Matt Gertken
If monetary policy operates with long and variable lags, just imagine foreign policy.
“Containment” is the term that George F. Kennan and other U.S. policymakers used during the Cold War to describe a strategy of preventing the expansion of the Soviet Union and communism. If the U.S. could maintain free and prosperous states in the border territories, then the USSR’s military and ideological advance could be halted.
Kennan popularized the term in 1947, but the USSR did not collapse until 1991. Containment seemed dangerously flawed during the Korean war, the Hungarian revolution, the Cuban Missile Crisis, the Vietnam war, the Prague Spring, and the Soviet invasion of Afghanistan. But ultimately, it triumphed.
Next came the U.S. policy of strategic engagement, which also operated with long and variable lags – although with less success than Cold War containment.
Once the Soviets fell, the U.S. tried to deal with its rivals by persuading them to join the Western economic system. Free markets and free trade created huge incentives to cooperate and set aside political and military grievances.
Beneath the surface, the liberal democracies hoped to remake eastern rivals in their image. The rivals hoped to take advantage of Western naivety – and get rich – without reforming their authoritarian political systems. Still, the policy worked for three decades, with the U.S. distracted by minor wars.
When the Great Recession happened, Russia and China began to build new spheres of influence, fearing that Western capitalism and liberalism would take down their regimes. The U.S. lashed out, blaming these states for political polarization and de-industrialization.
Yet the failure of engagement did not become undeniable until 2022.
Russia invaded Georgia in 2008 and Ukraine in 2014, but Europe kept its doors open. The U.S. followed Europe’s lead. Only the larger invasion of 2022 convinced Germany to abandon the policy of Eastern engagement that it had maintained since 1969.
German Chancellor Angela Merkel, who served as Europe’s de facto leader during the financial crisis, retired, a dupe to Russian wiles. Now, French President Emmanuel Macron has emerged as Europe’s leader during its strategic crisis – he is promoting rearmament. Russian instability manifestly leads to outward aggression. It will be a long time before Europe pursues deep engagement with Russia again.
Meanwhile, from at least 2011, China doubled down on mercantilist economic policy, regional territorial ambitions, and technological theft. Only after Chinese President Xi Jinping’s revival of autocratic rule did the U.S. retaliate, in the form of then-President Donald Trump’s sweeping tariffs of 2018.
When Xi seized a third term in 2022 and packed the Politburo with loyalists, the Biden administration slapped export controls on computer chips bound for China. Controls expanded in 2023, with tougher enforcement and additional measures taking shape in 2024. Reelection would enable President Joe Biden to build a coalition of democracies to “contain” China’s modernization.
Biden’s phone call with Xi on April 2 revealed that none of the grievances have been redressed. China is trying to export its way out of its economic slowdown, squeezing U.S. market access, and continuing its maritime-territorial push in the Taiwan Strait and South China Sea. The one bright spot in Biden-Xi relations was supposed to be cooperation on climate change, but even Treasury Secretary Janet Yellen complained about green dumping during her recent trip to China.
Biden is considering whether to raise the Trump tariffs, even as Trump himself threatens to raise tariffs to 60%. Both candidates are competing to see who can punish China harder to win the manufacturing vote.
All the talk about a U.S.-China détente is wishful thinking in the context of the emerging Russo-Chinese de facto alliance. It would be geopolitical suicide for the U.S. to resume funneling capital and technology into China when China is capable of harnessing Russian and Asian natural resources and strategic support.
Containment will be the key word until the economic and geopolitical costs of conflict become so painful that the two sides are forced to negotiate a détente. Even then, it will be a détente within a larger and longer competition, just as were similar periods with the U.S. and USSR.
Finally, engagement is on its last legs in the Middle East.
The U.S. walked away from the 2015 Iranian nuclear deal in a telltale sign that the Americans no longer had the vision or resolve to uphold their own strategy. Washington tried but failed to put the deal together again in 2021-23.
Meanwhile, Iran – having ousted all the reformers – doubled down on its nuclear program, allied with Russia, and enabled its regional militant groups to attack Israel and international shipping.
Today, the Biden administration is trying to avoid an explosive confrontation with Iran right before the election. Iran, for its part, does not want to push its regional conflict so far as to trigger an oil shock, since the U.S. military would retaliate—and Trump would be more likely to get reelected and restore his “maximum pressure” policy.
Israel is about to retaliate against Iran’s April 13 attacks as we go to press. It is unlikely to launch a crippling bombardment of Iran’s critical infrastructure or nuclear program when it faces conflicts on its borders and lacks American support. But it can and will strike Iranian soil and then continue to attack Iran’s presence in Syria and Lebanon, as in Damascus on April 1. That will prompt further Iranian actions designed to force the U.S. to restrain Israel.
The Democratic Party, if it retains the White House in the next election, will have one last chance to try diplomacy with Iran. But given that Iran’s quest for a nuclear deterrent is well motivated by the need for regime survival, the odds of successful engagement are not high. After the U.S. election, the U.S. and Israel will likely reconverge on the need to contain Iran’s regional and nuclear ambitions.
That brings us back to containment.
Containment is regaining currency as the only way to stop autocratic regimes from spreading their influence and power. But as everyone can now see, “containment” is a nice word for proxy wars.
And it may not succeed. Democracies face the greatest challenge to global peace since the 1930s – and at that time they failed to prevent proxy wars from expanding into world war. Nuclear weapons may prevent great power wars, but then proxy wars will be all the more likely, including over nuclear proliferation.
Global financial markets will eventually wake up to high odds of further trade wars and supply shocks, just as they always eventually wake up to restrictive monetary policy after a period of rising rates. For the past two years, they have greatly benefited from the fact that geopolitics operates with long and variable lags.
Matt Gertken is the chief geopolitical strategist at BCA Research. More information on Matt Gertken’s geopolitical strategy is available here: https://bit.ly/3vW1Qes
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS Stoxx or its affiliates.
Tags: China, containment, financial markets, foreign policy, global trade, Middle East, Monetary Policy, supply chains, Tariffs, trade wars