Mr. Zoellick’s and similar accounts certainly come as a welcome correction of the historical record.105 But if, in fact, the United States was once so adept at this brand of geoeconomic statecraft, why has Washington largely forgotten the instrument except for sanctions? What is it about the current historical moment that now seems to prevent successive administrations from doing what the United States once did so well?
Certainly there was a palpable shift in the attention spans of those making foreign policy; with the Cuban missile crisis, Vietnam, conflict in the Middle East, and Soviet military adventures in Angola, Mozambique, Central America, and Afghanistan, America became hyperfocused on the military dimensions of the Cold War. And undoubtedly much of the answer lies in the material factors described earlier—the onset of economic insecurity in the United States for the first time in a generation, and the rise of an organized domestic political constituency for trade.
Bureaucratic and institutional factors also played an important role. U.S. political scientist I. M. Destler describes how, beginning with “Nixon’s shutting of the Gold Window … onward, the connections grew between domestic and international economic policy.”106 The White House trade office evolved, transforming from a special trade representative with modest staff and limited jurisdiction to the much larger present-day Office of the U.S. Trade Representative, with a broad mandate to lead and coordinate all U.S. trade negotiations. It also grew steadily more responsive to Congress and domestic economic interests, and by 1992 the Office of the Trade Representative had a staff of 160 and cabinet status, with two deputies holding ambassadorial rank.
The primary bureaucratic loser in all of this was the Department of State. “As long as the cold war persisted, however, the influence of the economic complex was a function of whether economic issues could be insulated from security concerns,” Destler explains. “With a strong Treasury Department, an increasingly assertive USTR, with assertive external constituencies, this was often possible. But national security concerns retained primacy—they engaged presidents the most. But the fall of the Berlin Wall in 1989 and the Soviet Union in 1991 led to a questioning of this primacy at its core.”107
Yet the larger answer explaining why the United States shifted away from geoeconomics may have less to do with evolving foreign policy habits than evolving economic beliefs—and, maybe more to the point, changes in the willingness of economists to perceive themselves and their discipline as embedded in larger realities of state power. One of the most interesting and provocative claims on this subject comes from Yale law professor David Singh Grewal, who suggests that what today’s U.S. policy makers experience as a relatively recent phenomenon—this perceived divide between the logic and objectives of economics and of statecraft—actually marks a reversion to trend. In fact, Grewal argues, when it comes to any happy alignment between economists and foreign policy makers in the United States, it was the post-1945 period, not today, that stands as the aberration. Beginning roughly with Adam Smith and his critique of mercantilism onward, the non-zero-sum logic of liberal (and now neoclassical) economics, which favors liberalization, has been in tension with the historically more zero-sum logic of interstate politics.108 And it was only for a brief moment of U.S. history that this tension temporarily abated, owing to what Grewal calls the “enormous convenience (for the U.S.) of the ideological terms of the Cold War.”109 Allowing the propagation of this liberal economic doctrine, then—from the original ideas of Adam Smith through to the revisions of Milton Friedman—actually quite suited U.S. foreign policy objectives during that time. For, in that unique conflict, the Soviet Union was opposed to free trade, “which meant that any gain for free trade anywhere was a gain for the Western world in its bid to win the Cold War. Ah, how easy it must have been to do ‘grand strategy’ in those days!”110
In fact, it was during this allegedly brief moment of alignment that liberal economics saw its intellectual ascendance—a rise that, for several scholars including Grewal, Baldwin, and others, owes much to how well the prescriptions of liberal economic thought aligned with the aims of U.S. foreign policy at the time.111 This is not to suggest that these disciplinary tensions between economics and foreign policy were not also present for much of the country’s early history—again, a period of relatively astute geoeconomic performance for the United States—only that classical and neoclassical economic ideas were not at the intellectual helm of the discipline during this long period. Rather, the prevailing standard-bearers of economic thought during the nineteenth and early twentieth centuries were much more willing to view economics as an instrument of state power.112
