The rise of geoeconomics & the return of gunboat diplomacy (2020)

Narrowly defined, gunboat diplomacy refers to the pursuit of foreign policy objectives with the aid of conspicuous displays of naval power. More generally, gunboat diplomacy evokes the image of European and US war ships besieging the ports of weaker countries in an attempt to extract economic concessions from them. Commodore Perry and his black ships famously opened Japan to US trade in 1853, ending its two centuries of isolationism. Less well-known, Commodore Shufeldt forced Korea to negotiate a bilateral trade treaty with US in 1882, but only after a modernising Japan had resorted to its own gunboat diplomacy to impose an unequal treaty on Korea in 1876.

Gunboat diplomacy was also a fairly common feature of international intercourse, and not just in Asia. From Anson’s “visit” to Canton in the mid-18th century and the Opium Wars in the mid-19th century to the so-called Third Taiwan Strait Crisis in 1995, when President Clinton sent an aircraft carrier group through the strait to deter Chinese use of force, China often faced the sharp edge of Western naval power. Often, but not always, gunboat diplomacy sought to extract economic concessions and privileges. China was forced into granting foreigners extraterritorial rights and into ceding both territory and tariff autonomy. Britain, Germany and Italy imposed a naval blockade on Venezuela in 1902 in order to force the country to pay its debt to private bondholders. And, of course, Teddy Roosevelt’s big stick diplomacy  in the guise of the infamous Roosevelt corollary (1904) to the Monroe Doctrine (1823) led the United States to intervene repeatedly in countries in the Western hemisphere, on several occasions to enforce debt repayments. 

Economic statecraft refers to the use of economic tools in pursuit of political ends. Gunboat diplomacy can be thought of as the use of military means in pursuit of economic ends, though in practice it can also involve political ends. While gunboat diplomacy has gone out fashion, economic statecraft seems to be experiencing a major revival. Both the United States and China are increasingly resorting to foreign trade, investment and technology policies in in pursuit of narrow or general political-diplomatic goals. Washington, for example, restricts technology exports to China in the name of national security. China restricts travel to Korea in order to signal its displeasure of Seoul’s decision to install a new missile defence system. 

None of this is really new. Embargoes and export controls have been around for a long time. In the History of the Peloponnesian War, Thucydides recounts how Athens imposed a trade embargo on Sparta’s ally Megara. The allies instituted naval blockades against the central and axis powers during WWI and WWII and the US sought to deter Japanese expansion in Asia through the use of trade and financial sanctions in the run-up to Pearl Harbor. Nonetheless, the importance of economic statecraft has increased with respect to Sino-US relations.

Geoeconomics is not replacing geopolitics, contrary to Edward Luttwak’s prediction three decades ago. “Geoeconomics is displacing geopolitics. The methods of commerce are displacing military methods – with disposable capital in lieu of firepower, civilian innovation in lieu of military-technical advancement, and market penetration in lieu of garrisons and bases. States (…) will not disappear but reorient themselves towards “geoeconomics” (Luttwak 1990). Geoeconomics is an admixture of the logic of conflict with the methods of commerce. Rather geoeconomics is becoming more important in the context of intensifying geopolitical competition between the US and China. A high degree of international economic interdependence gives both Beijing and Washington ample opportunities to exercise economic statecraft and pursue geoeconomic policies.

States can exploit asymmetric interdependence in an attempt to deter or to coerce. By manipulating the flow of goods and services, capital, people (exit bans) as well as non-material item such as data and knowledge, states can exercise leverage. By threatening to restrict such flows, a state can impose costs on the targeted (stick). By promising to facilitate such flows, a state can offer benefits (carrot). An asymmetric relationship lends itself to leverage – whether in pursuit of economic and broader political ends.

The post-WWII international regime sought to de-politicise economic relations by way of multilateral rules that were meant to limit the relative power of economically powerful states and by way of providing smaller countries with reassurances that they will not get exploited. In other words, principles such as reciprocity and non-discrimination and rules such as tariff binding were meant to mitigate asymmetric interdependence. By the same token, a weakening of the rules-based international economic order allows for the politicisation, securitisation and even weaponisation of interdependence (Farerell & Newman 2019).

