The Virtue of Economic Interdependence

With the new year fast approaching, serious thinkers have been assessing the current annus horribilis. Anyone who imagined that world peace would arrive during 2023 was sorely wrong. 

To which economist Adam Tooze remarks in the Financial Times that we ought to learn a lesson from the current world chaos. He addresses the notion that economic interdependence can solve world problems.

This is an alternative to the notion that democracies are unlikely to instigate wars.

So, some believe that economic interdependence  produces peace. To which Tooze responds that such interdependence can produce  new round of conflicts:

The mis­take was not in believ­ing that eco­nomic inter­con­nec­tion pro­duces real social, eco­nomic and polit­ical change. It did. The mis­take was to ima­gine that this trans­form­a­tion was a one-way pro­cess that would auto­mat­ic­ally secure order — and that order would be to the lik­ing of the west. That was a simplistic les­son sup­posedly taught by the cold war of the 1980s, which our exper­i­ence in 2023 should finally have laid to rest.

The real problem, Tooze fails to notice, is that the economic interdependence must be managed by political leaders. Policies are managed by governments. The quality of leadership often determines whether or not free trade turns into war.

One might say, though Tooze ignores it, that Donald Trump’s Abraham Accords were an effort to create economic interdependence in the Middle East. It is one thing to say that they failed to do so, but it is quite another to remark that the senile fool who succeeded Trump did everything in his power to undermine them.

Among the first actions that Biden took were, funding Hamas and allowing Iran to circumvent sanctions on oil sales. 

While Tooze is bemoaning the inevitability of it all, nothing forced the Biden administration to take the Houthis off the terrorist watch list. Nothing forced it to sit meekly while Iranian proxies attacked American troops. 

The grand Tooze theory feels like an effort to relieve the Biden administration of responsibility for the horrors its policies have visited on the world.

And of course, the Biden administration, having provoked Russia with its show of weakness in Afghanistan, chose to fight a proxy war in Ukraine by visiting sanctions on the Russian economy. Again, this has not worked out as advertised. 

As for the tariffs and sanctions imposed on China-- first by the Trump administration-- they have not necessarily had the desired impact. They have obliged China to onshore manufacturing, to export through third parties and to place controls on the export of the minerals needed for high tech manufacturers, to say nothing of pharmaceuticals.

At times free trade can become unfair trade. At that point, savvy negotiators will need to rectify the situation, while not allowing it to break down. 

As free trade breaks down, conflict follows. 

Our willingness to fight the good economic fight through sanctions and tariffs has proved to be unsuccessful. Tooze remarks:

Growth has provided the con­tenders in many regions of con­flict with resources. Rus­sia’s energy export busi­ness con­tin­ues to feed its war machine, even as the west con­fis­cates hun­dreds of bil­lions in reserves. China is so deeply inter­con­nec­ted that it is dan­ger­ous to sanc­tion it while its eco­nomic growth means it can hardly avoid grow­ing into a mil­it­ary super­power. In Israel, a core ele­ment of Ben­jamin Net­an­yahu’s grand strategy has been to make the coun­try invul­ner­able to for­eign pres­sure, by fos­ter­ing its export strength and build­ing an out­size for­eign exchange reserve. There will be no return to the des­per­ate straits of the 1970s and 1980s.

Tooze offers a bizarre hypothesis. He pretends that the free trade regime, most clearly articulated by  Adam Smith, broke down because it was based merely on economic self-interest.

But bey­ond the mach­in­a­tions of this anti-west­ern coali­tion, we have to ask why the bor­ders of the former Soviet Union, the Middle East and east Asia are vul­ner­able to destabil­isa­tion in the way that they are. What they have in com­mon is that, after the cold war, they were sites of efforts to found peace not on a neb­u­lous “rules-based inter­na­tional order”, but on something more sub­stan­tial: the eco­nomy. From the 1990s onwards, “Wan­del durch han­del” (trans­form­a­tion through trade) was the maxim of poli­cy­makers across the west. Under the Wash­ing­ton con­sensus and Amer­ica’s mil­it­ary dom­in­ance there was a con­fid­ent belief that geo­pol­it­ics were either irrel­ev­ant or would be tamed by eco­nomic devel­op­ment. At its peak in 2021 the stock of for­eign dir­ect invest­ment in Rus­sia reached $500bn. The Clin­ton, Bush and Obama admin­is­tra­tions all tried to make Beijing a “respons­ible stake­holder”. Mean­while, former Israeli prime min­is­ter Shi­mon Peres touted a vis­ion of the “new Middle East” in which bit­ter divi­sions would be healed, as Europe’s had been, by eco­nomic growth and inter­de­pend­ence.

Tooz is arguing that we should not have ignored geopolitics. But, did we ignore geopolitics? The Biden administration has done nothing but engage in geopolitics. Did it not insist on the importance of human rights in Saudi Arabia? And did it not, along with the Trump administration, defend the Uyghur minority in China? Did it not denounce China for being a dictatorship, for not having democratic elections? And did it not denounce Vladimir Putin for being an autocratic tyrant? Weren’t we fighting a proxy war in Ukraine in order to show the superiority of liberal democracy? 

Surely, Henry Kissinger would have advised against making political values the basis for international commerce? When Richard Nixon went to China he was forging a relationship, withstanding the horrors that Mao was visiting on his people. Was he right or wrong about it?

Besides, we have gone all-in on attacking China for violations of this or that rule of international commerce. We have surely damaged China’s reputation in the world, action that has certainly contributed to China’s refusal to stop the Fentanyl trade or to intervene with Russia in the matter of Ukraine.

So, the clash of civilizations is playing itself out in the current round of Biden-induced conflicts. Either we are going to compete fairly in the free market or we are going to try to undermine and immiserate our opposition. 

Are we not seeing it all play itself out in the Middle East. Civilizations that fail to compete tend to see the game as rigged. They pretend that they gain power by destroying what others have built. In the end they will lose. Unfortunately, by becoming a death cult they gain high self-esteem. It is better than feeling like losers.