Facing a Derelict Fed, Trump Can Use the IEEPA to Boost Growth

Last Friday, our financial markets gyrated wildly as President Donald Trump made clear he would not back down in the current trade conflict whereas Federal Reserve Chairman Jay Powell suggested in his speech that while the Fed will react to economic developments it will not proactively coordinate its policy with the Administration. Amazingly, former NY Fed President Bill Dudley today wrote the Fed should not help boost growth amid the trade war and should actually consider setting monetary policy to make it harder for Trump to win re-election. This bastardization of so-called central bank “independence” to hurt an American President is deeply opposed to our democratic values and a blatant interference in our elections. So on the Fed, the view apparently ranges from not coordinating with Trump to actively undermining him.

This puts Trump, and by extension America, at a self-imposed disadvantage in trade talks with China as President Xi Jingping can have all layers of his dictatorial government coordinate policy. Trump must do everything in his power to boost American economic growth to ensure we maintain maximum leverage in this generational battle against long-running Chinese economic aggression.

As such rather than helplessly bemoaning Powell’s stubborn refusal to aggressively cut rates, Trump needs to use the powers of the Presidency to take unilateral action to boost US growth. In and of itself, the fed funds rates of 2.125% is not particularly high, certainly not in a historical context. However, relative to the rest of the world, US rates are exceptionally high. Japan, Europe, and Switzerland have negative rates; Australia, the UK, and Canada are each below ours. The fact the US offers the highest interest rates in a world awash in $16 trillion of negative-yielding debt has made us a magnet for foreign capital, which has flooded onto our shores.

Our relatively high interest rates have pushed the dollar substantially higher; indeed, the trade-weighted dollar is essentially sitting at an all-time high. The Fed’s relatively tight interest rate policy, despite below-target inflation, is pushing the dollar up, which is a major headwind for American exporters and the manufacturing sector, unnecessarily slowing economic growth and weakening our hand against China. The ECB and BOJ among others have used super-low interest rates to artificially weaken their currencies against the dollar. In other words, these governments have manipulated the dollar to unfair heights; US policy aimed at weakening the dollar would help return it to its fair, fundamental value. Fortunately, while the President cannot force the Fed to reduce interest rates, he can act to stop the dollar’s rise and strengthen our manufacturing sector, which would provide the same relief as further Fed rate cuts.

President Trump should immediately declare our trading relationship with China, one defined by chronic trade deficits and stolen technology, a national emergency, invoking the powers of the International Emergency Economic Powers Act (IEEPA). This statute gives the President broad power to regulate international commerce. Namely, section 203 empowers the President to “investigate, regulate or prohibit any transactions in foreign exchange.”

Using this power, President Trump must immediately impose a charge on all foreign capital purchases of US dollars. This could be enacted in one of two ways. Either Trump could impose a 5-10% tax on all foreign financial purchases of US dollars or impose a 100% marginal tax on purchases of US dollar above a certain exchange rate (ie 7 yuan to USD), which would eliminate the ability of other governments to keep weakening their currencies against the dollar. Either of these actions would make it costly for foreign investors to push up the value of the US dollar and enjoy excessive interest rates offered by the Federal Reserve. If foreigners want exposure to our deep, liquid, high-yielding financial markets, they will have to pay an entrance fee. By curtailing this financial flow, the US dollar would immediately reset lower by several percent, giving a shot of stimulus to our export sector, which would help reduce the US trade deficit. A lower dollar also makes it easier for domestic producers to compete against foreign producers within the US consumer market, a benefit to our manufacturing sector.

While Chairman Powell still controls the Fed funds rate, by taking firm control of US dollar policy, President Trump would be able to nullify the impact of higher interest rates that has caused him to criticize Fed policy so vocally, by functionally eliminating the relative rate differential between the Fed and other central banks. This action would also make it clear to President Xi that America will no longer fight this trade war with one arm tied behind our backs. Just like China, we also have the capacity, even if by unconventional means, to coordinate policy across government to maximize growth and enhance our leverage in trade talks.

And let there be no mistake, the current situation with China is a national emergency. For two decades, America’s policy of economic appeasement has let China amass over $3 trillion in foreign currency reserves, build new cities, and amass major military might all while destroying America’s manufacturing base, stealing our technology, hacking into our systems at OPM and elsewhere, and letting fentanyl poison our citizens. Combatting the aggression of the oppressive regime that seeks global superpower status is the defining issue for my generation, just as defeating the Soviets was the existential fight of the latter half of the 20th century. If this isn’t a national emergency, what is?