The China-US relationship has moved from cooperation to competition and even conflict or what has been referred to as 'managed enmity' (Feigenbaum 2020, Jaeger 2020). China’s international economic integration combined with its greater power and more extensive interests has made Beijing more assertive. This has alerted Washington. The increasing geopolitical competition between the US against the backdrop of economic interdependence creates opportunities, even incentives to resort to economic statecraft and play the geo-conomic game.

Sino-US economic relations are also increasingly, if thus far only partially subservient to security considerations. In the 1970s, economic relations were an afterthought as far as the Sino-US relationship was concerned. The purpose of the Mao-Nixon opening was geostrategic and squarely aimed at the USSR. After the initiation of Chinese economic reform in the late 1970s and particularly after the end of the Cold War in the late 1980s, economics became a more prominent factor in Sino-US relation. Over the past decade or so, economic cooperation has increasingly begun to be overshadowed by an emerging security competition. In fact, economic relations are increasingly seen by both Beijing and Washington through the prism of strategic competition. Contrary to Luttwak’s prediction, geopolitics remains a central aspect of Sino-US relations, but economic intercourse is increasingly becoming ‘geoeconomised’.

Ever since the US became powerful enough to have interests in and project to Asia, it has had fairly constant interests: prevent the emergence of a hegemonic power in East Asia and access to Asian markets, requiring in turn free (or non-discriminatory) trade and freedom of navigation. China’s continued economic and political rise has led the US to resort to geoeconomics. While initially unclear whether Washington was resorting to economic statecraft vis-à-vis China in order to (1) level the playing field, (2) increase bilateral leverage in order to extract greater concessions or (3) prevent China from weakening US economic and technological leadership, it is now fairly clear that the latter is the main driver of US policy towards China, not least because it enjoys bipartisan support (Jaeger 2019). 

Washington shares both economic and political concerns with respect to Chinese economic policies. Concerns relate to IPR (cyber-theft, forced transfer), reciprocal market access with respect to trade and investment (including regulatory barriers) and the role played by government supported SOEs, to name just the most important ones. These issues certainly make for an un-level playing field. 

From a short-term welfare perspective, it is at first difficult to understand why a country should be upset if another country sells cheaper products or overpays for assets. But the concern is of course that in oligopolistic markets producers once they reach dominance may be able to exploit their market power for both economic and non-economic purposes. If subsidised exports eliminate foreign competition, producers will have more pricing power after the fact. If the acquisition of foreign assets allows a foreign producer to bottle up strategic supplies or critical technology, it gains potential economic and political leverage. The risk is heightened even more if the producer does not operate on the basis of market principles and is influenced by political considerations, advertently or inadvertently. Economically, such concerns are particularly relevant in cases where supply is inelastic, subject to political rather than market calculus and/ or where goods are characterised by increasing returns to scale and are not reverse-engineerable. Externalities and security spillovers will increase concerns further. Under these circumstances, economic rents accrue, market power is considerable and political leverage is significant.

Put differently, extreme asymmetric interdependence or outright dependence translates into both heightened economic and political sensitivities and vulnerabilities. The same logic applies to the provision of many international public goods such as an international currency, freedom of navigation, public health, financial stability, free trade and so on (Jaeger 2020). Those who provide such goods in a quasi-monopolistic manner accrue economic rents and gain economic-political leverage (e.g. dollar as international currency). No wonder that Washington is concerned about Chinese state capitalism and its ambitious development policies with respect to international public goods (e.g. digital silk road, Made in China 2025, China Standard 2035), its push into emerging technologies (e.g. AI, quantum computing, biotech, composite material) and the creation of parallel international institutions circumventing US-dominated regimes (e.g. AIIB, BRI, renminbi internationalisation). Washington is of course inadvertently contributing to China’s push to reduce its vulnerability vis-à-vis US goods and institutions by exploiting China’s dependence on them. Decoupling in critical areas is likely precisely because both Washington and Beijing are seeking to leverage their position where asymmetric interdependence is in their favour and de-couple where it is not. 

Washington is pursuing a geoeconomic strategy vis-à-vis China and is quite prepared to weaponise interdependence. A few semi-random observations. The US can only resort to use geoeconomic measures so many times before China will make to reduce its vulnerability. The sum of all geoeconomic measures does not amount to a coherent strategy. The US has thus far failed to do a proper cost/ benefits analysis and assess the probability of success. For many of the measures to be truly effective, they require third-party support lest they risk third-party spoilers weakening the effectiveness of US measures. If the US continues to resort to geoeconomics, China will redouble efforts to de-couple, thereby undermining US leverage and power. This will be all the more the case if China begins not only to provide public goods itself but to garner a greater following of consumers.

