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The idea of global free trade as an end in itself is obsolete in a multipolar world of several great powers and shifting coalitions, in which today’s friendly trading partner may be tomorrow’s enemy determined to cut off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

The Covid-19 epidemic illustrated the shocking dependence of the United States on Chinese manufacturing for critical items from drugs to medical face masks. And on May 15 of this year, China was the second country in history to land a robot rover on the surface of Mars. Mexico has yet to challenge the United States in the space race.

China has the opportunity to become what neither Germany under the Kaiserreich and Nazi regime nor the Soviet Union ever had a realistic chance of becoming—a full-spectrum competitor of the United States, surpassing the United States not only in population size but also in domination of one global market after another.

While China could in time become the second superpower that the Soviet Union never really was, there may be others in the future. India lags far behind both China and the United States, but it will surpass China in population soon. A more advanced India that falls short of Western standards of living would still be a major power with a home market accounting for a large share of global GDP. The nations of Europe are unlikely ever to cohere as a functioning power bloc, but Britain, France, and Germany, along with Russia and Turkey on the European periphery, and Japan in East Asia, will be great powers of the second rank.

Unfortunately, U.S. adjustment to today’s radically new conditions is being thwarted by intellectual lethargy and special interests.

Intellectual lethargy takes the form of hoping that strategies that worked during the first Cold War—democratic regime change, support for a rule-governed global trading system—can work during what promises to be a prolonged rivalry with China.

The Chinese challenge has nothing to do with the regime. If China embraced Western-style liberal democracy tomorrow, it is likely that all of the politicians in a Chinese multi-party system would favor overtaking or displacing the United States in global markets and global power politics, just as most American leaders shared the goal of replacing culturally-similar Britain as the dominant industrial and commercial power in the world in the first half of the twentieth century.

Nor is calling on China to renounce its protectionist and mercantilist practices to embrace a rule-governed international trading system based on the ideal of free trade likely to succeed. If it did succeed, the beneficiary might be China, not the United States.

Remember that the UK and the United States both turned from catch-up industrial protectionism to the promotion of global free trade at the moment they were so far ahead of their peers that they could bid for global economic hegemony. The UK embraced free trade in an attempt to lock in its manufacturing hegemony in the 1840s. The United States embraced free trade in an attempt to lock in its manufacturing hegemony in the 1940s. What if China is so confident in its industrial superiority that it embraces free trade in an attempt to lock in its manufacturing hegemony in the 2040s? In that case, a deindustrialized and militarily weak United States might be reduced to the sad condition of contemporary Britain, which, having been driven out of most manufacturing apart from foreign transplant factories, specializes in finance, tourism, and selling prestigious diplomas to foreign students.

An ex-hegemon, like Britain in the twentieth century and the United States in the twenty-first century, must abandon the strategy of liberal hegemony that served it well earlier for a generation or two. It made sense for the United States to open its market to German and Japanese and South Korean imports when American industry was the strongest in the world and the United States needed military bases in those countries. It makes no sense for the United States to sacrifice its manufacturing to China today. Nor does it make sense for the United States to continue providing hegemonic services like extended deterrence and one-way access to U.S. consumer markets for other countries in a multipolar world in which the United States is no longer the hegemonic power but first among equals at most among the great powers.

Adding to the problem of intellectual lethargy is the problem of special interests that remain committed to the continuation of a failed U.S. strategy. U.S. multinationals that profit from low wages and sometimes Chinese government subsidies in their reliance on key suppliers in China, for the most part, resist moving any production back to the United States. Even if they wanted to reshore some production, it is difficult for firms to do so because the United States has allowed much of its industrial base to atrophy, including skilled technicians and the “industrial commons” constituted by regional manufacturing firms.

American corporations that benefit from offshoring strategic links in industrial supply chains, from medicine to electronics, are only part of the coalition that opposes any significant rethinking of U.S. trade and industrial policy. Opposition also comes from domestic U.S. industries that rely on cheap imported goods, like construction, whose firms want access to the cheapest steel on the world market, regardless of whether this undermines American national security and long-term economic growth. Then there are American farmers. First Japanese, then more recently Chinese, trade negotiators learned that by promising to import more U.S. farm products, they can mobilize American farmers to oppose measures to protect American manufacturers from foreign mercantilism. Many firms on Wall Street, too, are willing to sacrifice American industry in order to gain access to foreign financial markets, including the huge Chinese market for banking services.

The increasingly dangerous status quo is also defended by powerful ideological factions in both parties. On the Right, the libertarian ideal, more influential among Republican donors than Republican voters, is a borderless world of unrestricted commerce among individuals and firms. Many on the Left have come to view restrictions on trade, like restrictions on immigration, as motivated by xenophobia and therefore to be rejected.

Some environmentalists on the Left argue for appeasing China, which thanks to its subsidies and industrial policy controls 80 percent of the global solar cell manufacturing market and 80 percent of the global market for raw materials for advanced batteries. Arguing that global warming is such a grave crisis that countries must set aside their strategic rivalries, these Green ideologues prefer importing Chinese green energy products rather than taking the time to build up alternatives in the United States or among U.S. allies.

EVEN IF these formidable intellectual and political challenges to rethinking American grand strategy can be overcome, the bipartisan commitment of America’s leaders to hegemonic liberalism from World War II to the present means that precedents for a new U.S. policy must be found in the American protectionist era before the world wars. Plenty of historical precedents for American industrial policy can be found, including Alexander Hamilton’s “Report on Manufactures” in 1791 and Henry Clay’s vision of the American System, along with federal support for the development of the railroads, the telegraph, radio, television, aviation, and nuclear energy.

What cannot be found in American history, however, is a sustained period in which the United States was one of several great powers, rather than an isolationist country or the global hegemon. This explains, perhaps, why so many critics of overextended U.S. global hegemony tend to flip to the opposite extreme of isolationism. There is simply no institutional or historical memory among Americans of a time when the United States was not either trying to isolate itself from power politics or abolishing power politics by imposing its own vision and order on the world as the sole superpower.

In the absence of historical precedents, a new strategy for a post-hegemonic America that no longer treats national security and industrial policy as subjects in separate siloes will have to be improvised. While the details remain to be filled in, the outline is clear.

To begin with, the United States must distinguish between strategic and non-strategic industries. To protect everything is to protect nothing. To attempt to promote every sector and industry in the United States would waste and diffuse the attention and capabilities of the federal government. 

The industries and products and services that are identified as strategic will vary from time to time, depending on the state of technology. Nevertheless, it is not a difficult intellectual exercise, because all of the great powers engage in the same exercise at the same time. In the 1870s, every great power wanted to stay ahead, or catch up in, steel and coal and repeating rifles and machine guns and battleships. Today, the United States, China, and the EU all want to bolster existing aviation and steel and chip producers as well as maintain adequate shares of new industries with both civilian and military applications like artificial intelligence, drones, robotics, battery technology, and (following the pandemic) drug precursors and medical supply chains.

Raw materials and intermediate products, as well as finished products, can be deemed strategic if a lack of access to them renders a major power vulnerable to blackmail or blockade by a hostile rival or alliance. For that reason, the U.S. government is trying to reduce America’s dependence on rare earths—a primary product—as well as subsidizing private American rocket companies that can launch payloads into orbit—a finished product. In some cases, the government may decide it wants to keep one link of a supply chain on American soil but not others if there are multiple diverse and safe sources of supply.