In the past, the Fed has responded to such national emergencies. One of the Fed’s finest hours was during World War II when it coordinated policy with the rest of the Federal government, keeping rates low (0.375%) to help finance the war effort. Beating the Nazis trumped central bank “independence.” Critical national moments require policy coordination to ensure America’s national interest are best served. Sadly while World War II showcased the Fed’s patriotic purpose, today’s Fed sits stubbornly on the sidelines, which only helps China. This is why Trump must act.

Rather than merely expressing his displeasure with Powell’s anti-exporter Fed policy, Trump needs to effectively leverage the powers of the Presidency. It is time to se the IEEPA to negate Fed policy’s impact on the US dollar, accelerating manufacturing activity and economic growth, which will help America prevail in a prolonged trade conflict against Communist China.

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Taking on China in this Cold War: An 11 Step Plan

With President Trump recognizing the 75th anniversary of D-Day in Europe this week, I found myself wondering how the historic giant of that era, Winston Churchill, would view the present day, particularly the West’s relationship with China. Churchill not once, but twice, was early to see the threats oppressive, domination-seeking regimes posed to freedom loving people everywhere. While the political intelligentsia called for appeasement toward Hitler’s Nazi Germany, Churchill called for strength and resolve, nearly destroying his political career. Similarly, as World War II was nearing its conclusion, he saw the threat posed by Stalin’s Soviet Union, minimized by President Roosevelt and others. Indeed, the Soviets wouldn’t cede any of the Eastern European territory they had taken back from the Nazis, descending an “Iron Curtain” across Europe. Churchill was right both times; the establishment wrong.

As we engage with an increasingly powerful, emboldened, and repressive China, we should remember the painful lessons of history. I suspect Churchill would applaud Trump’s trade actions, lock arms with him, and call for more aggressive global action until China agrees to follow international law and join the ranks of civilized nations. Let’s make no mistake: China is an extraordinarily repressive regime. Political dissent is not tolerated, the government uses technology to track its citizenry’s every move, Taiwan lives under the threat of invasion if not for American support, Chinese Christians face constant persecution, and at least one million Muslims have been locked away in literal concentration camps for “re-education.”

Rather than confront China for these horrendous abuses, the Western elites have gone the route of appeasement, this time economically, to disastrous results. The Clinton and Bush Administrations bet that economic prosperity would lead to political liberalization. As such, they let China into the WTO, let it keep preferential developing nation status, let it depress its currency and subsidize its manufacturers, thereby stealing our industrial base, functionally raping and pillaging the Rust Belt, and costing at least one million manufacturing jobs. To this day, China continues to take Western technology and steal IP, and if a Western company complains, it loses any access to their market. When China hacked into Anthem or OPM, amassing data on millions of Americans, there wasn’t any outcry from our elites who instead remain obsessed with Russia.

This strategy of economic appeasement has instead been one of economic surrender with disastrous consequences. We have succeeded in making China incredibly wealthy, rebuilding its country and military, while giving them over $3 trillion in foreign currency reserves. Yet, the Chinese Communist Party has used this track record of economic success to further entrench itself, growing ever more oppressive and totalitarian. Economic appeasement toward China has only succeeded in making a dangerous, totalitarian regime more powerful with greater economic resources with which to challenge the West. Abject failure.

Fortunately, this soft on China approach, an unmitigated disaster, has come to an end with President Trump working to defend America’s industrial base. This is a generational opportunity to fix the US-China relationship. Postponing the inevitable battle only helps China, which has grown stronger every year. Often, it is only clear you’ve entered a “Cold War” well after it has begun. Well, it has begun; China’s been waging economic war on America for years, but our leaders are only now waking up to it. China is hell-bent on supplanting America as the world’s most powerful nation, leveraging its export-driven economy to move further up the value chain, entangle itself permanently in world supply chains, and build out its military might. Its imperial island building in the South China Sea leaves no doubt as to its ultimate intentions. After all, it is only natural for authoritarian leaders who oppress people inside their borders to seek to oppress those outside their borders as well.

Just ask yourself: how would the Cuban Missile Crisis have gone if the Soviet Union supplied America with most of its consumer goods, or rare earth metals, or medical ingredients, or worse all of the above? I suspect it would not have gone as well as quickly. We must be clear-eyed; relying on China economically poses a clear national security threat. We must disentangle our supply chain today so that China cannot use economics to leverage better military or geopolitical outcomes. Ultimately, economic security is national security.