All of this is to say that geoeconomics is in full swing. Multilateral, non-discriminatory, largely de-politicised economic relations are giving way to more politicised, power-based economic and financial relations. The purpose of maintaining economic relationship is not to generate absolute economic welfare but relative economic, security and strategic gains and/ or to minimise sensitivity and vulnerability vis-à-vis one’s geostrategic competitor.

What about gunboat diplomacy? It is swinging, too, if less visible so. Few states these days send naval forces to extract economic concessions. While economics and security have never been completely dissociated, even within alliances, both the US and China will increasingly be engaging in linkage politics, if less visibly so than during the second half of the 19th century. With geopolitical competition increasing and hence rules-based multilateral cooperation weakening, power and especially military power and security will affect international economic relations – and particularly Sino-US economic, financial and trade relations. After all, Japan and Korea were quite willing to quickly negotiate a trade deal with the US. Korea may or may not think twice before antagonizing China politically lest it incurs Beijing’s economic wrath. In short, both gunboat diplomacy and geoeconomics will remain a central and prominent feature of international politics for the foreseeable future.

Foreglow vs afterglow - The domestic politics of international ascendance & decline (2020)

The United States overtook Britain as the world’s leading economic power in the 1870s. But it took another seven decades and two world wars for the United States to take its place as the world’s most powerful state. Meanwhile, it took Great Britain about the same amount of time to retrench from its erstwhile dominant position. Emerging economically and financially exhausted from two world wars, the 1956 Suez Crisis and the retreat from East of Suez in the late sixties marked the symbolic end of Britain’s global great power position. 

Great powers often rise and decline with lags. What explains these lags? Robert Gilpin laid out the economic reasons for the rise and fall of hegemonic states in his masterly War and Change in World Politics (1981). Paul Kennedy examined the historical record in detail in his equally masterly Rise and Fall of the Great Powers (1987). Both scholars ultimately linked the rise/ fall to a strengthening/ weakening economic base. As their economies strengthen, states are able to expand their power until they face imperial overstretch. More often than not, they then fail to adjust their international position and suffer relegation, often in the wake of great power war. 

The afterglow hypothesis offers one explanation as to why great powers fail to adjust in a timely manner to the changing international distribution of power. It posits that the forces that drove a state to international dominance were locked into domestic institutions that subsequently prevent timely adjustment during the decline phase (Brawley 1999, Krasner 1982). It is tempting to propose the “foreglow hypothesis”. Rising states similarly need to overcome interests embedded in domestic institutions before they end up exercising international power commensurate with their potential. In other words, afterglow helps explain why declining powers adjust too late (or not at all). Foreglow helps explain why rising powers lag in converting potential into actual power. 

The “glow” hypotheses put a particular emphasis on the role of domestic institutions, including bureaucracies. Various institutional and bureaucratic actors are closely tied to the international position of the hegemonic state. For example, the Bank of England pushed for Britain to re-join the gold standard after WWI (supported the City of London). The Imperial Defence Staff was not surprisingly reluctant to dismantle the British Empire and retreat from its global position. Domestic interests were closely tied to Britain’s international position. Eisenhower would have called it the military-industrial complex. Similarly, domestic institutions may slow down a state’s rise. During the 19th century, the slave-owning South and the North were often at loggerheads over US territorial expansion, particularly in the Caribbean. Lacking a sufficient congressional majority, the US government was on occasion unable to push forward with territorial annexations. It is not only domestic institutions and interests that help slow down adjustment and ascendancy. 

By the same token, economically powerful states may need to create the tools to exercise power in first place. “Trading states” like Germany and Japan may have significant military potential due to their advanced economy and indigenous technology. They simply have not endowed themselves with the military tools to exercise greater power. Japan’s pacificist constitution and former prime minister Abe’s unsuccessful attempts to change it is an obvious example. The US, for example, did not have anything resembling a modern navy until well into the last quarter of the 19th century, even though it had already overtaken Britain economically.

