Canadian Prime Minister Mark Carney outlines an architecture
For some decades the United States of America domination of the world has been falling. This is most obvious in economic terms. The US is no longer the world’s largest economy. It is easy to say that China is because of it has larger a population but caution in the comparison is necessary. Comparing GDP per hours worked, the US is seventh behind Belgium, Denmark, Ireland, Luxembourg, Norway and Switzerland. Americans have a higher per-capita GDP because they work more hours or, put the other way around, many Europeans use their affluence for leisure.*
But it is not only economics. Think of how many international organisations are now being undermined by the US because it can no longer get its way in them. While the US has done some generous and noble things over the last 85-odd years, its self-interest was always there. These days its actions are more likely to demonstrate self-interest without much generosity or nobility.
It is true that the US remains the world’s largest military power, but its loss of economic superiority is making that hard to sustain. Donald Trump implicitly admitted it when he demanded Europe increase its military spending, acknowledging that the US can no longer share the burden in the way it once did. As this column is written, an American carrier task force has steamed from the West Pacific to the Middle East in order to threaten Iran. Does that not mean that the US can no longer sustain contemporary operations in the two theatres? (As if to answer, the US has just announced it will be stationing fewer troops in Japan and South Korea.) The US once had 17 military bases in Greenland; today it has one.
The US dollar still dominates the international financial system, but yet again its role is diminishing. Its share of the currency reserves of the world’s central banks is falling, while the euro share is rising. The withdrawal from investing financially in the US may be accelerating. Most switchers emphasise that they are worrying more about the burgeoning US budget deficit – a sign of fiscal weakness – than politics.
The expectation in the past was this decline of US dominance would be steady but slow. China’s rising significance would be offset by India – with its population growth and greater productivity gains – becoming globally more important, while the EU would slowly – oh so slowly – get more coherence in its governance.
The expectation was that the rule of law would continue to underpin the world order. Trump has repeatedly and unashamedly flouted that framework, instead pursuing ‘might is right' while overlooking that the US is no longer as mighty as it once was. Arguably, its current apparent strength comes from everyone else being unprepared for such erratic aggression.
It was not Trump’s intention to accelerate the US decline. Its consequence has been that China’s significance has been increasing more rapidly than expected. The authority of the EU and Indian offsets have not grown as quickly. The lack of coherence in the US strategy is illustrated by Trump imposing higher tariffs on India than on China, so India is trying to reset its fraught relations with China. The guests of honour at the 2026 Indian national day were from the EU.
It is difficult to predict the future world. Economists struggle to explain the workings of a market with four major players; markets do not have the added complication of politics and the military. However, the immediate new scenario is a duopoly of China and the US. Duopolies are easier, but still difficult, to analyse. How will the rest of the world respond, mindful of ‘whether elephants make love or war the grass gets crushed’.
Groups of countries are beginning to organise themselves. That was a popular interpretation of the outcome of the Davos World Economic Forum. Trump went a step too far over Greenland and the Europeans (and the US bond market) resisted. Taco Trump retreated. (Taco: Trump always chickens out.)
I am not going to predict the next political steps, especially as they depend on an erratic Trump. But we can try to think what the new architecture might eventually look like.
The Davos speech by Canadian Prime Minister Mark Carney, who has been the governor of both the Canadian and British central banks, was widely acclaimed for setting out the architecture issue. His critical point was that ‘nostalgia is not a strategy’.
Carney told a story by Czech dissident Václav Havel. A greengrocer has a sign in his window: ‘Workers of the world, unite!’ He does not believe it. No one believes it. But he places the sign anyway - to avoid trouble, to signal compliance, to get along. And because every shopkeeper on every street does the same, the system persists. Havel called this ‘living within a lie’. The system's power comes not from its truth but from everyone's willingness to perform as if it were true. And its fragility comes from the same source: when even one person stops performing – when the greengrocer removes his sign – the illusion begins to crack.
