Reset Pax Americana: The West Needs a Grand Accord

The world is trying to make sense of the Trump tariffs. Is there a grand design and strategy, or is it all instinct and improvisation? But much more important is the question of what will now happen, as new possibilities emerge from the shock effect of the tariff announcements and from subsequent moves and counter-moves.

To judge what might happen next, one must see the through-line—namely, Trump’s long-held grievance about what he sees as unfair global economic arrangements and widespread freeriding on the U.S., and his willingness to deploy all instruments of power to set this right. For Trump, the functioning of the global financial and trading system has seen the U.S. incur the costs of entrenched trade deficits, hollowing out of the U.S. industrial base and overvaluation of its currency, a consequence of the reserve status of the U.S. dollar and U.S. Treasury bonds.

It is clear that Trump will no longer tolerate a situation where other countries gladly consume the security that the U.S. produces, at significant cost to U.S. taxpayers, without contributing materially to that security and while enjoying the prosperity it brings.

Bargains regarding prosperity and security are often intertwined. The 1944 Bretton Woods agreement was negotiated at a time when the postwar security order was being shaped. The deal ended in August 1971, when President Richard Nixon suspended the U.S. dollar’s convertibility to gold and introduced a 10 percent import tax to compensate for ‘unfair exchange rates’—overvaluation of the U.S. dollar. In September 1985 in what became known as the Plaza Accord, the U.S. agreed with leading western economies that the U.S. dollar would be devalued in a managed fashion to tackle a mounting U.S. trade deficit. All the while, the U.S. kept up its end of the bargain in protecting allies and partners.

We should not be surprised that from time to time, the U.S. might deploy its enormous strategic and financial power to reset the terms of global prosperity and security. Whether by design or otherwise, we appear to be in another such moment.

Through the shock of the Trump tariffs, the U.S. has created for itself an extraordinary opportunity to restructure the global trading and financial system, with two twin objectives in mind. These are to increase the relative gains from that system for Americans and to reallocate the costs of Pax Americana, so that they are borne more by allies and partners and less by U.S. taxpayers.

To this end, the U.S. should pursue a new global agreement, which might be called the Pax Americana Accord. It should bring all issues to the table in the process, so we are not dealing later with other, related shocks—say, with U.S. currency or debt issues—or with doubts over U.S. alliance commitments.

The best way to do this, in a way that would take maximum advantage of the opening that the tariff shock has created, would be for Trump to call an urgent meeting of what might be termed the ‘G7+’. This would not be a meeting whose objective would be to craft and issue a worthy but forgettable communique. Terms would be set out and agreed in outline, under the threat of total trade war. The details could then be hammered out over the remaining balance of the 90-day pause period.

The G7+ would consist of the U.S., Germany, Japan, Britain, France, Italy and Canada (as G7 members), along with India, Brazil, South Korea, Australia, Mexico, Indonesia (representing itself and the rest of Southeast Asia) and the European Union (in its own right and also representing the 24 non-G7 EU members). The G7+ would represent 67 percent of global GDP. Others, such as Turkey, Saudi Arabia, Switzerland, Argentina, the United Arab Emirates and Israel, could sign on to the new accord at a later date, as might Taiwan.

The meeting would agree the broad outlines of a Pax Americana accord, which would ultimately address and, as necessary, resolve the following issues:

—U.S. chronic trade deficits and U.S. complaints about tariff and non-tariff barriers to its exports;

—China’s deliberate manufacturing overcapacity, which is creating global trade and financial imbalances, unacceptable supply chain dependencies and a dangerous capacity for rapid war production, all endangering the security and economic resilience of the U.S. and its allies and partners;

—China’s re-exports to the U.S. by way of countries such as Mexico, Vietnam and Indonesia, which would have to be blocked, lest China evade what will be crippling U.S. tariffs and other trade barriers (if a U.S.-China deal cannot be separately done);

—Technological de-risking in relation to Chinese goods and services, to prevent China from gaining security advantages by passing high-risk technology into foreign economies;

—The enduring role of the U.S. dollar as the world’s reserve currency, a global public good that the U.S. provides;

—Long-term funding of the U.S. Treasury, whereby U.S. debt underpins global security (by paying for U.S. military capabilities, another global public good) but where others who consume that security also enjoy income returns as debtholders and are not liable for the recapitalisation of those capabilities;

—U.S. concerns about its industrial base, the strength of which also underpins global security and so represents another global public good;

—Defence spending of U.S. allies and partners, most of which will need to build greater capacity to defend themselves without having to rely on U.S. forces, at least in the early stages of a war;

—Potential for co-production of defence capability, in which allies and partners make larger contributions to U.S. development programs; and

—Strategic reservation of critical minerals and other tangible assets by U.S. allies and partners and the granting to the U.S. of concessional access to these assets.

This is an ambitious agenda. A Pax Americana accord would address U.S. trade grievances but more importantly would better spread the costs and risks of global security. It would reset the terms of Pax Americana such that it could be sustained. The U.S. would be reassured about its strategic solvency, and allies and partners would take an active stake.

This would require negotiation of complex deals and arrangements. Achieving it would mean treading a narrow path. Careful and precise execution would be required, especially to reassure financial markets, which are always inclined to lose their minds during periods of uncertainty. If only we had a modern-day James Baker, the driving force behind the 1985 Plaza Accord. With the mandate of Reagan, who set the direction without managing the details, Baker deployed U.S. power through velvety diplomacy in pursuit of U.S. interests, knowing that U.S. allies and partners would always prefer to deal with America, even when it was having a bad day. Has their attitude changed from Baker’s time? We are likely to find out over the next 90 days.

China will have to brought into any accord at some point. The underlying problems that have led us to this point are largely a consequence of Beijing’s strategy of concentrating industrial power in China. This has stunted development of a services-based economy in China, distorted global trade and supply chains, hollowed out Western industrial bases, delayed the industrialisation of the Global South and created national security and economic resilience risks for the U.S., its allies, partners and others.

Through a concerted strategy, as sketched out here, global trade could be rebalanced such that China would have to divest itself of overcapacity, including to the benefit of less developed countries.

By reallocating the costs of Pax Americana, the U.S. would gain more financial and strategic resources to deal with the risk of China’s growing power and its strategic ambitions. It would be sustainably solvent, sitting at the centre of a reformed global system of prosperity and security. That would be worth the volatility of recent days. Whether we have arrived here through great cunning or as a consequence of instinct and improvisation does not matter much. What matters is the art of getting the deal done.

Michael Pezzullo is a former deputy secretary of defence and was secretary of home affairs until November 2023.

This article appeared originally at The Strategist (ASPI).