The US Addiction to the Marshall Plan, Using the US Dollar as a Weapon, and the Impact upon the Belt and Road and Globalization

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Op/Ed by Chris Devonshire-Ellis

The current United States administration, with its recent threats of trade tariffs on China, and use of trade sanctions in Russia and elsewhere appears to be shoring up protection for the Marshall Plan it originally introduced over 70 years ago. That plan, which was originally conceived at the end of World War II, was designed to help rebuild Europe and provide financial aid. In return, the participating countries would agree to purchase American made products.

The United States gave over US$12 billion (about US$100 billion today) in economic assistance, while the plan was in operation for four years beginning April 3, 1948. The official goals were to rebuild war-torn regions, remove trade barriers, modernize industry, improve European prosperity, and prevent the spread of Communism. In total, eighteen European countries received Plan benefits. Although offered participation, the Soviet Union refused, and also blocked benefits to Eastern bloc countries, such as Hungary and Poland. China was not part of the Marshall Plan, but did receive a credit line (which had to be repaid) of US$1 billion until 1953.

The original Marshall Plan was subsequently replaced by the Mutual Security Plan at the end of 1951; that distributed about US$7 billion annually until 1961, however, with more emphasis on military support and became a precursor to NATO. This was replaced with the current United States Agency for International Development, which now conducts most of its financial affairs in poorer regions of the world and crisis hit areas. The trade impact of the Marshall Plan was to introduce European consumers to American made products, and while the financial aid in doing so eventually ceased, the familiarity and habitual use continued and does so today.

Aid has been replaced with preferential trade agreements, often going hand in hand with military support. In the EU, for example, member states must join NATO. That commits European nations to purchasing US military equipment, an issue French President Macron complained about recently among calls to instead use the money to develop a European Army. President Trumps response was telling and a long way from being polite. On one hand, there is, for Europe, a real threat of a return to conflict.

On the other, an American hand that continues to extract cash to prevent this, and will not tolerate any systemic change. The US wishes to keep the EU permanently attached; it is, after all, a major consumer of American goods. It also has a vested interest in keeping conflicts alive and talking up threats, and from Europe’s perspective, especially against Russia, which remains a major power. Since the end of World War II, this concept has worked very well. Up until recently.

The dependence upon keeping Europe as a consumer of American goods, and Washington’s protection of US trade and military interests as concerns Europe is now being tested. This long term continuity is now under threat, and is largely due to events 25 years ago that gave rise to the development of China. Back in the early 1990’s, the Soviet Union had collapsed, thereby essentially removing Russia as an immediate threat.

Almost at that same time, American businessmen and politicians began moving into China under the essential belief that China would go the same way as the USSR and fracture unless it revitalized its economy and began to open up to foreign investment. I began Dezan Shira & Associates as a consulting practice advising foreign investors in 1992 as a result of this. I also recall the mindset of extremely powerful American business leaders, captains of industry, and diplomats at the time: China had a market of 1.2 billion people and they wanted them to ‘buy American’. In hindsight, that now appears rather naive.

In fact, although China did open up its market to foreign investment, it only did so in a manner in which factories would be built, almost exclusively with foreign money, with the Chinese side just providing the land use and the cheap labor. The number of JV deals I negotiated on those terms at the time was unbelievable, way into the hundreds. But there was a catch – most of the production went to service markets overseas, not in China. Although foreign manufacturers in China with existing supply chains to point of sale back in their home countries could, did, and do make a lot of money – even today Chinese workers see very little income in their own pockets for their work.

There is a simple reason why Apple has become the world’s first trillion dollar company. But China has continued to hold the controls for its domestic market. This upsets the US and EU, who require not just cheap labor (although that is slowly moving elsewhere in Asia) but market access as well. In return, President Trump has threatened tariffs upon Chinese goods entering the United States, albeit under an ongoing 90 day ceasefire to come to some sort of agreement. I examined the impact of tariffs upon Chinese exports to the US compared to other Asian countries in this article here.

