The Return of Geoeconomics

October 13, 2019 Topic: economy Region: Americas Tags: EconomyTradeDonald TrumpChinaImports

The Return of Geoeconomics

Debates about national security and the global economy are merging into a single debate about relative national power.

Such developments raise an obvious question—if considerations of national security and industrial self-sufficiency are so important, then why has free trade ever existed at all? The answer is that free trade is something of a historical aberration; it has been extremely uncommon in the two and a half centuries since the industrial era began. The world economy between the early modern era and the 1940s was carved up among protectionist European empires and protectionist nation-states like the United States. There was a brief period of trade liberalization in the mid-nineteenth century, promoted by Britain and France, but that was rejected by late-developing nations like the United States and Germany. 

As economic realism would predict, free trade is promoted very rarely, and only then by great powers which do not fear military or industrial competition. Put otherwise, countries are apt to promote free trade, not in the abstract, but in proportion to the amount that it is likely to benefit them directly. Exhibit A is Great Britain: after having employed protectionist measures for centuries to build up and expand its manufacturing lead, Britain opportunistically became an evangelist for free trade in the mid-nineteenth century, hoping to open up fresh foreign markets for its exports. A century later, after 1945, the United States also switched from infant-industry protectionism and preached free trade with the zeal of a convert. How convenient.

What international relations theorists like to call a strategy of “liberal hegemony” is not an alternative to realism and economic nationalism; rather, it is a version of both. A country that is a military and economic hegemon, with overwhelming military power and unmatched industrial supremacy, can afford to be relaxed about the military-economic security dilemma—at least for a time.

Until the war-devastated economies of Europe and Asia could begin to recover over a decade later, the United States enjoyed a near-monopoly in global markets for manufactured goods—a situation that it saw as the natural state of affairs. During the Cold War, U.S. policymakers indulged Japanese and German mercantilism, sacrificing the interests of American producers to the goal of keeping Japan and West Germany in the U.S.-led anti-Soviet alliance. They did so on the complacent assumption that the United States would remain by far the dominant industrial economy.

THE LOGIC of the military-economic security dilemma suggests that a grand strategy of liberal hegemony should be abandoned by a declining hegemon that is losing relative shares of military and industrial capacity to rising powers. The former hegemon need not revert to the infant-industry protectionism of its own earlier catch-up phase. Rather, it should seek to open foreign markets for its exports while preserving its domestic industries from unfair competition by insisting on strict reciprocity in trade. And it should minimize its economic dealings with current and potential military rivals altogether, for fear that its consumers and capitalists will build up the power of enemies.

Neither Britain nor the United States following their heydays have acted on this common-sense logic. Britain should have abandoned its policy of unilateral free trade in the 1870s and 1880s in response to the rise of protectionist America and Germany. Instead, it did not adopt neo-protectionism until the 1930s. By then, a crepuscular glow had set on the British empire—its elites realizing all too late that their might was disappearing.

Likewise, the United States dallied when it should have abandoned liberal hegemony for a more transactional Nixonian economic nationalism in the 1970s and 1980s, once American manufacturing began to be battered by revived German and East Asian imports, even before the industrial rise of China. Instead, for the last half-century, the United States, like Britain a century earlier, has done the reverse. Mesmerized by a putative liberal world order, Washington has extended its military frontier, taking on more and more imperial commitments, while allowing mercantilist Asian and European trading partners to wipe out much of American manufacturing. Likewise, U.S.-based multinationals have transferred over much of their production capacity to China, Mexico and other countries, where cheaper labor or government subsidies exist in abundance.

In my view, the persistence of free trade policies in Britain and the United States, even after they became harmful, is perhaps best explained in terms of domestic political factors. The most important among these is the political influence of finance.

Nations that rise to dominance via manufacturing enjoy vast profits, which are ploughed back into finance in the same country. Initially, a country’s financial sector tends to grow on the back of manufacturing and other industries. Consider how the Rockefellers moved from manufacturing into banking, or how Texas oil profits seeded Houston and Dallas banks. 

The problem is that a politically dominant financial sector may be willing to sacrifice the interest of domestic manufacturers in the service of other goals, like opening trading partners to financial investment. More than a century ago, in the debate over British policy, the City of London successfully defeated the British economic nationalists whose fears about German military and economic power and the decline of British industry were brutally confirmed in the world wars.

In the contemporary United States, Wall Street, through its allies in the U.S. Treasury Department, has been the strongest supporter of liberal globalization. Wall Street has been joined in its war against Detroit and Pittsburgh by multinationals like Apple, which moved assembly of its iPhones from the United States to China, and importers like Walmart, whose success was based on selling low-cost Chinese goods in the U.S. market.

DONALD TRUMP’S trade strategy, whether toward Europe, Mexico, Canada or China, has been blundering and inconsistent in many ways. Nevertheless, it can be viewed as a version of one of the two options for the United States that can be pursued by Trump’s successors. One is a new economic nationalism, preferably more sophisticated and far-sighted than Trump’s. It would abandon the anachronistic liberal hegemony strategy of the Cold War and post-Cold War eras for a more transactional approach in trade. It would treat domestic manufacturing as the basis of national military power.

The other option is an attempted restoration of liberal hegemony, possibly on a smaller scale—for example, by trying to create a “triad” bloc of the United States, Europe and America’s East Asian allies that excludes China. The Obama administration tried something like this second strategy of consolidating the industrial countries other than China into an American-led bloc with its promotion of European-American trade via the Transatlantic Trade and Investment Partnership and U.S.-Asian trade via the Trans-Pacific Partnership.

In the long run, the restoration of liberal globalism on a smaller scale minus China is unlikely to succeed. For one thing, America’s European and Asian allies cannot agree whether China is a threat or a commercial opportunity. For another, India, should it rise to great power status, is no more likely than China to give up self-interested economic nationalism and convert to quaint nineteenth-century British free-trade ideology of the obscurantist kind recycled in mathematical form in American economics departments. 

Thanks to the logic of the security dilemma, in a multipolar world of rival great powers in which the major centers of military-industrial power are North America, Europe, East Asia and South Asia, in the decades ahead international liberalization as a general economic strategy is unlikely to find powerful champions. To be sure, there may be a high degree of economic integration among allied countries, as well as free trade in particular industries of lesser strategic significance. But the major powers will not allow market forces to compel them to lose not only narrowly-defined military industries, but also a much larger set of strategic industries with both military and civilian applications. 

Power politics is back. The dream of a global free market is dead.

Michael Lind is a Professor of Practice at the Lyndon B. Johnson School of Public Affairs and co-author, with Robert D. Atkinson, of Big is Beautiful: Debunking the Myth of Small Business.

Image: Reuters