Macroeconomic & Geopolitical

Metternich, Modi & Markets

February 2020 – 3 min read
Don’t count on 19th-century diplomacy to tackle 21st-century challenges.

European diplomacy once centered on a theory that the best way to keep peace and stabilize financial markets was to preserve a "balance of power" that would prevent any one country from growing too strong and pushing others around. But with global supply chains—and the world's economy—under threat from epidemics, technology rifts and tariffs, President Donald Trump's efforts to balance China’s rise with a visit to India this week look very much like yesterday's answer to today's problems.

Balancing shaped European relations from the Peace of Westphalia in 1648 to World War I. Among its more prominent practitioners was Austria’s Prince Klemens von Metternich, who engineered his country’s entry into the alliance that defeated Napoleon and later resisted Russian ambitions in the east. Historians argue about how successful it was in keeping the peace, but it was axiomatic that preventing the emergence of a single power was in everyone else’s interest. For the most part, avoiding war was good for bondholders, too.

Economic interdependence, technological integration and legal norms have changed what is acceptable in modern diplomacy, but some habits die hard. Trump’s schedule in India seems defined by his personal relationship with Prime Minister Narendra Modi, whom he hosted in Houston last fall at a vast “Howdy Modi!” rally. But George W. Bush and Barack Obama both understood the logic of warmer ties with what is now the world’s fifth-largest economy (between Germany and the United Kingdom) and increasingly cultivated relationships with Japan and Australia, with an eye on China’s rising influence in Asia.

"Economic interdependence, technological integration and legal norms have changed what is acceptable in modern diplomacy, but some habits die hard."

Building a network of like-minded states to engage a growing China makes sense and was central to the logic of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the Pacific Rim trade agreement that went ahead without U.S. participation. Bilateral efforts to steady or contain China’s rise, however, seem beside the point in a world where the balance of military and political power look irrelevant in the face of transnational threats to growth.

This month, of course, the market’s worries are focused on the spread of the coronavirus. The number of new cases seems to be stabilizing in China, although investors still wonder if they can trust the official numbers or reports that factories are humming back to life. Even after China declares the “all clear,” it will take longer for foreign partners to resume business as usual.


Note: Confirmed coronavirus (2019-nCov) case counts in China compiled by Bloomberg Newsroom. Counts are subject to change as governments survey and confirm cases. Data are based on reported values as of Midnight China Standard Time.
Source: Bloomberg. As of February 21, 2020.


Note: Confirmed coronavirus (2019-nCov) case counts compiled by Bloomberg Newsroom. Counts are subject to change as governments survey and confirm cases. Data are based on reported values as of Midnight EST.
Source: Bloomberg. As of February 21, 2020.

There is even less faith in the data from elsewhere in Asia (or the Middle East or Africa), where the medical infrastructure to identify and contain the disease is hardly reliable. All this raises suspicions about current scenarios that involve a little fiscal and monetary support getting us back to initial growth targets by the end of the year. The IMF’s economists are sticking to forecasts of 3.3% growth this year, up from 2.9% in 2019, but the strength of their conviction is wavering.

A healthier relationship between Washington and New Delhi doesn’t do much to address the other central risk emerging from China around diverging technology supply chains, either. Concerns around cyber-espionage and intellectual property theft have fueled the Trump Administration’s measures to block Chinese purchases and sales of advanced technology.

Last week, these efforts included Acting Chief of Staff Mick Mulvaney warning British counterparts that their inclusion of Huawei equipment in a 5G telecommunications network would threaten longstanding intelligence sharing. President Trump overrode his Commerce Department’s intention to stop the sale of General Electric’s latest aircraft engine to China, but the future of industrial supply chains across Asia looks increasingly uncertain.

While the president talked up a possible U.S.-India trade deal last week, the prospects remain limited and will hardly restore confidence to a global system where tariff threats lurk everywhere. Trump, who has famously declared himself “tariff man,” recently dubbed India the “tariff king” and expelled the country from a program of trade preferences for developing countries.


Source: Factset. As of October 31, 2019.


Source: Factset. As of October 31, 2019.

Prime Minister Modi has been liberalizing the Indian economy, but the protectionist impulses are strong. Moreover, for all the historic tensions with China, its model of welcoming investment while protecting domestic markets may be more relevant than anything a substantive trade deal with the United States might offer.

Of course, cultivating better relations with a country that will only grow larger and more important to the global economy makes sound strategic sense for the United States. And there is even important symbolism in a planned “Namaste Trump!” rally at the world’s largest cricket stadium in Ahmedabad, the capital of Modi’s home state of Gujarat.

But expecting that any re-balancing of Asian powers will help address a lengthening list of disagreements with China harkens to a long-ago world of international relations. Epidemics, splintering supply chains and looming tariffs will drive investment returns and financial markets far more than any fresh attempts to reshape Asia’s diplomatic geometry.

Christopher Smart, PhD, CFA

Chief Global Strategist & Head of the Barings Investment Institute

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