In a way, it is a continuation of the Marshall Plan ideology: open up your markets to the United States. If not, there won’t be any financial support. The only thing that has changed since then is a new American aggressiveness in pursuing this goal. The recently enacted Countering America’s Adversaries Through Sanctions Act (CAATSA), was approved by the US Congress last summer. The legislation allows Washington to introduce penalties against enterprises and individuals that are seen as hostile towards the US or loyal to regimes that are hostile to the US. The definition, however, remains ambiguous over what the term ‘hostile’ actually refers to. While CAATSA refers specifically to sanctions against Iran and Russia, the reasons for doing so remain contentious and debatable – Iran had previously signed off on an agreement with the US over nuclear non-proliferation to allow them to trade, while the Russian sanctions relate to the annexation of Crimea, a previously Russian held territory that had been gifted to Ukraine in 1954 and of which the majority of citizens were Russian.

CAATSA, therefore, is seen by some as introducing sanctions against regimes the US competes with, while either creating or using conflicts or differing perspectives to justify them. Increasingly the interpretation by Washington seems to refer to ‘competitive’. The CAATSA document, for example, specifically targets Iranian and Russian crude oil supplies. Both nations wish to sell to Europe, who also wants to buy energy. However, that impinges upon the interests of the US, who also wishes to sell oil and gas to Europe. At higher prices. In fact, the US is not even in the top ten in holding the world’ s oil reserves and is placed fifth in terms of gas reserves.

Nation Reserves (Billions of barrels)
Venezuela 298
Saudi Arabia 268
Canada 173
Iran 156
Iraq 141
Kuwait 104
United Arab Emirates 98
Russia 80
Libya 48
Nigeria 37

(Source: Global Europe Anticipation Bureau)

Nation Reserves (Trillion cubic feet)
Russia 1,688*
Iran 1,187
Qatar 885
Turkmenistan 353
United States 334
Saudi Arabia 290
United Arab Emirates 215
Venezuela 195
Nigeria 182
Algeria
(Source: Hydrocarbons Technology)
159
*Russia’s share equates to 25% of the total global reserves

It is interesting to note that in the global energy sector, the US’ main competitors and its relations with them: Venezuela, Iran, and Russia all feature. All are under heavy trade and financial sanctions. The US, meanwhile, uses the threat of Russia to discourage the development of the Russian-EU Nordstream gas pipelines – and impose sanctions on Russia to prevent it happening.

The US is using sanctions as a means to preserve the effects of the Marshall Plan – buy American. That is exactly the mantra behind President Trump’s “Make America Great Again” slogan – a return to the Marshall Plan era where Europe purchased from the United States. Competitors to that now face sanctions and penalties. That is hardly ‘free trade’.

The difficulty with this extended Marshall Plan objective as concerns China is that the Chinese economy is rather more robust than that of the old Soviet Union, and that the Chinese have purchased huge amounts of US debt. The US essentially owes China US$1.2 trillion. The two economies are also trade intertwined, with hundreds of thousands of American employees involved in the US-China trade space, while a US-China trade war and imposition of tariffs would see prices on many imported Chinese made products shoot up. The outcry from the voting population would become shrill, yet corporate damage may already have been done: US companies relying on Chinese imports are now either cutting back their exposure to the domestic American market, relocating their manufacturing plants from China, and generally seeking market opportunities elsewhere in what may become a volatile US consumer base. China can probably stand up to the US, and Beijing has already signaled its deep displeasure at the arrest of a Huawei executive accused of breaching American sanctions by trading with Iran. One wonders what the outcry in Washington would be if the Chinese arrested an American executive for trading weapons with Taiwan.