Thus far, Trump has levied 25% tariffs on $250 billion of Chinese imports. Unsurprisingly in trade deal negotiations, China has backtracked, in keeping with their history of never living up to promises. Fortunately, rather than accept a bad deal, Trump had his team say “no,” raise the tariff rate to 25%, and contemplate further tariffs. However, this is not enough. Until and unless China faces real economic pain, they will never agree to follow the international rules and make real concessions. Recognizing that this trade conflict is but one front in an ongoing economic Cold War, we must enhance the pressure. The President must publicly and forcefully, perhaps with a detailed address to the nation prior to the G-20 summit, explain the threat China poses and call for a national, coordinated response.

Currently, China is coordinating policy, imposing tariffs, but also cutting taxes, and easing monetary policy to support growth. Ultimately, America has far more leverage and tools if our government’s institutions can unite and coordinate behind a central mission: to grow the economy, repair our industrial base, and enhance domestic economic security and sufficiency. Wars are when a nation is united and policy is coordinated. Now is the time for such a national effort. To do so, I would humbly suggest the President announce the following action plan as he prepares for the G-20.

 

  1. Trump should announce we will not re-open negotiations with China. Ultimately, these talks have increased business uncertainty, and consequently, some businesses have been slow to readjust supply chains or launch new investments domestically in case talks lead to a deal. Make it clear to executives they should assume the tariffs are the permanent “new-normal,” and uncertainty will diminish, and growth will pick-up as they invest in boosting domestic capacity.
  2. For America to re-engage with China on trade talks, China will have to, as the only pre-condition, actually stop the flow of fentanyl into America. While recently they have increased regulations on fentanyl, they must enforce these laws. Chinese fentanyl, which President Xi lets come to America, has poisoned our streets and killed at least 45,000 Americans. Xi and the Chinese government is at the least complicit in this mass murder of our citizens. They should be held to account for this. They must commit to paying the US government $45 billion ($1 million per American dead due to China) as a show of good faith to merit a reopening of the trade dialogue. Until they publicly commit to the $45 billion, which we can use to end the opioid epidemic, there will be no trade discussions. I suspect this means no trade talks for some time.
  3. Trump should announce tariffs on the remaining $300 billion of Chinese imports by July 1. As these are more consumer facing (ie iPhones), the tariff rate should begin at 10% on September 1, rising to 25% on January 1, 2020. By staggering the tariffs as such, corporations will have ample time to begin moving supply chains and reshoring jobs to minimize product disruptions and price changes. An orderly implementation of tariffs will calm consumers and markets, ultimately making them more productive
  4. Trump should, effective no later than year end, ban and embargo Huawei, ZTE, and any other Chinese-linked entity from core technology infrastructure susceptible to espionage. Any foreign network using Chinese equipment would also be banned from having secure communications with the US.
  5. As seen by China’s threats on rare earth metals, they cannot be relied on as a stable supplier, yet we rely on them for most of our medical ingredients, which is unacceptable. Any product where China accounts for more than 33% of the supply would be protected by additional national security tariffs to take effect January 1 to promote more domestic production and self-sufficiency.
  6. Chinese state-owned entities would be barred from issuing either stock or borrowing money in US dollars to limit China’s ability to finance its economic war upon us.
  7. No Chinese individuals planning to return to China can receive student visas. We will no longer educate the global competition. Our schools will educate Americans first and foremost.
  8. America works best when it works together, so recognizing this, and to ensure calm in financial markets, the Federal Reserve should announce it will coordinate monetary policy with fiscal policy. It’s time for the Fed to stand with Trump and not with China, which needs to see our economy slow. Namely, in conjunction with these actions on trade, the Fed should announce an immediate 1% interest rate cut to 1.38% and end to balance sheet normalization. Moreover, the Fed should pledge to increase the supply of dollars with an unlimited QE program whenever the trade-weighted dollar passes $125 (it is nearing a record of $130) to defend against foreign currency manipulations and protect American exporters. These policies will boost growth and minimize any disruptions to markets.
  9. Until and unless Democrats agree to immediately use the tariff revenue (at least $90 billion in year 1) to fund new infrastructure projects via a new “China Rebuilds America Fund,” which would make the tariff policy clearly pro-growth, Trump should order the Treasury to dividend all China tariff revenue to each state government on a per capita basis (ie a state with twice the population gets twice the revenue), ensuring fair and equitable distribution. With the influx of cash, each state government can recycle the tariff revenue into their economy as they see fit (lower taxes, infrastructure, or more school spending) with no strings attached.
  10. Trump should direct every regulatory body to streamline permitting and regulatory processes and hasten coordination with private sector bodies and companies to increase apprenticeships and job training to increase US domestic manufacturing capacity as quickly as safely possible.
  11. Finally, the Administration should begin “break-glass” preparations to freeze and seize China’s US Treasury holdings in the event the Chinese government tries to sell to disrupt financial markets. The treasuries could be placed in the Medicare and Social Security trust funds to improve their financial health. Such a move would cripple China financially but should only be taken if China retaliates in a particularly destructive fashion.