As the Cold War came to an end, the orthodoxy of neoclassical economic thought persisted, as did the resulting divides between foreign policy thinkers and neoclassical economists (who continued to hold economics and markets as a realm to be kept free from geopolitical interference). Again, for a while, it was of no great consequence; in roughly the first two decades following the Cold War, the United States faced no serious strategic challenge that required revisiting whether this once-happy alignment between neoclassical ideas and the country’s foreign policy needs still held up. However, disciplinary tensions between neoclassical economics and U.S. foreign policy, on hiatus during past decades, have now returned—evidenced, for example, by the surfeit of commentaries lamenting the present failure of the United States “to craft a [foreign] policy that connects our national security and our economic interests.”113 Accordingly, any meaningful attempt to return geoeconomics to a considered place within U.S. foreign policy must reexamine the most basic assumptions and “[think] outside the bounds of … deeply established disciplinary conventions.”114
What the United States faces today is a set of states, many of them rising powers, that are entirely comfortable employing most of the tools of economics to advance state power (defined to include geoeconomic and geopolitical elements alike). Often the results sit uncomfortably with the tenets and assumptions of neoclassical economics. For U.S. policy makers, to recognize this is not to advocate a response in kind. But it is to argue that many of the largest strategic challenges America faces are cases where the tools of neoclassical economics are being applied quite apart from the priors that have traditionally guided their application.115 And it is perhaps to recall the advice of Keynes and other early neoclassical economists who, in fashioning Bretton Woods, clearly saw themselves as situated within—indeed, guided by—prevailing realities of state power in all its aspects, and who saw dangers in illusions to the contrary.116
And as Chapter 7 details, these geoeconomic factors, even when present, are not driving Washington’s decision making.
CHAPTER SEVEN
America’s Geoeconomic Potential
Harnessing economic power to foreign policy goals presents formidable obstacles … Yet if war is too important to be left to the generals, surely commerce is, in this context, too salient to be left to bankers and businessmen.
—SAMUEL P. HUNTINGTON, AMERICAN POLITICAL SCIENTIST, 1978
THE RISE of China is arguably America’s most important foreign policy challenge.1 If so, then in its dealings with China the strategic tests facing the United States for the foreseeable future will be primarily geoeconomic. As China transitions to a more consumption-based growth model, takes slow but decisive steps to internationalize the renminbi, and continues diversifying away from the dollar, its economic dependence on the United States will diminish—and so, too, will its hesitation to mount a greater geoeconomic challenge to U.S. power and influence.
As Henry Kissinger explained about a year after Lehman Brothers filed for bankruptcy, “As Chinese exports to America decline and China shifts the emphasis of its economy to greater consumption and to increased infrastructure spending, a different economic order will emerge. China will depend less on the American market, while the growing dependence of neighboring countries on Chinese markets will increase China’s political influence.”2 That is not to discount China’
s military buildup or to suggest that China will inevitably swear off the use of force; rather, it is only to argue that, whatever the danger of military conflict involving China, the PRC possesses global power today largely because of the dynamism of its economy. As Leslie Gelb puts this point, “Nations around the world already see China as the future No. 1 economic power, even though it still lags behind the U.S. substantially in most categories. It’s the perception of [China] going up and [the United States] going down. And upon such perceptions, power is based.”3
But there is an even simpler reason any strategic test between the United States and China is more likely to be geoeconomic than military: geoeconomics tends to be easier and cheaper.4 As Chapter 1 noted, geoeconomics is also a realm where China finds itself less outmatched by the United States.
If the next great strategic test regarding the rise of Chinese power is to be primarily geoeconomic, the outlook for the United States is mixed: America stands well equipped but ill-prepared. Thirty years of neglect have clouded the role that geoeconomics played historically in U.S. foreign policy and given rise to a different set of understandings about its rightful role today. Consequently, the United States is underperforming compared to its present geoeconomic potential. But it is worth remembering that this potential is formidable.
