War by Other Means
Page 6
If the return of geoeconomics is driven at least partly by its popularity among rising powers, what explains their attraction? It may be a lack of promising alternatives. The logic of challenging the United States in a large-scale war is growing more remote (especially for state actors and especially in any land-war scenario). One need only observe the way that other countries are looking at their respective military equations—none is even attempting to challenge American military primacy in a comprehensive way. At most, they seek to blunt the ability of the United States to exercise unilateral dominance in a given regional context (as with China’s ongoing military buildup). The theater of contest has shifted in important ways.
Even if countries were challenging the United States militarily, there remain separate questions about whether today’s security challenges are best suited to military tools. Even as U.S. military and security investments have climbed over the past decade, military intervention buys less and less: America spent as much on Iraq as on Vietnam, and a decade after the U.S. invasion of Iraq, that country’s future remains highly cloudy or worse. Despite this, extremist Islamic militants in Iraq have staged an impressive comeback since 2009. Harvard researcher Linda Bilmes estimates that the wars in Iraq and Afghanistan will eventually cost American taxpayers $4 trillion to $6 trillion.6 In Afghanistan, meanwhile, the Taliban could well mount a nationwide return to power.7 While the United States has significantly degraded al-Qa’ida’s core operational capacity, al-Qa’ida’s affiliates—along with jihadist organizations that are operationally independent but sympathize with its mission—have proven resilient.8
Some skeptics of geoeconomics will invariably point to the military crisis of the day to argue that military muscle remains very much in fashion. Many looked at Russia’s invasion of Georgia in 2008, for example, as proof that the hoped-for transition from geopolitics to geoeconomics was illusory. As Robert Kagan explained at the time, “Many in the West still want to believe this is the era of geoeconomics. But as one Swedish analyst has noted, ‘We’re in a new era of geopolitics. You can’t pretend otherwise.’ ”9
Kagan’s binary construction—conceiving of geoeconomic muscle as somehow zero-sum in combination with military power—misses the point. The same is true for those who would read similar lessons into today’s military contests, both those that are realized (in Crimea, for example) and those that are merely implied (as with China’s naval buildup). To argue that states are looking more and more toward economic methods of advancing their geopolitical aims is not to suggest that the potential use of military force does not also remain an important ingredient in how many states pursue geopolitical aims.
But it is no longer a sufficient ingredient, or usually even the leading one. Today, economic factors can enable states to pursue more traditional geopolitical aims or constrain them from doing so. Consider the U.S. and EU response to Putin’s encroachment upon Ukraine, where the Kremlin “is gambling that old alliances like the EU and NATO mean less in the 21st century than the new commercial ties it has established with nominally ‘Western’ companies, such as BP, Exxon, Mercedes, and BASF.”10 China’s increasing assertiveness suggests that it may be making a similar wager around U.S. treaty commitments in Asia.11
Understanding when and how modern geoeconomics works requires appreciating it as inextricably intertwined with traditional military and diplomatic strands of foreign policy. In fact, many of the topical criticisms of certain geoeconomic tools—especially sanctions—conclude that they are ineffective precisely on account of misunderstanding these linkages. This is not a new problem. Contemporary debates in the United States and Europe on whether and how aggressively to sanction Russia over its recent territorial aggressions, for instance, share striking parallels to similar debates in the run-up to World War II. When Mussolini’s Italy annexed Abyssinia (what is now Ethiopia) in 1935, the United States and United Kingdom agonized over how to respond. “Prime Minister Baldwin [of Britain] was to say somewhat wistfully that any sanctions that were likely to have worked would also have been likely to lead to war,” Henry Kissinger once recalled. “So much, at any rate, for the notion that economic sanctions provide an alternative to force in resisting aggression.”12 But as historian Alan Dobson explained, “Italy could not have prevailed against France and Britain, or either of them separately, but the danger of retribution had to be conveyed effectively. If economic sanctions had been imposed in a different way … and had been made to appear as a clear preliminary to the use of force by France and Britain, then the story might have been very different.”13 In other words, more aggressive sanctions might have worked, but they would not have worked as a geoeconomic instrument unrelated to other aspects of statecraft.14
A second factor in the reemergence of geoeconomics is that, compared to previous eras, those states most prone to economic displays of power today have vastly more resources at their direct disposal. This is largely a story of the modern return of state capitalism.15 Like geoeconomics, state capitalism is not new, but it is witnessing a resurgence. Governments, not private shareholders, now own the world’s thirteen largest oil and gas firms and 75 percent of the world’s energy reserves.16 Between 2004 and 2009, 120 state-owned companies joined the ranks of Forbes’s list of the world’s biggest 2000 companies, while 250 private firms dropped off.17 According to reports from 2013, state-backed companies account for 80 percent of China’s stock market, 62 percent of Russia’s, and 38 percent of Brazil’s—and since 2005 have claimed more than half the world’s fifteen largest initial public offerings (IPOs).18 One-third of the emerging world’s foreign direct investment (FDI) from 2003 through 2010 came from state-owned firms.19 Governments are now the largest players in some of the globe’s most important bond markets. In the early 2000s, the world held around $2 trillion in reserves; as of mid-2015, that total now exceeds $11 trillion, with sovereign wealth funds—a term only coined in 2005—holding another estimated $3 trillion to $5.9 trillion in assets. (By some projections, this amount could rise to $10 trillion by the end of the decade.)20 The reserves of emerging nations have likewise increased, from just over $700 billion in 2000 to around $7.5 trillion in 2015, vastly exceeding reserve levels needed for import purchases.21
Across a number of measures, from major industries to equity and bond markets, from capital flows to foreign direct investment, the state’s hand is visible and growing. Moreover, the continued pattern of larger structural forces—for example, Asian trade surpluses and high commodity prices—suggests that state coffers will remain considerable (notwithstanding bouts of oil price volatility as seen in 2014–2015).22 The financial crisis that began in 2008 has done little to undermine these structural forces or to alter the political status quo in such centers of state capitalism as China, Russia, and the Gulf Cooperation Council (GCC) countries. If anything, it has reinforced the views of leaders already skeptical of core U.S. economic, diplomatic, and strategic capacities.