 

This policy playbook, combined with already announced policy actions, would show that the Administration is taking the China threat seriously. Increased tariffs and sanctions would put tremendous pressure on the Chinese economy while coordinated policy-making from the executive branch, Federal Reserve, and congress or state governments can ensure the domestic economy continues to run hot. Policy coordination is absolutely critical.

As we stare down China, history will remember this moment as a generational opportunity to protect our industrial base and a free world. It is a time for choosing; will we be a nation of Churchills or Chamberlains?

Trump Should Propose the “China Rebuilds America” Fund Now!

Following a midterm election in which Republicans gained seats in the Senate but lost their House Majority to Nancy Pelosi and the Democrats, President Trump needs to manage a divided Washington to continue delivering on campaign promises and advance America’s interests, which in turn will boost his own re-election chances. As the consummate negotiator, Trump must strike fast to put Democrats on their back foot and immediately offer a deal that will aid America’s workers and economy: a Chinese funded infrastructure bill.

Right now, the American economy is rocking, maintaining 3% growth, which has pushed unemployment below 4% and wage growth to around 3%. The manufacturing sector, which has been enjoying its strongest stretch of job creation in over 20 years, is resurgent. It’s no wonder then that the GOP was able to take Senate or Governor races in manufacturing-heavy states like Indiana, Tennessee, Missouri, and Ohio. Trump needs to ensure economic growth continues to broaden out to further tighten labor markets and push wage growth higher so that all workers see their paychecks rising.

Investing in infrastructure, which enjoys broad political support, will create jobs now, and importantly by modernizing and expanding our infrastructure capacity in everything from rail to broadband, we enhance the long-term potential of our economy. Strategic infrastructure investments will boost near-term growth and employment, forcing wages higher, while also increasing wages over the long-run for all Americans. In so doing, he lays the groundwork for his own re-election. However, we can’t borrow more money to have a multi-billion-dollar boondoggle while deficits are running around $1 trillion.

And this is where China enters the picture. Trump has rightly singled out China as our top long-term geopolitical foe, and they have used unfair trading practices and intellectual property theft to amass a cumulative $4.5 trillion trade surplus with America since George W. Bush foolishly let them in the World Trade Organization (WTO). With this wealth transferred from Americans, China has rebuilt its economy and military. We have literally funded China’s rise as our top rival.

In an effort to right these historic wrongs and restore our industrial base, Trump has correctly levied tariffs on about $250 billion of Chinese imports to level the playing field and eventually force China to negotiate in good faith. From January 1 onward, these tariffs will generate about $62 billion in revenue, which currently goes into the Federal Government’s general budget and reduces the deficit. If, as threatened, 10% tariffs are placed on China’s remaining imports, the annual tariff run-rate will approach $90 billion.

Trump should immediately and publicly offer House Democrats a deal: all Chinese tariff revenue is put in a segregated trust fund (named the China Rebuilds America Fund) to invest in new infrastructure projects in partnerships with state and local governments. By making states and localities together put up 50% of the funding, you can increase accountability and double the effective size of the infrastructure program. We can cap annual federal spending from the China Rebuilds America Fund at $50 billion ($100 billion with state matches) as over time China tariff revenue will fall as companies move production back into the US, which in turn will create new jobs. By capping the fund, infrastructure spending can then continue for some time even as the tariffs are removed. Importantly, by recycling tariff revenue into productivity-enhancing projects, Trump will be offsetting any near-term dislocations caused by the China trade situation and actually accelerate economic growth.

By getting Democrats on board with this plan, Trump would show a unified front to China, which only further enhances our bargaining power to strike a new trade agreement. This is compounded by the fact that Trump’s tariffs will be funding growth-accretive infrastructure. By strengthening the economy further, there is less need for us to strike a quick deal, ensuring we get a better one. There will now be a clear benchmark for China: until they are willing to offer enough concessions to outweigh tariff revenue funding major infrastructure improvements, we have no reason to say “yes” and remove the tariffs.