Before prognosis or prescription, however, comes the question of diagnosis. How might one characterize the present use of geoeconomics in U.S. foreign policy today? Is it that geoeconomics has disappeared altogether from American foreign policy in the past few decades? Or, rather, are those making foreign policy still wittingly and deliberately practicing geoeconomics, albeit not particularly well? Or is it perhaps that they are still practicing geoeconomics, just not in a way they are conscious of, or comfortable owning up to?
Good Geoeconomics or Just Good Marketing?
In many cases, the United States is clearly pursuing economic policies for which a geopolitical case can be made. Geopolitical considerations can be read into certain policy choices—strategic and foreign policy arguments can be offered for both the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), for instance. And, indeed, as endgames for both agreements drew closer, U.S. officials turned increasingly to national security and geopolitical explanations to gain congressional support.5 Just as when General Colin Powell pushed the passage of the North American Free Trade Agreement (NAFTA) through Congress in 1993, this is largely after-the-fact marketing, brought in to sell these agreements to Congress and the American public.6
And just as with NAFTA twenty-five years ago, geopolitical considerations, while certainly there for the arguing, were not leading considerations shaping the substance of either TPP or TTIP. Instead, and in keeping with many recent U.S. policies that could be construed as having some geoeconomic logic, it is economic considerations, not geoeconomic ones, that largely drive how these policies are designed and whether they come into effect.
Take TPP, for instance. It was conceived primarily not as a geoeconomic answer to growing Chinese geoeconomic power and coercion in Asia but rather as a shot in the arm for a dying Doha Round at the WTO.7 By securing agreement on issues that were being hotly contested in Doha negotiations, policy makers hoped TPP would unlock a path forward for Doha.8 A December 2013 report by the Congressional Research Service explains this logic: “Past FTAs, such as NAFTA, incorporated new policy ideas … that were concurrently being negotiated in the Uruguay Round.… [T]he approval of NAFTA among Canada, Mexico and the United States helped push the Uruguay Round to conclusion. Today, the approval of a comprehensive, high-standard TPP agreement could signal to recalcitrant members of the WTO that trade liberalization can proceed without them and might spur action at the multilateral level.”9
Of course, a trade agreement like TPP could be both things. The United States could devise policies that are both economically and geopolitically minded, in much the same way that other countries enact measures meant to simultaneously advance economic and geopolitical goals—China’s “strategic investments” in Africa, for instance. But if TPP had been conceived as a serious means of pursuing U.S. foreign policy objectives regarding China, the result would have been a different sort of agreement.
In fact, as if to telegraph the extent to which TPP was not a foreign policy exercise, when the Obama administration decided to go ahead with TPP (plans that were incubated during the final months of the Bush administration), the agreement’s name was changed. The original agreement, called the Trans-Pacific Strategic Economic Partnership, was concluded in 2005 between Brunei, New Zealand, Chile, and Singapore. The move to drop the word strategic proved telling of the administration’s substantive approach to the negotiations, as geopolitical considerations never meaningfully came to influence the agreement’s substance and design.
