Read THE SHIELD OF ACHILLES Online
Authors: Philip Bobbitt
The society of market-states will be dominated by three important actors, much as the Cold War was dominated by two. Europe will be the world's largest market and the largest trader; Japan will be the world's largest creditor, as it is now, with a GDP that approaches that of the United States; the United States will remain the world's most powerful single economic state, the possessor of the world's reserve currency,
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and the market with the largest GDP.
Since the end of World War II, economic relations among these three actors have been largely guided by the Long War objectives they shared and the security alliances that served those objectives. Indeed there was
relatively little direct collaboration between Japan and Europe, as both saw their futures as linked directly to Washington. German redevelopment occurred, perhaps could only have occurred, within the nuclear and conventional strategic guarantee of NATO. This relationship tempered economic competition in both directions: the Americans were anxious to develop a strong ally as a bulwark against communism; the Germans were eager not to alienate the Americans and be abandoned in the center of Europe, astride the division between East and West. Germany realized that its long-term goal of reunification could only take place under American sponsorship; America understood that a neutral West Germany would not only demoralize the remaining noncommunist European states, but would cease to be the driving economic engine of European recovery within what was then the European Economic Community (EEC). The EEC itself was strongly endorsed by the United States as offering the best prospect for European growth and stability.
With respect to Japan, the intertwining of economic development and security guarantees was even tighter. Japan faced at least three potentially lethal adversaries in the western Pacific and was largely unarmed; she therefore depended upon the United States to underwrite her survival as an independent state. At the same time, the United States was an avid mentor, encouraging economic development. Here too Washington believed that its own struggle against communism would be best served by a dynamic, capitalist economy in an allied state. For its part, Japan attempted to pacify U.S. alarm over growing American trade deficits, in order not to upset existing security arrangements. As C. Fred Bergsten observes:
The United States and its allies… frequently made economic concessions to avoid jeopardizing their global security structures. Cold War politics in fact sheltered the economic recoveries of Europe and Japan, and America's support for them. The United States seldom employed its security leverage directly in pursuit of its economic goals; indeed, security and economic issues remained largely compartmentalized in all of the industrial democracies.
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Bergsten concludes that the end of the Cold War will “sharply heighten the prospect of a trade war”
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among these three northern-tier communities. For each of the world's principal market-state actors, the overriding security concerns that muted its economic conflicts have receded, and there are substantial incentives to play a rougher game. In Europe, efforts to deepen the European Union (bringing about greater political centralization within the E.U.) and widen it (expanding E.U. membership to Central and Eastern European states) mean that imports to the European market are likely to decline. Preferential access to markets within the E.U. will act to deliberalize
global trade. Even with Great Britain within the E.U., the historically mercantile trading policies of France and the consistent German demand for a strong euro—with all this entails for the other E.U. members' monetary policies in a single currency environment—will drive the demand for strong external barriers against the United States and Japan. A strong euro makes German exports less marketable and makes foreign imports more threatening; if the other E.U. states are required to adopt deflationary monetary policies, then it is difficult to see how they could maintain liberal trading policies with either Japan or the United States.
For their part, the United States and Japan are locked in a kind of codependency. The Japanese have a large investment in American firms
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and hold a large amount of American external debt.
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Indeed Japan can be said to have financed the U.S. budget deficit for over a decade. Without this ready buyer of American debt—Japan is now the world's largest creditor state and holds between one-quarter and one-half of all U.S. debt to foreigners—interest rates in the United States would have increased, choking off growth. The alternative, a rapid and precipitous tax increase, would have had the same effect, drawing liquidity out of the American economy at a vertiginous rate. There was, in reality, no other short-term alternative. At the same time, Japan has been dependent on the vast American market to supplement consumer demand at home. Only this fertile opportunity has permitted Japan to maintain full employment despite a sluggish domestic economy that has failed to generate new jobs. Without exports to the United States, Japan would have unemployment rates similar to those of Western Europe—9 percent to 11 percent at this writing—and higher in the politically sensitive smokestack industries that are facing ruthless competition from states such as South Korea.
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Like two persons trapped in a bad marriage, the United States and Japan have grown increasingly hostile to one another precisely because each blames the other's unwillingness to reform for its own troubles. There are powerful political voices in both countries that find popular support in bashing the other. Any significant recession in either state would result in calls for an aggressive protectionism—but against whom?
Strategic studies in history, as well as contemporary game theory, suggest that a multipolar system is an unstable configuration.