By proposing the China Rebuilds America Fund, Trump can retake control of Washington, show voters he is a deal-maker, get implicit backing for his tough on China trade stance, provide tangible change to voters via better infrastructure, and boost economic growth. Additionally, he achieves two critical strategic priorities: rebalancing trade with China and modernizing American infrastructure. If Democrats don’t accept this win-win deal, it’d be a proof point to voters they are uninterested in governing and are simply the party of obstruction. Trump wins if they accept this offer because it will help America, and he wins if they say no because it will show Democrats to be hypocrites on their promises for bipartisanship.

It’s time we rebuild America’s roads, bridges, airports, and rail, and with Trump’s tough trade stance, we can have China pay for them.

 

 

The Paris Agreement: Yet Another Meaningless Deal

On Saturday, nearly 200 nations signed a climate pact that President Barack Obama called a “turning point for the world.” Obama argued this agreement was the one “the world needed.” Upon reading the actual text of the deal, it would appear the world didn’t need very much, if the President’s claim is to be taken at face value. In the end, this deal is as fanciful and toothless as the Kellogg-Briand Pact of nearly a century ago that banned war in the wake of World War I. While the failings of this deal are unlikely to be as grave (World War II was pretty awful, you know), it suffers from the same fatal flaw: no enforceability.

This agreement doesn’t actually do anything; it is merely a voluntary plan whereby nations will unilaterally cut emissions or something. The over-arching goal is to keep global temperatures rising 2 degrees (Celsius) from the current expectation of some in the science community for 2.7-3.7 degrees. If this voluntary deal works really well (!!!), the agreement leaves open the possibility of pushing for a more aggressive 1.5 degree target.

This agreement “invites Parties to communicate their first nationally determined contribution no later than when the Party submits its respective instrument of ratification, accession, or approval.” This agreement merely invites nations to come up with their own plan to bring down emissions to unspecified levels to lead to less climate change. Does that sound vague? Don’t worry; this agreement also creates an “ad hoc working group” to monitor nations’ progress because groups of bureaucrats are renowned for getting things done.

Signing to this deal merely signifies the “Voluntary participation authorized by each Party involved.” Are there any enforcement mechanisms that punish nations for failing to bring emissions down (or for some developed nations, rise more slowly)? Nope. We are operating solely on the trust system—no way that could produce underwhelming results. Some hailed the underlying goal of the deal as ground-breaking: “Parties aim to reach global peaking of greenhouse gas emissions as soon as possible.” Others may contend that the phrase “as soon as possible” means absolutely nothing and gives offending nations plenty of room to maneuver if confronted (i.e. more action just wasn’t possible). This deal also says developed nations are to give developing ones at least $100 billion/year by 2020 to help fund their development, thereby making income redistribution an international affair. Good luck getting everyone to write those checks…

Those who are unconvinced climate change is the world’s most pressing problem and aren’t prepared to crush the economy to cut emissions should actually be thrilled by today’s deal as no new policies have to be implemented. If we actually wanted to cut emissions, any deal needs to have set targets and strict ramifications for violations (for example, automatic WTO admissible tariffs to hurt the economy of offenders). Otherwise, developing nations, like China and India, will cheat, pointing to the fact there were no restrictions on the West’s industrial revolution a century ago. Of course, they benefit from our revolution (India doesn’t have to invent the car for instance), so there should be restrictions if we are to have some, though perhaps not quite as onerous for a bit of time. Adhering to unenforceable deals threatens to leave the American economy relatively uncompetitive as other nations’ flout the deal’s requirements.

Fortunately for the climate alarmists in our midst, the private sector is already helping to solve the problem. Our abundance of natural gas is hurting coal, and with or without government regulations, coal will likely go the way of the dodo bird in this country over the coming decades. As we export LNG, energy production around the world will only get cleaner. Automotive emissions keep improving, and the advent of the electric car will only help. Continued advancement in battery technology could facilitate a smaller, cleaner grid while improvements in transmission will make nuclear more viable in more regions. Even in countries like China, popular discontent over ridiculous pollution levels could force the regime to act over time if only to keep the public happy. Indian cities aren’t far behind.