One area that helps illustrate the lack of foreign policy considerations in TPP is currency—namely, whether TPP would include provisions around currency management. Beijing has made clear that it regards global reserve status for the RMB as a first-order geoeconomic aim and an important contribution to China’s overall power projection going forward.10 Arvind Subramanian and Martin Kessler of the Peterson Institute of International Economics suggested that a renminbi bloc is already emerging in Asia, where seven out of the ten East Asian currencies already track the yuan more closely than they do the dollar.11 On foreign policy grounds, then, the United States would seem to have an interest in advancing provisions in TPP that, at a minimum, seek to ensure that any expansion of the RMB’s global role does not also serve to strengthen China’s ability to use financial and monetary policy to project state power, or as a means of undermining U.S. strategic primacy in Asia. Indeed, a foreign policy maker wishing to check a feared rise in Chinese power might go further—one could imagine TPP provisions that, while almost certainly intolerable to most economists, would explicitly seek to discourage a global reserve currency role for any currencies managed by authoritarian, nonmarket economies.12
And, although the issue is outside the scope of this book, it is worth noting that the United States also has compelling economic reasons for including currency within the scope of TPP. Since China continues to artificially restrain the value of its currency to gain export advantage, a TPP agreement that managed to establish binding rules against such behavior would clearly help the U.S. effort to pressure China to adopt a market-based currency. On geopolitical and economic grounds alike, then, the United States would seem to have an interest in seeing currency provisions included in TPP. Indeed, the notion has attracted bipartisan support in U.S. policy-making circles, championed by international economic policy thinkers such as Fred Bergsten, Simon Johnson, and Robert Zoellick.13
Opposition to the idea tends to come from finance ministries, typically warning of unduly “politicizing” monetary policy by inserting a “monetary policy issue” such as currency values into a trade agreement.14 These arguments assume that the issue is not already politicized to an important extent—a shaky assumption given how openly China has couched its monetary aspirations in geopolitical terms, not to mention the extent to which currency intervention has driven global imbalances in recent years (and the difficult domestic politics, especially the exporting of unemployment, these imbalances bring). Concerns over whether the United States risks unduly politicizing currency by introducing it into a trade context also fail to acknowledge that current U.S. law already treats currency as a trade issue. Indeed, the very reason the U.S. treasury secretary is obliged to release a semiannual report on the incidence of currency manipulation around the world is that Congress mandated it as part of the Omnibus Trade and Competitive Act of 1988.15 It is precisely this sort of historical distortion that winds up with geoeconomics being portrayed as somehow “abnormal” in contemporary U.S. policy.
Beyond currency, a second measure of how U.S. foreign policy considerations have failed to influence the design of TPP is seen in the handling of provisions on s
tate-owned enterprises. SOEs are among the leading geoeconomic vehicles through which China projects geopolitical influence abroad. To return briefly to just one of the several examples cited earlier, when China sought to assert its claims in the South China Sea by redeploying an oil rig owned by one of its national oil companies to another state-owned oil company (which then positioned the rig within Vietnam’s claimed exclusive economic zone), the move captured Western headlines and policy makers’ attention. Following the episode, Asian media outlets reported that Chinese SOEs had been quietly ordered to temporarily freeze any plans for new business in Vietnam.16 Chinese foreign policy experts interviewed by local Chinese media were not shy about acknowledging the geopolitical motivations at play.17
While TPP did opt to include a designated chapter on SOEs, there is no indication U.S. negotiators focused on anything beyond the level-playing-field concerns SOEs present, nor did U.S. trade representatives prove willing to prioritize these issues over other strictly commercial objectives. As a result, the scope of ambition for the SOEs chapter of the agreement has narrowed substantially during the course of the negotiations, as Obama administration officials have themselves acknowledged.18
During TPP negotiations, U.S. officials did explicitly confront and debate questions around currency and SOEs. However, looking at what the negotiations have ignored altogether can give insight into the effective absence of foreign policy considerations in TPP. For example, there is a lack of any explicit attention to the growing class of geopolitically motivated economic and trade abuses seen in East Asia. Further, TPP does not consider the levers of state control (in other words, aspects of state capitalism) that enable many of these geoeconomic moves to occur in the first place. The popular face of today’s state capitalists may be state-owned firms and investment vehicles, but it is these countries’ unique domestic banking sectors—the financial plumbing—that connect and enable state capitalism’s other dimensions. The nature and caliber of state control may vary, but today’s most ardent state capitalists, with Beijing and Moscow foremost among them, still manage to direct nearly all key decisions in their domestic banking sectors, including interbank rates, deposit rates and bond prices, spreads, major lending decisions, and the handling and disposition of bad loans.
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