This new tendency of the United States to now bully its way into new markets using tariffs and continue to defend its “European trading rights” some 70 years after the end of World War II via imposing sanctions is not entirely going to plan. The sanctions introduced upon players such as Russia, Iran, and potentially China in order to bend the international trading community to its willpower is having consequences. While the United States and the US dollar continue to dominate global trade, a gap between the US as a trade partner and the dominance of the US dollar is beginning to grow. As I explained here, the US is now behind both the EU and China as a net exporter, while global trade in dollars still accounts for the bulk of international transactions. The US will decline as an exporter in coming years – India is expected to overtake the US in export volumes by 2025. Of the top ten most traded currencies globally, most of these are supported by the US dollar while several are now way behind many Asian countries as well as Russia in terms of their GDP clout. India, Russia, South Korea, Mexico, Saudi Arabia, Brazil, Indonesia, Turkey, and Iran all have larger GDP’s than Australia, Switzerland, Sweden, and New Zealand. The latter are among the world’s top ten most traded currencies, the former aren’t. It has stopped making any sense. Continuing with a global trading basket including numerous small currencies is both unsustainable and ultimately undesirable.

Meanwhile, the reliance of the global trading community upon US controlled payment systems, such as SWIFT along with card payment systems such as Visa and Mastercard is also being questioned. The United States has been using these systems as a weapon in its trade sanctions, for example, recently cutting off Iran from the SWIFT interbank network. Russia is anticipating the withdrawal of payment services by Visa and Mastercard from most of its banking network from January 1.

Russia is also the lead nation in the Eurasian Economic Union, which sits between the EU and China. With a US$5 trillion GDP, the EAEU is a significant part of the Belt and Road. Yet it has de-dollarised 70 percent of its internal trade away from the US dollar this year in a market that has been growing at rates of 38 percent per annum. Russia, Iran, and Turkey are implementing a new “Foreign Trade Action Plan” to cease all US dollar trade between them, while India and the UAE have just done the same.

This behavior by the United States to protect its mantra and interests of “buy American” is coming at a yet-to-be-determined price. Russia, in response to the Visa and Mastercard situation, has been developing its own card payment system, Mir, and had issued 38 million of these by June this year. China has been developing its Union Pay global system, and both, along with Iran and India, have been developing other payment platforms such as Alipay, WeChat, Yandex, Digikala, and Myntra among several others. All have the potential to evolve away from the current SWIFT/Visa/Mastercard usage and transfer money around without having to route through US controlled and monitored financial networks.

The impact then of the more aggressive nature of the Marshall Plan-style attitude of President Trump and the current Washington hawks is already starting to be felt. President Trump himself has stated he is “against globalization” and in this respect he is ushering in a US era that will not be participating in such a concept as much as it did before.

Whether or not the US is wise to continue to cling to its Marshall Plan era strategy of “buy America” and “Make America Great Again” while at the same time threatening sanctions and tariffs on countries that stand in its way remains to be seen. This is especially so when China holds over a trillion dollars of American debt, and new technologies and international systems are being developed externally from the influence of Washington. America, wanting to be great again, continues to refer to its past.

In direct contrast, China, Russia, and other nations in Asia, South America, and Africa are moving ahead. Turbulent times await as this transition develops.

About Us

Silk Road Briefing is produced by Dezan Shira & Associates. Chris Devonshire-Ellis is the practice Chairman. The firm advises international businesses throughout the Eurasian regon and has done since 1992. Chris has lectured at Cambridge University, Peking University, the Moscow HIgher School of Economics, and many other academic institutions on the impact of China’s Belt & Road Initiative. He may be contacted via silkroad@dezshira.com or visit our practice website at www.dezshira.com

 

 

Related Reading:

The Case for the Belt and Road’s Alternative Currency Basket


What the CPTPP and RCEP Mean for China and Asia-Pacific Trade


China’s New Economic Silk Road

This unique and currently only available study into the proposed Silk Road Economic Belt examines the institutional, financial and infrastructure projects that are currently underway and in the planning stage across the entire region. Covering over 60 countries, this book explores the regional reforms, potential problems, opportunities and longer term impact that the Silk Road will have upon Asia, Africa, the Middle East, Europe and the United States.

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