Economic interdependence among nations, Americans have long believed,
is the surest and safest path both to a wide prosperity and a perpetual peace. If
all nations jointly depend together on one vast "global" factory for many basic
goods, so our thinking holds, no one state will ever dare disrupt the
functioning of this "communalized" system.
In recent years, the United States pursued this strategy nowhere
more dramatically than with China. The basic idea -- as Bill Clinton put it in 1997
-- was that further "isolation would encourage the Chinese to become hostile."
Conversely, greater interdependence would have a "liberalizing effect."
But nearly two decades after Washington lifted almost all
controls on commerce with China, this is not happening. Despite a vast increase
in trade between China and the rest of the world, and a vast increase in the wealth
and well-being of the average Chinese citizen, the regime has become more
autocratic at home and more adventurist abroad. If anything, Beijing is proving
highly adept at leveraging interdependent systems for national political advantage,
as it did two years ago when it cut off export of rare earth metals to force
Japan to back down in a territorial dispute.
So what should a fading hegemon do when its grandest of
strategies proves to be flawed?
One extreme option would be to double down on that strategy,
hoping that yet greater degrees of industrial interdependence might finally
convince our rival to act as a more responsible partner in the world system. Another
extreme option, diametrically opposed to the first, would be to abandon interdependence
in favor of more traditional approaches such as a military balance of power.
The Obama administration, over the last year, has chosen to pursue
both of these extreme -- and opposed -- options. On the one hand, it has begun
to devote real energy to a new generation of trade agreements, like the Trans-Pacific
Partnership, which aim to tie the U.S. and Chinese economies together even more
closely. On the other, it has begun to meet force with force. As Beijing
blusters in the South China Sea and builds up military power, Washington has dispatched
Marines to Australia, promised a new missile shield to Japan, and proposed to station
a second carrier group in the region.
This is absurd. To tighten the gears of the international production
system and, simultaneously, to position more heavy weapons right on the factory
floor is a recipe only for catastrophe. Any conflict of any size would almost
instantly break many of our most vital systems of supply. Instead, the United
States should use its power to force corporations to distribute production
capacity more widely. Such a move would reduce China's growing leverage over
America -- and it would help stabilize the international system, economically
To understand our task today, we must first remind ourselves
of what American policymakers intended when they set about rebuilding the
nations shattered in the Second World War.
One of the most daunting political challenges of the late
1940s and early 1950s was to figure out how to restart German and Japanese
industry while preventing either state from using that capacity to support
reckless military ventures. In Europe, the result was the Coal and Steel
Community, which tied German industry intimately to that of France. In Asia,
the result was to cede large sections of the U.S. market for industrial goods to
Japanese firms, and thereby to tie Japan's industrial interests intimately to those
of America. The idea was to develop the industrial capacities of our allies,
then to weave those many distant factories into complex, border-busting networks
designed to force a productive cooperation among peoples.
These days, international relations experts often distinguish
between "hard" power --namely, military force -- and "soft" power like diplomacy.
In the years after World War II, policymakers in Washington carefully
coordinated the projection of national power across at least four distinct
planes. In addition to military force, they manipulated ideology and
information, monetary policy and finance, and supply and production.
Sometimes the aim was to coerce a private firm into sharing some
industrial art with an ally. In one classic example, Washington forced U.S.
companies to transfer both technology and machines to Taiwan's nascent radio
industry. Another came when Washington helped to transfer television
technologies to Japan.
Other times Washington brought power to bear directly on an
allied state. The most dramatic instance was in 1956, when the Eisenhower administration
shut down an Anglo-French attempt to seize control of the Suez Canal. It did so
not by threatening to intervene militarily, but by threatening to crash the
British pound and to cut off the flow of oil to both nations.
During this first era of postwar "globalization" there were,
however, still real limits to how much industrial specialization nations would
accept or expect. Washington -- even while liberally welcoming the exports of
Japan, Germany, and other nations -- sought to ensure that U.S. firms remained
competitive in all vital industrial activities, hence that Americans would
continue to understand all basic industrial technologies. Key trading partners,
meanwhile, also demanded high degrees of autonomy for certain industries, demands
that Washington rarely challenged. As a result, nations mostly continued to
produce their own heavy machinery, automobiles, defense materiel, chemicals,
The wide distribution of industrial capacity and industrial
ownership that resulted was buttressed by the fact that the United States and
other industrial nations still enforced strong antitrust laws during this
period. And it was further boosted by the then-common fashion among "vertically
integrated" industrial firms to make their own components rather than rely on
By the time the Berlin Wall fell in 1989, the achievements of
this first generation American imperial system were far greater than almost
anyone had imagined when the rules were first established. The nations integrated
within this system enjoyed a great and highly democratic prosperity. More
important, they enjoyed a wide and deepening peace, most strikingly on the millennia-old
battlefields that stretch along the Rhine. And yet these nations were tied
together loosely enough to allow for failure. The collapse of a large company
or large bank generally threatened only one economy at a time. Problems could
be isolated, cleaned out, even fixed.
