State leaders must learn to navigate increasingly weaponized interdependence.
If globalization has been the political buzzword of the past few decades, “decoupling” is likely to be the word of the 2020s. While we’ve reached a truce in the trade war between China and the US, the fallout between the two superpowers highlighted states’ desire to disentangle themselves from an increasingly intertwined global economy. Efforts to untwine the increasingly complex economic web, such as tariffs, quotas, or the recent EU policy to screen Chinese investment, are likely to multiply as security concerns come to coincide with economic interest. In short, the 2020s will see the world’s largest game of state leader twister.
But is it too late to decouple? This is the question Harry Farrell and Abraham Newman of Georgetown University set out to answer in their latest work. To them, the global spread and entanglement of financial flows, digital networks, and supply chains are increasingly being weaponized – particularly by the United States and China – as means of state coercion. Treating these global networks as a “web in which to trap one another”, states are arming interdependence to political ends. Farrell and Newman provide numerous examples: The U.S. Department of Treasury has mobilized the international financial system to penalize rogue states and errant financial institutions; in service of its trade war with China, Washington has tied down massive firms and entire national economies by targeting vulnerable points in global supply chains; Japan has used its control over key industrial chemicals to hold South Korea’s electronics industry for ransom; and Beijing might eventually be able to infiltrate the world’s 5G communications system through its access to the Chinese telecommunications giant Huawei. Indeed, the authors see globalization to not be the benevolent force for liberation cherished by economic thinkers but “a new source of vulnerability, competition, and control [as] networks have proved to be less paths to freedom than new sets of chains.” These chains are what characterizes economic interdependence today. “Chained globalization”, as they call it, binds states together by “interdependence that will tempt them to strangle their competitors through economic coercion and espionage, even as they try to fight off rivals’ attempts to do the same.”
How will states weaponize these ties? The answer is hubs. While digital and economic networks have spread across the world, many still rely on single points of control through which states threaten competitors. There are several examples of these hubs. With the international exchanges heavily reliant on a single currency, the dollar, Washington wields substantial leverage over the global financial system. Outsourcing production has led to the rise of large, specialized firms such as Foxconn, under which hundreds of supply chains branch out, giving China the possibility of targeting crucial transnational supply links. With telecommunication networks increasingly centralized in few firms such as AT&T or Verizon, the NSA engages in espionage of firms and individuals at home and abroad. With China’s race to develop and distribute Huawei’s 5G network, the possibility of Beijing one day being able to tap into a worldwide network of communications looms larger.
Once we see the global economy as a complex web dependent on hubs, it is clear that governments’ targeting of them could set off what Farrell and Newman call escalatory spirals: “By targeting a firm with an unexpectedly crucial role in a broader industrial network, for instance, a government could mistakenly generate widespread economic damage—and trigger retaliation from other states in turn.” Therefore, it shouldn’t be a surprise that governments from East to West are seeking a “decoupling”: U.S. commentators speak of a great decoupling from the Chinese economy, only vaguely understanding what such a rupture might involve. China, for its part, is pouring resources into an indigenous semiconductor industry that would protect it from U.S. threats. South Korea has sought to build up its own chemical sector in order to lessen its dependence on Japan. The examples are numerous.
“Farrell and Newman
seem to make the case
that the optimal solution
to governments’ increasing
regulation and control.
This news could not
be worse for trade
But decoupling might be a much more difficult task than claustrophobic governments anticipate. Global economic networks are ties that bind and while some degrees of insulation might be possible, a large decoupling of worldwide financial systems, manufacturing supply chains, and information networks would overturn industries, cause prices to skyrocket and send us into serious economic turmoil. So, if governments are locked in this global web, how can they be in control of national economic and security concerns? They must learn to live with them.
To avoid unintended consequences, escalatory spirals, and economic disorder, Farrell and Newman suggest Washington and others make use of four channels to navigate economic and security concerns in a globalized world. First, governments need to break down barriers between economic and security concerns. This could be achieved by, for example, allowing the Department of Commerce to deal with security issues. Second, thorough scrutiny of foreign investment, such as the EU framework for the screening of FDI established last year, is needed. Thirdly, where screening of foreign investments aren’t enough due to the national security value of the specific industry, regulators should resort to limiting industry access to only trusted groups. Lastly, this new world of chained globalization is in dire need of new ways of communication. To Farrell and Newman, this is primarily achieved by more research into the intersection of economic and security concerns, which can provide the vocabulary needed to address the increasing entanglement as well as the tools and levers to minimize escalatory spirals.
Farrell and Newman’s analysis is simple and clear, providing a coherent view of the diplomatic crises that we’re seeing globalization produce every year now. But their message, that economic ties are now intrinsically linked to security concerns and should be treated as such, is also terrible news for traditional believers in a globalization propelled by free trade. Instead, Farrell and Newman seem to make the case that the optimal solution to governments’ increasing claustrophobia is regulation and control – a globalization with checkpoints and border control.
Written by Jeppe Damberg. Cartoon by our illustrator Jimena Madrigal.