However, our President is a climate alarmist, which leaves one befuddled as to why he would be happy with this deal that is voluntary and lacking enforcement mechanisms. This climate pact is strikingly similar to the Iran Deal, which is nonbinding (heck no one even signed the agreement!) and has laughable verification measures (not to mention the fact that re-imposing sanctions with Russian approval and European unity is as likely as Hell freezing over, unless of course unfettered climate change here serious impacts the temperature down below…).

Our President seems to have a lot of trust in foreign powers to do the right thing despite their national interest. It’s a fascinating turn for a President who so recognized the free-rider problem, he coerced Americans to buy healthcare insurance or face stiff financial penalties (the individual mandate). Of course, if the insurance under Obamacare is as good and affordable as advertised, wouldn’t people be clamoring for it and not need coercion? I guess, unlike China and Iran, Americans can’t be trusted to the right thing.

Moreover, our President may see no need to make legally-binding agreements since he never feels the law binds him as evidenced by the lawless immigration executive orders and potential one on Guantanamo Bay. Ultimately, our President seems to enjoy doing things for the sake of doing things. That is how Democrats inevitably react to gun violence (just pass a law, even if it wouldn’t have stopped this shooting). Obama wanted a deal with Iran to check off a box on his legacy, even if the deal was a poor one. Similarly, he wanted to do something on the climate. We can all sleep easy and claim the moral high ground now that this high-sounding, completely unenforceable garble has been agreed to. In the view of our leadership, just doing something is an achievement, results be damned. That is the only way to explain the Iran Deal, the Paris Accord, gun violence reactions, and our tepid ISIS bombing campaign. At least we can feel good about ourselves as the world implodes!

Now, I don’t believe economy-crushing cuts make sense, but it astonishes me how horrendous of a negotiator our President and his Secretary of State, John Kerry, are. They are either delusional or lying when calling such a deal as this a groundbreaker. If we ever want to deal successfully with China or Putin or Iran, this naïve idealism is dangerous.

Recently, Obama and the Left have often linked climate change to terrorism. Well, the Paris Agreement will do as much for emissions as those 20 bombings/day have done to roll back ISIS.

Just like coal, this deal will end up being a puff a smoke, not worth the two weeks of diplomats’ hot air blown in Paris.

Putin’s Goal: Prove NATO’s Dead

After years of provoking Western powers, Vladimir Putin finally crossed someone who was willing to stand up to an increasingly imperialistic Russia when Turkey shot down a Russian jet that had violated its airspace. It is in many way fitting that the man with the strength to act was President Recep Erdogan who is emulating the Putin model at home. Facing term limits as Prime Minister, Erdogan shifted to the Presidency, which was previously a ceremonial role, and has been moving powers to that office. As such, he remains the de facto leader of the country as evidenced by the fact he, and not the PM, is the person Putin and President Obama interact with during this and other crises. As with Putin in Russia, in Turkey, the powers increasingly are endowed to the man not the office. Just as Putin has ramped nationalistic rhetoric the past decade to consolidate public opinion, Erdogan has let religion creep into a government that has been proudly secular to secure support. In Erdogan, Putin has a worthy and like-minded adversary.

While some of his actions have been unseemly, the fact is Erdogan is an ally in NATO with Turkey an indispensable nation in the Middle East that on balance is a positive influence. That raises the stakes of this incident severely, and a NATO power has not shot down a Russian plane since 1952. With Russian and American planes flying over limited airspace, the risk of accident or unintended escalation is great, and with our nuclear arsenals, the cost of a worst case scenario is unimaginable. Given the mutual defense clause (Article 5), a Turkey-Russia skirmish is equally dangerous.

Now, I do not ascribe to the view that this incident could be the precipice of a world war, despite the fact World War I was beget by a minor incident. Irrespective of constant underestimation by some on the left (who seem to have a real penchant for underestimating threats, mind you), Putin is not an oafish brute, seeking to use hard power everywhere. He is a strategic thinker who uses hard power only when necessary. A direct Turkish-Russian war is in no one’s interest. His goal is a different one entirely with long-lasting geopolitical implications: to prove what we secretly fear to be true, that NATO is dead.

NATO enlargement has been a key policy priority for years, and it is a wise policy assuming two conditions are met. First, the new country’s principles and policies are in-line with the organization’s goals and values (one does not typically allow enemies into an alliance). That condition has largely been met during enlargement, and if anything the former Soviet States who have been the focus of enlargement more forcefully support a united Europe than existing ones. Second, member nations must have the same willingness to provide for the common defense of new members as existing ones, for a failure to defend any nation would undermine the basic fabric of the alliance. If NATO members are unwilling to fight on behalf of Country X, they should not accept Country X into the alliance. This is the condition that Putin is wisely testing. Invading Turkish airspace is not intended to provoke Turkey; it is a test of NATO’s resolve. We must calibrate our response accordingly.