After the collapse of the Soviet Union in 1991, groups around
the world began to promote the idea of a next phase of international industrial
integration. One key goal would be to expand the international system to include
nations like China and India. Another would be to deepen integration among the nations
already within the system.
The first main step toward such a "second-generation"
globalization was the lifting of most trade restrictions on China, beginning in
1993. Even more fundamental was the transfer of much of the power to regulate
trade from the state to the corporation, accomplished through such agreements
as the 1994 Uruguay Round of the General Agreement on Tariffs and Trade, which
established the World Trade Organization.
This era also saw the establishment of a new myth -- that "globalization"
is less the result of political decisions than of some sort of metaphysical and
hence unstoppable "force," powered perhaps by technology or the market itself. And
this era saw the establishment of a new set of high rules, the most important
being that no state should ever attempt to interfere in the workings of this "natural"
process of "globalization," not even the state that imposed the system in the
In the nearly two decades since, this replumbing of the
international system has resulted in a truly revolutionary change in how
international industrial activity is regulated.
In the 1980s, when Tokyo moved to capture command over the
production of computer components like DRAMs, the Reagan administration used a
combination of tariffs, quotas, subsidies, and arm-twisting to force the shift
of much of that industrial capacity to third-party nations, such as Taiwan,
South Korea, and Singapore. The goal was not to bring this vital capacity home,
nor to restore manufacturing jobs in America. It was to make the international
system itself more competitive, more international, and more stable.
In the 1990s, by contrast, Washington paid little or no
attention as Japan and other mercantilist nations -- most notably Germany,
South Korea, Taiwan, and China -- made similar plays to capture control over particular
industrial activities. When Taipei used the Taiwan Semiconductor Manufacturing
Corporation to build a commanding position in the business of making chips, no
one challenged this play. Nor was there any effort to stop Seoul from using Samsung
to capture a commanding position in the business of making DRAMS. Or to stop Beijing's
highly coordinated efforts to capture command over the assembly of most electronics
or the production of vital chemicals like Vitamin C.
This change in international regulation of industry was
compounded by the de facto abandonment of antitrust enforcement in the United
States and elsewhere, and by industrial "outsourcing," the euphemism of choice
for the practice by which industrial corporations jointly pool the operations
of their suppliers. Suddenly, after many decades of careful grooming of competition,
no authority in government or in the private sector was charged with preventing
monopolization of control and the concentration of capacity and power.
The result today is an entirely new level of geographic
concentration of industrial capacity. In instance after instance, some nation
or another has made itself master of some vital link in the chain of production.
This concentration of capacity poses many, entirely
unprecedented problems. One of biggest is that it makes the production system,
as a whole, physically unstable. For the first time in history, entire swaths
of our international industrial system have become subject to "crashes" much
like financial crashes. A good example of such a crash took place after the
March 2011 tsunami in Japan. Much of that disruption could be traced to the
loss of a single plant, belonging to a semiconductor manufacturer named
Renesas, which supplied a single vital component to almost the entire Japanese
automotive industry, as well as many car manufacturers abroad.
Indeed, industrial capacity today is so highly concentrated
and tightly integrated that any of many natural, financial, epidemiological, or
political disasters anywhere in the world would immediately paralyze much if
not most of the international system, with perhaps catastrophic results.
A second problem posed by this extreme geographic
concentration of capacity is that it appears to be politically destabilizing. High
priests of this second generation of globalization -- like New York Times columnist Thomas Friedman -- hold that such extreme
industrial interdependence means no rational actor will ever risk disrupting
business as usual. After all, for system to work, everyone must show up for
work every day.