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Two parties will inevitably coalesce, leaving the third in a highly threatened position. The incentive that drives war is usually the desire to prevent a steadily worsening position. In such circumstances it hardly matters to the society
of states which coalition forms—there are plausible scenarios for all three possibilities. Europeans and Americans have strong cultural bonds; the United States and Japan have, as we have observed, strong economic links that are acutely sensitive to severance; Japan and Europe have similar protectionist attitudes, and similar models of close cooperation between banks and industries with government planning and support.
Nor would a trade war necessarily take on the overt, violent manifestations of previous wars. If that were so, then perhaps the underlying strategic strength of the United States would assert itself toward harmony (though it is just as possible that Germany and Japan would react by developing nuclear weapons). Rather it is more likely that trade conflicts in the twenty-first century will be fought with covert means for which governments could deny responsibility. So-called logic bombs, which are planted in computer software, could disrupt and even cripple the economic behavior of any of the advanced states. The “choke points” so beloved of strategists from Mahan onwards, the closing of which could interdict sea-borne supplies, may now take on a less geostrategic and more cyberstrategic aspect. In a tripolar world of disguised, privatized attacks, against whom does one retaliate? And if retaliation becomes uncertain, of what real significance is it that a state has the power to retaliate, this power having lost any deterrent effect?
The nation-state is peculiarly vulnerable to such attacks because they appear to come from the private sector and not directly from a rival state. With its sharp division between state activities and private ventures, nation-states have difficulty—as we have seen in the case of covert state-sponsored terrorism—dealing with threats that do not obviously come from other states. A society of market-states could better cope with such attempts at extortion. The emergence of the intense economic competition that characterizes market-states, however, might also combine with another strategic innovation of the Long War, the development of weapons of mass destruction, in a particularly threatening mode.
Consider, for example, the possibility of using biological (and possibly chemical) weapons not against the military targets of the nation-state, but against the economic targets of the market-state. Suppose an adversary raw materials producer—say China—attempted to gain market share in corn exports by dramatically weakening U.S. corn production. There are corn-seed blights, such as
fusarium graminearum
, that could be clandestinely sprayed over the U.S. Midwest from commercial airliners flying the polar route from Beijing to Chicago or St. Louis.
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If this hardy spore were disseminated in winter, the blight would be present in the soil at the time for spring planting. The resulting corn-seed blight would crush the U.S. crop. Hogs and cattle would become too expensive for many farmers to feed. The United States would be forced to import corn for the first time in its history. Food prices would skyrocket with immense profits to those states that could still produce. If, as Shintaro Ishihara predicts, “the twenty-first century will be a century of economic warfare,” the means of prosecuting such warfare will arise from the innovations that won the Long War.
Information technologies are the product of the synergy evident in two of the Long War's strategic innovations, international communications and rapid computation. These technologies enable private companies to elude and even punish nationalist attempts by governments at controlling the market. As a result, market-states are compelled to avoid measures that are anticompetitive if these states are to maintain the basis for their legitimacy, because only the most efficient responses to the demands of the international market will maximize the opportunities available to consumers and producers. Patently “protectionist” moves to manipulate that market—as Japan, Europe, and the United States have all attempted—are, in fact, counterproductive because the information technology available to the private sector can easily counterbalance any national efforts to govern the market. Two examples will suffice.
In order to stimulate exports, Japan has manipulated the yen, depressing its value. The domestic Japanese economy, however, has not responded to this stimulus, even at interest rates that are at historic lows. With a huge dollar surplus, the Japanese have been forced to overinvest in United States assets even though Japanese financial experts, and the Central Bank, knew these assets were overvalued and would have to be marked down. The United States attempted a similar effort to boost exports in the late 1970s by depressing the value of the dollar. American exports rose sharply, but here too the domestic economy failed to pick up. Indeed it fell into a recession, producing high unemployment figures and high inflation. In both cases international markets in the yen and the dollar absorbed the manipulative efforts of governments, without producing a domestic stimulus.
Only economic activity that actually enhances wealth—as judged by its contribution to the valid information devoured by the market—produces growth. Neither the Japanese nor the U.S. model for economic management is necessarily better (despite current appearances to the contrary), as we will see in the next chapter, because each must be measured not only in terms of economic performance but also with respect to the culturally idiosyncratic needs of very different societies. Neither a mercantilist, export-driven policy with an emphasis on capital formation and protection nor a free-trade, consumer-oriented, debt-financed policy is a priori superior. Either policy can succeed*and has—so long as it does not defy the source of wealth within the society of market-states, valid information, by attempting to manipulate that information through regulatory, fiscal,
and monetary policies. Corruption and cronyism, on the one hand, and concern for the disruptive effects of free trade on workers or protected sectors like farming, on the other, can motivate states to perpetrate such distortions.