For months, Putin has been provoking the West from buzzing U.S. ships to sending submarines near Swedish waters. Since launching airstrikes in Syria, Russia has violated Turkish airspace several times, and after repeated warnings, Turkey shot down an unmanned drone last month. It must also be noted that the fact Russia is bombing near the Turkish border is your evidence he isn’t focused on defeating ISIS as they do not control that territory. He is bombing moderate rebels to help boost Assad’s grip on power. Putin does want to eradicate ISIS eventually as that’s required to help Assad, but his mission is to roll back all rebel groups and is currently focused on moderate rebels to ensure there is no credible alternative to Assad, or an Assad-like crony. Of course, some of these rebel groups, including the Turkmen, are supported by Turkey, only antagonizing Russian-Turkish relations further.

It is from this perspective that Erdogan’s decision to down a Russian jet must be viewed. Russia has ignored repeated warnings about entering your airspace and is killing the very rebel groups you have been helping. It’s an exasperating situation that can fairly be seen as an act of war. So when a Russian plane entered Turkey, even if it was for less than 30 seconds, Erdogan felt compelled and was entirely justified in acting. To be clear, Erdogan is completely in the right. That said, I think Erdogan likely made a strategic error here. It is one thing to shoot down an unmanned drone; it is another to shoot down a jet, which led to the death of the pilot and a marine. The fact the Russian plane appears to have been shot down over Syrian territory also makes the decision even more questionable.

If anything, this incident has given Putin cover to intensify bombing against the pro-Turkey rebels, and he will likely deter tourism (Turkey has a mock-Kremlin so many Russians visit it) and other joint economic projects. Shooting down a Russian jet also increases the tail-risk of the situation escalating beyond anyone’s controls.

Is a 17 second violation enough to merit being shot down? The slippery slope argument is powerful here, if not 17 seconds, is 1 minute enough, 5 minutes? Further, the history of appeasing strongmen in the hopes their thirst for expansion is satiated is disastrous, and a violation of airspace is a violation no matter how long it lasts. That said, my reaction given the brevity of the incident would have been to give Putin just one more mulligan, have scrambled jets but not shot, come out publicly with the information a Russian jet violated Turkish air space, publicly vow to shoot down any jet that enters the air space going forward, and proactively offer coordination to avoid a similar incident (an offer which Putin would likely ignore). Should a jet violate the airspace after Tuesday, I would then shoot it down without hesitation. This policy to me would not fall into the appeasement camp, but be a final proverbial warning shot that I would then act upon if necessary (unlike certain people who erase their red lines).

We are now in a dangerous situation, one Putin precisely wants to be in. What if he violates Turkish airspace again? Erdogan would have to act again, but does that just result in further escalation from Putin? We also know that Europe, France in particular, sees Putin as an essential partner in Syria. Thanks to years of dithering on our part, Putin has been able to insert Russia as an integral player in a political solution. He and Iran continue to prop Assad up, and unless we are willing to put in our ground troops and risk direct conflict, they will have to acquiesce to any political transition. Putin is using Syria to gain leverage in his real area of territorial ambitions: Europe. Therefore, our response to his aggression needs to be centered in Eastern Europe.

Putin is fully aware Europe wants him involved as a partner in the fight against ISIS, and as such, he has us over a barrel. While Europe seems willing to continue the existing sanctions against Russia over his invasion of Ukraine and annexation of Crimea, they are unlikely to support a significant ratcheting of pressure for fear that will preclude him from cooperating on the Assad question. Putin has the ability to keep provoking with little if any ramification. As such, he will continue poking to find the weak underbelly of NATO to exploit it.

In all likelihood, NATO members urged Erdogan to soften just as we urged France not to invoke Article 5 after Paris, which is shameful. Does anyone really think Italy is willing to face off with Russia over Turkey? NATO membership has devolved into a two-tier system: nations whom we would defend no matter what, and nations who we would defend depending on the aggressor. Now, Turkey is such a critical player in the Middle East, it may be a core member, but this flare-up will only serve to increase the tensions between the Russia hawks and doves in NATO. This could be a prelude to a stiffer test of NATO’s resolve.

