The Case for Economic Arms Control

The Case for Economic Arms Control

The idea of global free trade as an end in itself is obsolete in a multipolar world of several great powers and shifting coalitions, in which today’s friendly trading partner may be tomorrow’s enemy determined to cut off essential supplies.

But another scenario is possible once the catch-up phase of national industrialization is complete. In a unipolar world in which a single power radically outmatches the other powers in military power, industrial capacity, and market size, the sole superpower can establish something like an informal world government, albeit one with rules it makes and with norms that it tends to enforce in a unilateral way. A hegemon that possesses overwhelming industrial power, as well as military might, can afford—at least for a time—to be much more relaxed about competition in international trade with other countries. It can even afford to be willing to pay some unreciprocated costs to provide transnational public goods, without endangering its primacy in the system.

ONLY TWO countries have been liberal economic hegemons since the industrial era began: Britain and the United States. In each case, the hegemon pursued an infant-industry protectionist policy for generations. Once its national industries were far superior to those of other countries, both the United Kingdom and the United States adopted and preached policies of international free trade and free investment, on the theory that their manufacturers and capitalists had more to gain from opening up global markets than their domestic producers had to lose from import competition.

Unlike the United States, Britain was never a global military hegemon. In the military dimension, Britain was only one of a number of great powers. Britain’s brief hegemony in the mid-nineteenth century was limited to manufacturing and finance.

From the Tudor era in the sixteenth century to the 1840s, Britain engaged in strategic protectionism and a highly sophisticated industrial policy. Its colonies, including those in North America, were banned from trading with other empires and forced to buy British goods, which by law had to be shipped on British vessels. The transfer of advanced technology was discouraged by British laws making it illegal for skilled technicians to emigrate.

Only after Britain had become the first industrial superpower thanks to centuries of protectionism did it switch to free trade, on the assumption that the non-industrial nations of the world would have no choice but to buy Britain’s manufactured exports while competing with each other to drive down the prices of cheap food exports to British workers and cheap raw materials exports to British factories. As the economic historian Ha-Joon Chang has explained, Britain’s free trade strategy may have been rationalized in terms of idealism or economic “laws,” but its goal was the same as the goal of mercantilism: to create a buyer’s market in Britain for low-value-added imports from other countries and a seller’s market abroad for high-value-added British manufactured goods. The British economist Stanley Jevons declared: “Unfettered commerce … has made the several quarters of the world our willing tributaries.”

That British manufacturers benefited the most from free trade in the early industrial age was not lost on the leaders of the nineteenth-century United States, Germany, Japan, and others. They realized that London wanted them to specialize forever in providing agricultural commodities, mineral ores, and lumber to Factory Britain and decided they preferred to have factories of their own, not least because no country without its own factories can be a major power in the industrial era. As a result, with the goal of catching up with or surpassing British industry, in the late nineteenth century all of the great powers adopted their own versions of import substitution industrialization. For its part, Britain persisted too long in its policy of unilateral free trade, with the result that American and German imports, and later East Asian imports, in Britain’s unprotected market eroded much of British industry with consequences that linger to this day.

ALTHOUGH NINETEENTH-CENTURY Britain for a time was the manufacturing and financial hegemon of the world, it was never a global military hegemon, only one of several great military powers. In 1945, however, the United States was a full-spectrum hegemon—the first in the history of the industrial era and possibly the last. Postwar America’s GDP was larger than that of the next few great powers combined. Because many of the factories of Europe, Russia, and Japan lay in ruins, American exporters could dominate global markets while facing little competition.

The Cold War order is usually described as bipolar, but that needs to be qualified. Arguably the world was unipolar and America-centered from 1945, and the Soviet goal was to catch up with the United States and become a genuine second superpower—a goal at which it ultimately failed. At most, the world had one full hegemon and a half-hegemon, the Soviet Union, which combined a massive military along with considerable ideological appeal in the Third World, and even in the West, with a limited and inferior economic base.