Enhanced technologies of computation and communications will further accelerate the shift to the market-state that maximizes opportunity (which is an information good) and the shift away from the nation-state that maximizes welfare. This movement, however, may provide the best inoculation against trade wars. A nation-state only wishes to improve its relative position, in order to be able to control its environment and thus bring a better life to its people than its ideological competition; a market-state attempts to improve its absolute position, because only in so doing can it maximize the opportunities available to its citizens. For this reason, nation-states were actually more likely to wage trade wars and market-states more likely to concentrate their energies on more aggressive competition—though we must bear in mind that the two strategies are by no means mutually exclusive.
The long-term decline in the demand for raw materials that began in the late 1970s has inevitably had important effects for the states of what was once called the Third World. If, for example, raw-materials prices had not collapsed in these years, Brazil would have had an export surplus almost 50 percent higher and would have had little difficulty in meeting the interest payments on its foreign debt. Indeed, if raw-materials prices had remained at 1973 or even 1979 levels, there would have been no debt crisis for most debtor countries, especially in Latin America.
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More important, the terms of trade—the ratio between the prices of manufactured goods and services and the prices of raw materials—are at present as unfavorable to the underdeveloped, raw-material-producing states as they were in the deflationary period of the Great Depression.
This is partly the result of abundant harvests and greater efficiencies in producing raw materials. It is also the result of the smaller—and shrinking—component that raw materials make up of finished products. An IMF study concludes that the amount of raw material needed for a given unit of economic output has been declining at the rate of 1¼ percent per year since 1900.
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In 1984 Japan consumed only 60 percent of the raw materials consumed for the same volume of industrial production in 1973.
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Several factors are responsible for this change. Industrial production is switching away from products like automobiles (40 percent of whose cost is in raw materials) to microchips (1 percent to 3 percent). Automobiles and other traditional goods are themselves using cheaper, artificial materials (steel is being replaced by plastics made of raw materials with half the
cost of steel); fiberglass cables can transmit as many messages over 50 – 100 pounds of cable as are carried by one ton of copper wire.
Additionally the comparative advantage of low labor costs in the underdeveloped world is increasingly of less significance as labor costs themselves amount to a smaller percentage of total manufacturing costs. Partly this is due to increasing automation and the replacement of manual labor by machines, including robots. But this change in the components of production costs is also due to the shift from industries that were labor-intensive to those that are information- or knowledge-intensive. The manufacturing costs of the semiconductor microchip are estimated to be about 70 percent intellectual (research, development, testing, marketing) and less than 12 percent labor. About the same figures obtain for pharmaceuticals, whereas even the most highly robotized automobile plant would still find about 20 – 25 percent of its costs consumed by labor. Because raw-materials earnings and profits from labor-intensive industries are used to provide the capital for industrialization, one can wonder on what basis development can take place in the Third World when these avenues are denied them. Peter Drucker notes:
In the rapid industrialization of the nineteenth century, one country, Japan, developed by exporting raw materials, mainly silk and tea, at steadily rising prices. Another, Germany, developed by leap-frogging into the “high-tech” industries of its time, mainly electricity, chemicals, and optics. A third, the United States, did both. Both routes are blocked for today's rapidly industrializing countries—the first because of the deterioration of the terms of trade… the second because it requires an infrastructure of knowledge and education far beyond the reach of a poor country… Competition based on lower labor costs seemed to be the only alternative; is this also going to be blocked?
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The potential consequence for the society of states is a disjunction between one group composed of market-states and a second group of states whose underdevelopment hampers their making a constitutional transition to the new form. Of course, at any moment in the story of consti-tutional change, there are always examples of different models being simultaneously pursued. Many Third World states (such as Taiwan, Jordan, or Guatemala) did not become nation-states until almost the end of the era of the nation-state itself, but most had long been nation-states (though some, such as Saudi Arabia and Brunei, resemble much earlier constitutional forms).
The consequence for the society of states can be profound, however, because the unassimilated states will be unable to participate effectively in the multistate institutions and practices that this new constitutional form
creates. The relationship between the G-7 and the Group of 100 (proto-market-state institutions) scarcely parallels that which exists between the U.N. Security Council and the General Assembly (with regard to nation-states). Unlike nation-state institutions with virtually universal membership based on the political equality of states, there is a price of admission to the society of market-states (though there may be “scholarships” for some). Some states will be left behind. With no stake in the system as a whole, and following a different archetype for the very basis of legitimacy of the State, these unassimilated states may form a competing, retrograde society, or simply become solipsistic, venomous states, alternately dedicated to isolation from the rest of the world and to its destruction.