Carney argued that it was:
‘time for companies and countries to take their signs down. For decades, countries like Canada prospered under what we called the rules-based international order. We joined its institutions, praised its principles, and benefited from its predictability. We could pursue values-based foreign policies under its protection. We knew the story of the international rules-based order was partially false. That the strongest would exempt themselves when convenient. That trade rules were enforced asymmetrically. And that international law applied with varying rigour depending on the identity of the accused or the victim. This fiction was useful, and American hegemony, in particular, helped provide public goods: open sea lanes, a stable financial system, collective security, and support for frameworks for resolving disputes. So, we placed the sign in the window. We participated in the rituals. And largely avoided calling out the gaps between rhetoric and reality. This bargain no longer works. Let me be direct: we are in the midst of a rupture, not a transition.’
Trump was infuriated. He immediately revoked the invitation to Canada to join his Gaza ‘Board of Peace’, which is probably not of great significance to anyone other than Trump’s acolytes (a cruder writer might call them ‘bum-lickers’). Then he threatened to raise tariffs on Canadian products not covered by their free trade agreement (to be renegotiated this year) by 100 percentage points (effectively prohibiting Canadian exports to the US in those products) using the excuse of the Canada-China deal which he had earlier praised. The fury is understandable, given that geopolitically Canada and the US have been close – closer than even Australia and New Zealand. The prohibitory tariffs would just as brutally penalise US consumers as Canadian producers so, like as not, TACO will trump Trump.
That does not point to the new international architecture. Getting to it may be a bit like getting agreement from a herd of (frightened) cats. Carney listed the steps Canada is taking:
doubling defence spending by 2030;
diversifying abroad;
pursuing variable geometry with different coalitions for different issues, based on values and interests. (On Ukraine, Canada is a core member of the Coalition of the Willing; on Arctic sovereignty, it stands firmly with Greenland and Denmark.)
an ‘unwavering’ commitment to Article 5 of the NATO treaty agreement that an armed attack against one member is an attack against all;
forming a buyer's clubs for critical minerals;
cooperating with like-minded democracies to ensure that AI does not force Canada to choose between ‘hegemons and hyperscalers’;
championing efforts to build a bridge between the Trans-Pacific Partnership and the European Union, creating a new trading block of 1.5 billion people.
New Zealand may take a small bow at his CPTPP-EU proposal. While it kept the required sign in its shop window, it has long been aware of how vulnerable it is given its size – Canada’s economy is about twelve times larger than New Zealand’s) – and position – David Lange famously described it as ‘a dagger pointed at the heart of Antarctica’.
So while supporting the rules-based world order as it appeared (keeping the notice in the window), New Zealand has pursued a backup policy of ‘open plurilateralism’ in economic relations. The noun is an alternative to ‘multilateralism’ (all countries) and ‘regionalism’ (New Zealand is hardly in any economic region). ‘Open’ is the notion that each deal is designed to enable others to join, as illustrated by Britain recently joining the CPTPP.
The CPTTP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) is perhaps New Zealand’s greatest contribution to this strategy (despite the US not finally joining). Success has many fathers but New Zealand was there and driving at the beginning. I recall my scepticism when Brunei, Chile, New Zealand and Singapore signed the first Trans-Pacific Strategic Economic Partnership Agreement in 2005. (What were these geographically diverse pipsqueaks doing?) It has evolved into a 12-member multilateral trade agreement covering more than14 percent of the global economy.
What Carney has in mind is not clear. Many CPTPP members already have free trade agreements with the EU. The economic barriers can be reduced (but don’t expect significant gains in dairy trade). What at this stage is critical is that New Zealand will be at the same table as 38 other countries which cover around 28 percent of the global economy. Add in some EU associates and it will be a kind of UN of mainly developed economies; the US will not be there.
Where this leads is uncertain. But as the (American) folk song says ‘step, by step the longest march can be won’.
* There are other European nations with hourly productivity close to that of the US. The EU economy is almost as big as the US economy, but it has a bigger population.