The emergence of this new generation of state capitalists—significantly larger, wealthier, more global, less democratic, and more sophisticated than their predecessors—raises important questions for U.S. foreign policy. For example, the only democracy represented among the world’s ten largest sovereign wealth funds is Norway.23 The concentration of such wealth and large levers of economic influence in state hands offers these governments new sources of power and foreign policy instruments. Today’s state capitalists are entering markets directly, at times “shaping these markets not just for profit,” as former U.S. secretary of state Hillary Clinton explained, “but to build and exercise power on behalf of the state.”24 One would have to search for a better or more telling U.S. government identification of geoeconomic applications.
A third factor explaining the resurgence of geoeconomics has less to do with evolving patterns of state behavior and more with changes to global markets themselves. Notably, today’s markets—deeper, faster, more leveraged, and more integrated than ever before—exert more influence over
a nation’s foreign policy choices and outcomes, compelling more attention to economic forces along the way. Apart from how states are turning more to economic instruments to produce beneficial geopolitical results, market forces and economic trend lines are themselves dictating strategic outcomes across the most important of U.S. national interests. The fate of the European Union—perhaps the West’s greatest foreign policy achievement of the twentieth century and the closest U.S. foreign policy partner—for several years rested at least as much in the hands of bond markets as in European political capitals.25 The ability of Egypt (and, by extension, the region) to navigate its way from transition to stability hangs largely on its economic performance. Indeed, the very terms of U.S. engagement in the Middle East may perhaps be significantly rewritten in the next decade, thanks to a shale energy revolution now under way in North America.26
To dwell on this final North American example just a bit more: according to the U.S. Geological Survey, recoverable gas resources have increased by more than 680 percent since 2006, and production of light tight oil (LTO) soared eighteen-fold between 2007 and 2012.27 As America’s LTO production increases and its oil imports decline, countries in West Africa, North Africa, and the Middle East will increasingly send their exports to China. And as trade routes redraw themselves, so too will the foreign policies of these energy producing countries. If U.S. production eventually hits the upper end of projections, 14–15 million barrels of oil per day, the global oil market could undergo a fundamental transformation. The longtime ability of the Organization of the Petroleum Exporting Countries (OPEC) to set the price of a barrel between $90 and $110 would be undercut if not ended. Good as this sounds, the convergence between the market price and production cost of a barrel of oil would not be uniformly advantageous to U.S. geopolitical interests. While some countries that depend upon oil revenues as a major source of public financing are traditionally unfriendly to U.S. interests, such as Iran, Russia, and Venezuela, others are friends, including Saudi Arabia, Mexico, Norway, and increasingly Vietnam.
As the energy revolution brings jobs, industries, and capital investments back to the United States, will America leverage its growing economic strength to reassert its leadership abroad, or will it decide to withdraw? Will the United States protect the global commons—sea-lanes in particular—as vigorously when it is no longer the principal energy beneficiary? Will it be inclined to use its status as an energy superpower as a tool of geopolitics? An America that is awash in shale gas and LTO could use energy as a geoeconomic instrument to strengthen its relationships around the world (as Chapter 8 argues in more detail), but will it?
How Is Geoeconomics Changing the International System?
The modern resurgence of geoeconomics, now practiced on a globally significant scale, brings with it a set of deeper, structural changes to the very logic and operation of foreign policy. At times it is a straightforward account of flexing economic muscle to advance geopolitical ends—the $12 billion that funneled into Egypt from the Gulf countries in the weeks after former President Morsi was removed from office is one example.28 As often, though, these shifts come less from the deliberate workings of a given geoeconomic policy and are far more the stuff of collateral consequence. We identify six ways in which geoeconomic tools and approaches are changing the current geopolitical landscape and, often, the practice of foreign policy itself.
CHANGE 1
Geoeconomic statecraft enables new policy choices.