The problem with this line of thinking is that it is simply
not true. Indeed, it is all too easy to imagine scenarios in which a high
degree of interdependence actually tempts
some rational actor to disrupt the normal flow of goods, to achieve some
political end. This includes, most obviously, enemies of the system, like
terrorists. But it also includes factions within a state making a play for
power. And it includes existing state leaders, perhaps seeking to exploit some
particular dependency in our interdependent world for national gain, just as
Beijing itself did in the fall of 2010 when it cut off the flow of rare earths elements
This same power can be turned on America.
In recent years there has been a lot of talk about how China
has become America's main banker, hence how Beijing can cut off our credit. The
far more real and immediate threat is posed by the fact that China has also become
our main provisioner of innumerable vital goods, including some of our most
important pharmaceuticals, chemicals, and electronics, as well as our clothing,
shoes, hand tools, lightbulbs, and batteries.
The threat is beautifully simple -- to stop us from getting
what we need.
The time has come to recognize that America's decision to
renounce our traditional role as the ultimate arbiter and enforcer of the postwar
international economic system has left the world a far more dangerous place,
politically and economically.
First off, doing so unleashed a dangerous scramble for
power, by all but forcing second-tier regimes to adopt reckless, nationalistic behaviors
to promote their industrial exports, if only to protect themselves from the tactics
of the other mercantilists in the room. Along the way, one of these regimes,
Beijing, managed to consolidate sufficient industrial and financial power -- and
a sufficiently sophisticated understanding of how to exercise such power -- to
do what no other nation has managed since the war, which is to establish itself
as de facto co-hegemon alongside the United States.
Worse, America's decision in the 1990s to dismantle both the
intellectual framework and the state institutions necessary to understand how the
global industrial system really works means that the United States -- due to
our blindness - is itself fast emerging as one of main threats to the peace,
prosperity, and stability of today's world.
Nowhere is this more evident than in our present attempt to combine
further industrial appeasement of Beijing with a provocative show of military force,
in our increasingly panicky effort to keep China productively engaged in our
world system. Obama officials clearly view their "Asia pivot" -- and new
proposals to further liberalize trade -- as a smart hedging strategy, a bit
more carrot backed by a bit more stick. Yet given that neither element of this
"strategy" makes any sense on its own, it is highly unlikely that the two
elements will be effective when combined together.
On the contrary, this "strategy" -- by simultaneously further
empowering and further provoking China -- may well only lay the groundwork for
some sort of grand and dangerous national humiliation, not unlike that imposed
by the Eisenhower regime on Britain and France in 1956.
In the event of some sort of actual showdown in the South
China Sea, Beijing already knows, first of all, that the United States is
extremely unlikely to use military power. One of the prime rules of warfare,
after all, is to keep your supply lines behind you, and the first shot in the
South China Sea would immediately sever many of the most vital systems of
supply that serve not only the U.S. military but the civilian population stateside.
Second, Beijing already knows that it enjoys the ability to project significant
real power directly into the United States by disrupting the normal flow of
Officials there do not even need to impose some sort of
across-the-board trade embargo to achieve their ends. Far more effective would
be to put the squeeze on one industrial system or other, or one company or
other, day after day, in a systematic fashion, until Washington cried uncle. The
Pentagon has sketched out complex plans for how to respond to any use of force
by China. Far more useful would be to know how the United States as a nation
would respond when, suddenly, grandma can't get her medicine. Or when,
suddenly, the store shelves empty of batteries and lightbulbs. What does the
president do when he has General Electric and Wal-Mart both on the phone,
demanding the restoration of normal trade? Or when Apple's stock plummets
because the company can't move any of its iPhones through Chinese ports?
The only real option is to embrace the logic of industrial
interdependence, hence to recognize that the only way for the United States to
achieve its most vital national aims -- indeed, to be taken seriously by China --
is no longer to reposition its aircraft carriers, but to force its industrial
and trading corporations to reposition the machines on which it depends. The
United States does not need to bring all or even any of these systems of
production home. But it can no longer continue to live in a world in which many
activities remain in one location, under the control of one state, especially a strategic rival.
The task won't be easy. More than half a century has passed since
the United States had sufficient power simply to dictate policy to its
industrial partners. But if there is any doubt that a large nation today can
compose a strategic vision and then put it into effect, we need but consider
China. From a position of near impoverishment China has, over the last two
decades, leveraged itself into a position as co-sovereign over today's
Washington will also likely soon discover that it has real
allies in this effort. When a system is built to crash, the only rational
action is to fix it, and rational actors in other states will therefore support
any reasonable effort. The goal, after all, is a third generation global
system, one built to last for the 21st century.