Ultimately, there is no strategic reason for Putin to war with Turkey, but there are NATO members that should be worried. In particular, I have concerns about Estonia, which has a 25% Russian-speaking population; remember, Putin used supposed discrimination against Russian-speakers to explain his annexation of Crimea. He also exploited this population to foment an “internal” resistance in East Ukraine that has totally crippled the nation. Estonia is in the process of fencing its Russian border over this very fear. The appearance of an internal rebellion is preferable for Putin as it would make it easier for some NATO members to say Article 5 does not apply (it must be an external aggressor). With its large Russian population, Latvia too is a potential target.

Estonia is a country of 1 million, and Western Europe is uninterested in a direct confrontation with a nuclear power, especially given the pressing problems in Syria. Turkey was the first attack on NATO, and the Baltic States are the obvious next target. While these are small nations, their defense is critical. Once it appears Article 5 does not apply to a member, how can we know what members of NATO are really protected? By enlarging the alliance to nations we are unwilling to protect, we actually risk shrinking the alliance in the long-run. Sure, the U.S., Canada, Germany, France, UK, Poland and others are almost certainly core nations, but Eastern Europe should be petrified. How important are they? Are Germans willing to die for Slovenians should Putin go too far?

NATO is now an alliance without a cause and as a result is dying a slow death. What is its raison d’être now that the Soviet Union is gone? It has been wandering aimlessly without any core objectives; all the while, European armed forces have decayed and much of the continent is headed for economic and geopolitical irrelevance. Eastern Europe sees Putin for the threat he is, but the rest of Europe and current US leadership doesn’t see Putin as a mortal danger. We are minimizing (if not ridiculing) his aggressiveness as a result. We do so at our own peril.

Fracturing NATO and cracking the façade of a united Europe would be a dramatic diplomatic coup and undermine the security order of the world. Action in Estonia, if not responded to, would render NATO impotent and show the US, not only unwilling to enforce red lines, but unwilling to defend allies. That could have cascading ramifications across Eastern Europe and Asia where American allies like the Philippines, Taiwan, Japan and South Korea face an increasingly adversarial and expansionist China. If they question U.S. commitment, we risk capitulations that could up-end the balance of power in that region.

This is what at stake. We are not on the precipice of a Turkey-Russia war (in all likelihood), but we face something equally dangerous. Putin is pushing around the edges of NATO to test how united we really are, and if we actually will honor our commitments. Proving that Article 5 is really more bark than bite for non-core nations could unravel the US-security compact that has kept the world safe, and we in its center, in favor of a world where the Russia-China-Iran axis gains strength and US reliability is questioned. The seeds have been sown for a second Cold War, if it has not already begun.

In response to the Turkish air invasion, we must make crystal clear that NATO support cannot be questioned. We have increased our military presence in the Baltics a bit, but NATO needs to move beyond a token presence. Announcing further deployments to Estonia and the Baltics in the wake of the Turkey incident would be a clear signal to Putin that he should not test NATO resolve. Simultaneously, we should commit to build the cancelled-missile defense shield in Eastern Europe, for which the Poles have clamored. This would apply a real cost to Putin’s actions. If you mess with a NATO country, it must be clear, we will work against your strategic objectives (dominion over Eastern Europe) and redouble commitment to member nations. Putin’s goal here is not to intimidate Turkey; it is to prepare for a grand pivot to Europe. Accordingly, NATO must pre-emptively harden its European positions.  Whether he is actually willing to call NATO’s bluff in the Baltics is uncertain, but we should pro-actively make clear NATO commitments aren’t a bluff to ward off any potential Russian intervention.

With the rise of ISIS, it should be Eastern Europe in a panic. Putin has built leverage over Europe in Syria and is now testing NATO. We must stand firm and signal our commitment to all member nations. Putin, like any thinking person, can see that NATO is divided with many members likely lacking the will to risk war with him over smaller, newer members. Destroying the illusion of NATO joint security and unwavering US commitment to its treaties would be the greatest political coup since Nixon opened relations with China. That is why we must come out now, in the wake of Turkey, and dispel these concerns, affirm all NATO nations stand firm, increase our presence in the Baltics to comfort these nations, and build the begged-for missile defense shield. Maintaining the balance of power not just in Europe but also in Asia requires this reaction and a steadfast commitment to all allies, big and small.

NATO is being tested in a way it hasn’t since the Cold War ended. We must prove it is an organization that has not outlived its usefulness. To do otherwise would undermine US leadership and the quarter-century of great power peace and prosperity it has bought us.