The Cold War United States created a Pax Americana in which it provided quasi-governmental services to its allies and clients, including the two most important industrial capitalist nations, Japan and West Germany, which, following their defeat in World War II, unlike Britain and France, were not traditional great powers but American protectorates. One hegemonic service was extended deterrence. The United States agreed to go to war to defend allies and client-states in Europe and Asia, with no expectation that its allies and clients would defend the United States—and went to war to prove its credibility to more important allies by defending the minor client-states of South Korea and South Vietnam.

Another hegemonic service provided by the United States as a benefit to members of the Pax America was financial—the use of the dollar as the world’s reserve currency. Finally, in the area of trade, the United States tolerated a high degree of protectionism and mercantilism on the part of its allies, particularly its East Asian allies—Japan, South Korea, Taiwan, and Singapore—which, having lost the China market following the communist victory on the mainland in 1949, were dependent for their prosperity on access to American and Western European consumers.

American industrial producers were often sacrificed to American national security strategy in the Cold War Pax Americana. A high dollar hurt American exporters and made foreign imports cheaper in the United States, but the U.S. government was willing to pay the price to maintain the dollar as the global reserve currency, which allowed the United States to borrow in its own currency even when it ran up huge trade deficits. Even worse, from Harry Truman and Dwight Eisenhower to Ronald Reagan, whenever American manufacturers complained that their goods were being kept out of the markets of U.S. allies or otherwise undercut, the Defense Department and the State Department often would weigh in and say that having U.S. bases and good relations with those trading partners was vital, even if it meant sacrificing American industries. Usually, American presidents sided with the Defense Department and the State Department.

An opportunity to reconsider the Pax Americana strategy arrived after the end of the Cold War. The United States should have begun to adjust to an inevitable future multipolar world order in both its security strategy and its trade and industrial policies. Unfortunately, utopian adherents of liberal hegemony won the debate among Democrats and Republicans alike. According to the rosy scenario shared by American triumphalists, China would be integrated with little friction as a low-tech, low-cost manufacturer into the existing Pax Americana system that would expand to incorporate the entire world. The United States would be the “sole superpower” in the military dimension and the “headquarters nation” in the global economy. Bush Republicans and Clinton Democrats alike optimistically interpreted the rapid defeats of Iraq and Serbia by high-tech U.S. weaponry to mean that the United States would lack great power rivals for the indefinite future and needed only to worry about weak “rogue states” seeking weapons of mass destruction and stateless terrorist groups like Al Qaeda. Meanwhile, the leading role of the United States in the third industrial revolution of information and communications technology, much of it, like the internet and computers, originally emerging from Pentagon state capitalism during the Cold War, made the American strategists of the 2000s as confident as the British strategists of the 1850s that the rest of the world could not catch up for decades or generations.

THE INCREASING economic sophistication of China and its combination of growing military capabilities with aggressive revisionist policies has shocked many, though not all, complacent members of the American foreign policy elite into rethinking their assumptions. Two decades ago, most in the U.S. foreign policy establishment thought of China as a hybrid of Mexico, with its cheap-labor maquiladoras assembling goods with high-tech components made in the United States and elsewhere, and Boris Yeltsin’s post-Soviet Russia, where foreign carpetbaggers could make a quick fortune. But while it lags behind in some industries, like chip manufacturing, Xi Jinping’s China is determined to compete at the level of advanced technology, not just provide cheap labor and consumer markets for American, German, Japanese, and South Korean multinationals.

Already DJI, a Chinese drone manufacturer, controls 70 percent of global civilian drones, a technology pioneered in the United States. In global shipbuilding, an advanced manufacturing industry abandoned by the United States under Reagan, China controls nearly 40 percent of the global market. By 2015, thanks to the Reagan administration’s short-sighted abolition of U.S. subsidies under the influence of free market orthodoxy, only one-third of 1 percent of new commercial shipbuilding construction occurred in the United States.