A State is Not a Company

States don't maximize profits

As the Trump administration has begun its foreign policy adventures, it is becoming increasingly clear that they are making the classic fallacy of mistaking a nation-state for a company or a business. You can see this in their approach to both Ukraine and the Israel-Palestine conflict. Trump believes that the United States “owning” Gaza will be beneficial. After all, a company benefits from obtaining assets for free. Furthermore, they view the money spent in Ukraine as a financial investment that must be recouped through, say, Ukrainian rare Earth minerals.

This view makes perfect sense if you see the United States as a firm seeking to maximize profits. It makes no sense if you understand that nation-states are not companies and operate under radically different constraints. Below I will try to explain this distinction and its relevance to the issues facing us today.

Anarchy, Anarchy, Anarchy

The first thing international relations students learn is that states exist under anarchy. This does not refer to constant pillaging of grocery stores and lawlessness, but rather that there is no higher authority that countries can appeal to. As a famous Realist likes to say, if a state attempts to call 911 to protect their rights, it will discover that there is no one ready to take the call.

When you realize the importance of anarchy in geopolitics, quite a few things begin to make sense. First of all, it should become obvious to you that states face massive commitment problems. Ukraine and Russia could make a deal where Russia promises to not attack if Ukraine puts its NATO ambitions on hold, but there is no way to guarantee that either side will uphold its end of the bargain. Russia could rearm and launch another offensive, or Ukraine could wait for a window of opportunity where Russia is weaker and try to join NATO.

And after the brutal consequences of anarchy dawn on you, it should become clear that assets are not mere assets. The United States can’t just hold onto Gaza like a piece of land. It will require military forces to maintain. It risks border conflicts with neighboring countries such as Egypt. It risks putting US troops in harm’s way if Hamas reorganizes and decides to strike. Simply put, land can become as much of a liability as an asset.

Anarchy also means that states become forced to think about relative gains. In our day-to-day lives we view war as obviously harmful. It leads to the deaths of thousands, the destruction of property, and massive trauma. If only states could have avoided the war through diplomacy we would all be better off. This would be the behavior of firms in a market. They would strike a deal that would be enforced by courts. But since states are unable to do so because of commitment problems (again, Russia can’t promise not to attack in the future and Ukraine cannot promise to not join NATO), war becomes inevitable. Then your goal becomes to lose less than the other side.

This implies that certain states may view destructive wars as beneficial. Indeed, if Americans were cynical enough then they might see Russia’s invasion as a triumph of US foreign policy. A major geopolitical opponent began a war which led to it losing hundreds of thousands of soldiers. The cost to the United States was just around 0.1% of GDP per year. If American leaders thought this option possible during the Cold War, they would have been ecstatic. When viewed this way, American assistance to Ukraine has paid off a hundred fold and might be a rare instance of what our aforementioned Realist called “bait and bleed”.

Alienating Allies

Because of the issues mentioned above, allies become essential in international politics. You cannot really ever trust other states since they are always incentivized to renege on deals. But you can try and build reputation through decades of mutual cooperation. This is what the United States has done with its NATO allies.

But what if you just don’t like your allies anymore? Could the United States decide to make a “grand deal” with Russia and align with Putin against China? This is the “reverse Kissinger move” that some believe the Trump administration is attempting to pull off. Stranger things have happened in the past. In 1756, the European powers reshuffled their alliances and the continent changed radically. In 1945, the US and the USSR went from allies to enemies, whereas Japan and the US went from enemies to allies. Changes in the world do often lead to instantaneous changes in alliances. But is that possible today?

Most likely not. Though the Trump administration may be interested in a grand realignment, it is impossible to commit to such a realignment. Russia might view an alliance with the US against China as ideal, but they have spent decades on the opposite approach. In fact, they do not trust the US. Sure, Trump might promise to play nice, but he made similar promises in his first term, only to eventually give Ukraine lethal arms. Furthermore, chances are that Trump’s successor will change US policy again. Russia cannot afford to let its existing alliances go down the dumpster and alienate China for the sake of an increasingly mercurial and unpredictable United States.

But of course, if these two were companies trying to maximize profit and had the power to take their matters to court, life would be much easier. Unfortunately, that is not the world we live in. The administration ignores this simple truth at their peril and is pursuing an impossible strategy.

Not Understanding Scale

The final mistake we see today is complete blindness to the scale of the United States versus firms. The biggest employer on the planet is Walmart with 2 million workers. That is hilariously small in comparison to the US labor force of 160 million people (not counting those who do work at home, of course). Similarly, Walmart’s 650 billion revenue is a joke compared to US GDP of 30 trillion dollars.

When you operate on this scale, the value of every dollar becomes drastically different. Even if the United States were to sign a punitive rare minerals deal with Ukraine and magically obtain $500 billion, that would be equivalent to a one-time end of year bonus of 1.6%. If stretched out over ten years, it’s a “raise” of 0.16%. This is not enough to make a dent in the US national debt of $36 Trillion.

On the other hand, this would be a massive loss for Ukraine. The country’s GDP is currently around $180 billion. Asking for $500 billion is equivalent to taxing Ukraine for all of its income for three consecutive years. As any good right-winger such as Trump should understand, a 100% tax will generate 0 revenue because of the Laffer Curve.¹ In other words, it will crash the Ukrainian economy. This increases the probability of further Russian aggression in a few years and will lead the Ukrainians to detest the United States. Even if that does provide a one-time 1.6% end-of-year bonus, it is obviously a poor idea.

Conclusion

We are living through an administration that is making extremely basic mistakes about geopolitics. They see the world as an opportunity to make money as opposed to guaranteeing US security. Towards this end, they have chosen two financially poor targets to exploit in the form of Gaza and Ukraine. This is unlikely to be profitable and will only lead to the demonization of the US as an ally. If American policy does not change, in a few years you can expect renewed pro-Russian sentiments in Europe as many begin to claim that both the US and Russia are simply out to exploit the continent for their own gain. There is next to no benefit to the path we are on. We are being led by weak men. Pray that they do not create hard times.

1. Fellow academics might know the Laffer Curve as Rolle’s Theorem with constructed axes.