“Second, and this is more of an American hang-up, there are only three countries in American history that have ever threatened the mainland,” he explained. One of them is Mexico, which was forced into a subordinate economic position.

The second country was the Soviet Union, according to Zeihan. “We took a certain amount of glee in the 1990s when we tightened the screws,” he said, “and we will never admit them back into any version of a system that we run.”

The third country was the United Kingdom: Zeihan expects London to lose its status as a global financial hub. The City’s economic traffic will shrink by three quarters, he said.

Where will that traffic go? Half of it, he predicted, will be claimed by the United States.

Follow the 72nd CFA Institute Annual Conference online with Conference Live. It’s an insider’s perspective with live broadcasts of select sessions, exclusive speaker interviews, discussions of current topics, and updates on CFA Institute initiatives.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image courtesy of Harry Richards

This entry was posted in Economics, Investment Topics, News and tagged , , , , , . Bookmark the permalink.