Declining states – already feeling vulnerable – may be reluctant to retrench in an attempt to preserve their credibility and their reputation. Given that there is always uncertainty about the real balance of power as well as the willingness of adversaries to incur costs, declining states are tempted to maintain their commitments and thus fail to adjust. They may also hope that weakness proves temporary if they manage to hold out long enough. If a residual of uncertainty attaches to the balance of power, it may be rational to take a gamble and not adjust, not least because adjusting rather than standing one’s ground may also encourage adversaries to push even harder. This may have been the calculation of the Austro-Hungarian Empire in 1914 when it risked a war with Russia following the assassination of the archduke. 

By comparison, a rising power may not feel any urgent need to exercise its power, particularly if it involves uncertain costs and risks. Rising powers, unless they are challenged, may simply decide to stay the proverbial course. Things are bound to move its way. US policymakers frequently took this view with regard to various annexation targets during the second half of the nineteenth century. Not feeling vulnerable like a declining state, a rising state feels a much more limited need to “up-adjust”. With their reputation rising, the need to prove It is arguably also less urgent.

Cognitive biases like the endowment effect, loss aversion and the sunk cost effect may also make it harder for a declining state to adjust its position. The endowment effect leads decision-makers to overvalue what they own. Loss aversion and sunk costs make them reluctant to cut their losses (if they have already occurred any) and, if anything, to double down. Incidentally, this may be why strategic adjustment typically involves a new government or even a new political regime. A new leadership is less invested in the status quo and, acting more rationally, is more willing to accept already incurred losses. By comparison, the rising state is not faced with losses but rather with foregone gains if it does not exercise its increasing power. It is psychologically easier to forego gains than incur losses. No wonder that rising and declining states respond in very asymmetric ways to a changing balance of power.

Domestic decision-makers in declining states have also little incentive to retrench in terms of personal-political interests. Few political careers and few historical legacies are built on retrenchment and successfully managing decline. Maybe some historical legacies are, but political careers are not. Charles de Gaulle oversaw Algerian independence and Gorbachev the dismantlement of the Soviet empire in Eastern Europe. Both statesmen faced coup attempts. After all, a rational, forward-looking policy of retrenchment is easily exploited by domestic opponents, who play the nationalist and jingoistic card. By comparison, political leaders in rising states have substantially more room for maneuver, even if they, too, are sometimes forced to fend off domestic forces that demanding more aggressive policies. Against their will, McKinley was forced into the Spanish-American War and Bismarck was forced into annexing Alsace-Lorraine. (Probably urban myths; but myths are very illustrative.)

Culture, elite socialization and ideas may affect both retrenchment and expansion. Narratives may make it difficult for political leaders in rising powers to resist calls for a more hawkish foreign policy. Germany’s stab-in-the-back legend after WWI, France’s revisionism after the Franco-Prussian war with respect to French Alsace-Lorraine or contemporary China’s discourse about the century of humiliation victimhood make it more difficult for policymakers to resist exercising power. By the same token, post-WWI French pacifism and US discourse about the need to avoid foreign entanglement may have unduly constrained the two countries’ rise, or at least more forceful foreign policies during the inter-war period. Culture, history and memory may matter. How much they matter relative to material interests is a historical or policy question. Elite socialization and elite change can also constrain or accelerate a state’s shift towards more forceful policies. After Bismarck stepped down, a new generation of policymakers took over Imperial Germany’s foreign policy. The political outlook of post-war German and Japanese elites, having suffered catastrophic defeat, was completely different from that of their predecessors. No doubt, material factors mattered. But this does not mean that elite turnover is irrelevant.

None of this is meant to suggest that systemic-level factors do not matter. Domestic factors in so far as they mediate international pressure for adjustment – whether retrenchment or expansion – are important. Rising powers may generally be less constrained than declining powers in terms of their strategic position, the need to defend the status quo and room for strategic maneuver. Nonetheless, rising states when faced with security competition or threats to its “vital” interests may also quickly become subject to very similar systemic pressures than declining states do. It may not be the shifting balance of power that affects a rising state’s foreign policy as much as the balance of (perceived) threat (Walt 1985). In other words, the distribution of power and the balance of threat do matter, too. And a thorough understanding of a state’s rise and fall, including why states typically fail to adjust in a timely matter, require an analysis of both domestic and international variables.