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A World of “Fortress Economies”?

President Trump’s Trip to the 2018 G7 Summit. By Shealah Craighead, The White House – Public Domain

Over at The Monkey Cage, Henry Farrell and Abe Newman argue that the world is headed away from old-style globalization and toward “fortress economies.” In their view, Trump’s latest threats to increase tariffs, as well as his warnings to American companies to relocate out of China, provide a dramatic example of a general trend. U.S. policymakers have already converged on the need to reduce the American military’s dependence on Chinese-produced technology components. Trump’s trade wars are not the only thing making a number of governments think twice about high levels of economic interdependence.

The new hostility to cross-border ties will have transformative consequences for the world economy. It is hard to exaggerate how deeply entwined the U.S. and Chinese economies are. Over the last 20 years, manufacturing has become globalized, so that final products are made with components from multiple suppliers, many of them Chinese. Even partial efforts to disentangle these complex relationships are likely to have extraordinarily wide-reaching consequences.

Other states besides the U.S. are taking similar steps. Most obviously, China itself has accelerated its technology development program, so that Chinese firms will not have to rely on U.S. subcontractors. Other countries too are hardening their attitude to globalization. On Wednesday, a European Union report was leaked, suggesting that the E.U.’s key executive body wanted to build up its own capabilities to impose unilateral tariffs against the U.S., and boost European national champion companies that could compete with Facebook and Alibaba

My sense is that Henry and Abe are getting a bit ahead of current trends.

First, the overall trade picture is far more complicated. The EU and Japan are now part of a major free-trade agreement. Trump withdrew the United States from Transpacific Partnership but pretty much everyone else went ahead with a modified deal, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. What we’re seeing looks less like a collapse of globalization than a shift away from American-centric economic globalization, with other countries and organizations routing around the United States.

Second, they emphasize the role of “weaponized interdependence” in driving these developments. In their view, governments increasingly worry about other states using asymmetries in economic flows and regulatory power as tools of statecraft. To illustrate this argument, they often point to Washington’s use of SWIFT to force European firms to comply with sanctions on Iran—even though the UK, France, Germany, and other European powers want to hold the JCPOA together. As they argue, this is driving efforts to develop alternative mechanisms, which could, in turn, greatly reduce US power over financial flows.

Moving toward “fortress economies” is a classic “realist” solution to reducing the kinds of vulnerabilities created by international interdependence. But as their SWIFT example highlights, states can also respond by, in essence, diversifying their portfolios—by increasing the number of suppliers of a particular good. This can involve both developing domestic sources and also a greater number of external providers.

Taken together, this suggests to me less an inevitable retreat to regional trading blocks or national “fortress economies” than mutations in the overall ecology of globalization—ones that may involve reduced interdependencies among some economies but greater interdependencies among others. This parallels trends in security interdependence, where some states, such as Turkey, are moving away from the American system while others remain highly integrated.

In this sense, I think Henry and Abe are correct in their earlier work on weaponized interdependence. Fundamental shifts in the global economy—such as the increasing relative wealth of East Asia in general, and China in particular—are changing the playing field for economic and security policy. But the implications of these shifts for the United States depend a great deal on the choices that it makes.

For his part, Trump is doing his best to highlight the downside risks of tolerating asymmetric interdependence with the United States. Given that no future administration can guarantee that America will never elect another Trump-like figure, it’s very hard to see how Washington can convince foreign leaders not to take those downside risks very seriously in the future. The backdrop of the Bush years, which created significant international backlash against the United States, doesn’t help matters either.

As Nahal Toosi writes in Politico:

A Democratic successor to Trump would face a world even more confused about the basic tenets of American foreign policy [than Obama did after the Bush presidency]. Trump has thrown into question America’s support for what were once bedrock bipartisan principles, such as unwavering support for the NATO military alliance, promotion of global free trade and diplomatic respect for allies.

Attempts to rescind Trump’s executive orders or regulations could actually feed into the narrative that the United States is unreliable — that a deal one president signs could be thrown out by the next.

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