The Russia of 2014, even with the extended slide in the value of the ruble, bears little resemblance to the Russia of ten or fifteen years ago. In 1998, Moscow, with less than $15 million in official reserves, was itself a customer of the IMF.29 But by 2008 Russia had amassed over $600 billion in reserves (more than forty times its 1998 reserve levels), enabling the Kremlin to bully its neighbors in Georgia and Ukraine and, at least at this writing, more or less weather any market fallout.30 Now roles have fully reversed and Russia is the one offering bailouts. Understandably, Moscow’s bailout to the ailing Yanukovych regime in late 2013 may be the most iconic example. But increasingly, Kremlin bailouts are targeting the EU’s own ranks—especially its weakest links (Cyprus, Greece, and Hungary, for example)—with packages and terms unequivocally aimed at fracturing the EU and undermining its alliance with the United States.31
What is more, Moscow now has recourse to deep-pocketed friends, which—even if they are of the purely tactical sort—might well see fit to cushion Moscow from any economic fallout for their own geopolitical reasons. Whereas the Beijing of 1998 or even 2004 may not have seen itself as having the financial resources or the foreign policy inclination to help Moscow flout the United States and EU, the Beijing of 2016 seems to have plenty of both. There emerged a flurry of energy, financing, and military deals from Moscow and Beijing in the wake of U.S.-EU sanctions against Russia. Asked about the string of deals and whether it signaled a new form of Sino-Russian alliance, Russia’s ambassador to the United States summed it up thusly: “You are pivoting to Asia,” he said, “but we’re already there.”32
In other words, newly deep coffers and the willingness to use them for the sake of geopolitics widens a state’s options and can lend new room for maneuver to governments not traditionally friendly to the United States—Angola, Ecuador, Guinea, Venezuela, and Zimbabwe are all recent examples—enabling them to make decisions at odds with U.S. national interests without nearly the same negative consequences.33 For Ecuador and Guinea, Chinese lending has acted as a buffer against market fallout from bad behavior. Lending from China (at interest rates roughly 3 percent below market) meant that Ecuador could afford to forgo tapping international credit markets in 2012, President Rafael Correa said in February 2012—thus rendering political decisions such as granting asylum to Wikileaks founder Julian Assange easier.34 In Guinea in 2010, just fifteen days after soldiers shot down 157 pro-democracy demonstrators, the Guinean government signed a $7 billion mining contract with a Chinese state-owned enterprise.35
Then there was Qatar’s autumn 2011 takeover of Iran’s national airline, Iran Air, which was strapped by UN sanctions and unable to procure necessary parts. State-owned Qatari Airways, widely described as one of the country’s most effective diplomatic tools, quickly offered itself to Tehran as a means to circumvent the sanctions.36 “Allowing Qatar or any other foreign country to operate some of our domestic flight is aimed at diminishing the pressure of the sanctions, and it is a suitable policy under the current conditions,” Iranian lawmaker Ali Akbar Moghanjoughi explained after Iran and Qatar reached a deal.37 But, as with so many of Qatar’s investments, the deal came with strategic influence over its sometime friend in Tehran, also one of the region’s most crucial geopolitical states. “A very small country will be in charge of Iran’s domestic flights,” Kamran Dadkhah, a U.S.-based professor of Middle Eastern economies, said of the deal. “As a result of the deal the services provided by Iranians and their jobs will practically be under the control of another country.”38
CHANGE 2
Geoeconomics enables states to use new foreign policy tools, some of which are unavailable to U.S. and other Western leaders.
Beyond enjoying a wider set of policy options, at least some states also find they have new geoeconomic tools available to them that the United States and other Western countries cannot exercise. When Chinese president Xi Jinping visited Russia in March 2013, he called for closer cooperation between the two nations. As a goodwill gesture, he outlined a $2 billion loan by China to the Russian oil company Rosneft, which will repay China in oil over a period of twenty-five years. And when Brazilian president Dilma Rousseff arrived in Beijing on her first state visit to China in April 2011, Chinese president Hu Jintao, aiming to strengthen diplomatic ties with Brazil, greeted her with an order for thirty Brazilian Embraer planes plus five options, executed via three different Chinese state-owned airlines.39 As one observer noted, “That is not the sort of gift that the U.S. government, or Japan’s could or would gi
ve—All Nippon or United would not obediently line up to buy diplomatically preferred aircraft, and announce their purchase exactly on the diplomatically preferred date.”40
Moreover, especially when applied coercively, today’s brand of geoeconomics seems to confound Western governments, straining their ability to respond. Europe and Japan, America’s closest security partners, are facing some of the most brazen shows of coercive geoeconomics anywhere. Yet in both cases these U.S. allies have struggled to mount any effective and united rejoinder to Russia’s economic intimidation of Ukraine and to China’s coercive economic tactics vis-à-vis its own region, including Japan. Tensions between the United States and the EU over their seeming inability to mount a fitting and collective geoeconomic response, meanwhile, seemed to wear heavily on the relationship, exposing tensions and existential doubts about what sort of EU foreign policy is realistic for Washington to expect.41