Non-Events As Evidence, Causes and Effects in International Politics (2023)

Paul Schroder once observed that what really required an explanation was less why World War I broke out but rather why it did not break out in 1912 or 1913. This shift in explanatory purpose from “why did World War I break out at all” to “why did it break out in 1914 rather than in 1912 or 1913” reframes the question by focusing less on “why at all” and more on “why then.” This etiological shift makes sense if one is of the view that conditions conducive to a world war existed in the years prior to its actual outbreak. 

This is an example of how a focus on explaining events neglects non-events that are in similar or even greater need of explanation. It is priors and expectations that make a non-event etiologically interesting. Unusually, the question why the Cold War never turned into World War III has garnered significantly more scholarly attention. Here again, an expectation, based on historical regularity, makes a non-event intellectually interesting. World War III should have broken, but it didn’t. Why? Standard answer: the existence of nuclear weapons and mutually assured destruction "did it."

Non-events garner less analytical attention than events and they attract less attention than they should. This may be because humans are cognitively wired to notice change and therefore have an innate tendency to want to explain changes rather than non-changes. Intuitively, a change can be accounted for by another change (or changes) preceding it, whether in terms of causation or correlation. 

But this is a contestable presumption and assumption. Both an event (change) and a non-event (no change) can be picked out as the cause of another event (change). At least, this is true in terms of the counterfactual conception of causation. What caused the match to light? Was it because somebody struck it or was it because there was enough oxygen present? What caused a person to die of thirst? Was it the absence of water? Often “unchanged” factors are regarded as background conditions. This is legitimate as long as one admits that background conditions are part of a sufficient constellation of causal conditions. This does not always happen, thereby leading to a discounting of relevant background conditions as contributory causes. 

Put differently, what if a match is struck repeatedly and it does not light until it is finally struck in the presence of oxygen? In this case, the oxygen would be widely seen as the cause? But is this really justified? Returning to the outbreak of World War One: the assassination of the archduke was equivalent to the striking of the match, the presence of oxygen was equivalent to the international political situation. Or was it the other way round? The point is this: Non-events can be conceptualized as causes of events (and non-events) under both a counterfactual and a regularity interpretation of causation.

What makes non-events as causes and effects interesting in the first place is the role they play in conceptual frameworks (theory) or  as elements of an established (or posited) empirical regularity (history). In other words, inductive or deductive inference needs to assign etiological relevance to them. If both inductive and deductive inference suggest that an effect should be preceded by a specific cause, but the effect takes place without the expected cause being present, the non-event becomes intellectually interesting. In the Schroder example cited above, it is a non-event as the absence of an effect that is interesting because the presence of a cause (or causal constellation) should have led one to expect the effect to occur (World War I prior to 1914). 

The focus on events, as opposed to non-events, also creates explanatory biases. In hindsight, historical events and sequences of events seem logical in the sense that they appear explanatorily coherent and (largely) consistent with the facts. But this can be deceiving, psychologically and epistemologically, precisely because the facts have been subsumed under some intuitively plausible model (or interpretation or explanation). But a sequence of historical events can be subsumed under a large number of different models, many of them fairly coherent and explanatorily satisfying. But re-interpreting or providing a different explanation for an event may also be constrained by the available evidence or lack of evidence. A plausible potential theoretical alternative may require evidence that exists but because it has not been entertained has not not been looked for. This is where  researchers and historians enter the picture: they are the ones who will not or should not simply accept an explanation only because it is logically coherent and consistent with the available evidence. This may make for a good explanation, but it may be be faro from being the best possible explanation. Providing a better explanation requires offering an alternative or modified hypothesis and evidence that support it.

Sherlock Holmes realized that a non-event (the dog that didn’t bark) provided an explanation for a hypothesis that in turn allowed him to explain who committed the crime. The dog must have known the person that entered the stable at night, otherwise it would have barked. This led the detective straight to the criminal. Sherlock Holmes seems to have a keen appreciation of the importance of non-events. (A lot of what goes by intelligence analysis would benefit greatly from an appreciation of the potential importance of non-events as well as the potential relevance of the absence of evidence.) What makes this so interesting is that a non-event tied to a secondary hypothesis helped the detective solve the case. This is intellectual creativity.

The presence and absence of evidence in terms of confirming or disconfirming hypotheses is a long-standing issue in epistemology. Only because there is no evidence does not mean that the hypothesis this evidence is meant to support is not true. But such an absence is unlikely to make the hypothesis likelier to be true. The absence of evidence can matter to the extent that one has legitimate expectations as to whether the evidence should be found or not. This of course requires one to posit auxiliary hypothesis and make assumptions as to how likely should be to find evidence provided it exists. It also matters where one looks for evidence and how much effort one expands searching for evidence (aka “streetlight effect”). So sometimes the absence of evidence may provide some evidence for its absence, and hence evidence for or against a given hypothesis. But not always.

Anthropologists have trouble finding evidence for humans having inhabited certain areas of the world. This may be because the climatic conditions over time have made it unlikely that any evidence remains. But anthropologists might expect, based on their otherwise well-supported model or explanation, to find little evidence of human habitation in another part of the world because their model suggests that very few, if any humans lived there. But because evidence was more likely survive in these areas, researchers would be wrong to conclude that humans were more plentiful in areas where evidence is found, compared to areas where no such evidence is found (despite significant efforts to find it). In other words, evidence (and its absence) bears more or less strongly on a given hypothesis, depending the assumption one makes with regard to other plausible, but not necessarily strongly confirmed auxiliary hypotheses. This is where Bayesianism enters the picture!

Non-events and the absence of evidence are very important epistemological concepts. Their explanatory and confirmatory relevance is on a par with events and evidence.

 

How to Design and Implement an Effective and Efficacious Outbound Investment Policy in Nine Difficult Steps (2023)

> Designing an effective and efficacious outbound investment policy aimed at controlling technological leakage needs to take into account complex trade-offs. This is particularly true for a country like Germany that is more dependent on technology exports and more vulnerable to geo-economic retaliation than most other countries.

> With Sino-U.S. security competition intensifying, Washington will continue to tighten measures aimed at limiting Chinese access to critical U.S. technology, including outbound investment restrictions. At a minimum, Washington will expect its allies not to undermine its policies; more likely, it will increase the pressure for its allies to fall in line.

> Germany should therefore push more forcefully for an integrated EU policy on outbound investment (as well as export control and inward investment policies) to help strengthen its position in negotiations with Washington and to enhance its ability to nudge Washington towards narrower restrictions in exchange for helping to make them more efficacious. A failure to reach agreement may lead Washington to implement “secondary” measures that will negatively affect German and European economic interests.

See also: Restricting Technology Leakage

In a conflictual geopolitical environment, economic interdependence gives rise to economic and political vulnerabilities, or what might be called an “economic security dilemma”. Geopolitical competition leads governments to put less emphasis on absolute economic gains and more emphasis on both relative economic advantage and national security. By imposing selective restrictions on cross-border trade and financial flows, governments seek to mitigate their own economic vulnerabilities, exploit others’ vulnerabilities and generate relative economic and national security gains.

Technology diffusion – a major source of national and international prosperity – is dependent on the relatively unrestricted flow of cross-border trade and financial. But advanced technology can also enhance a country’s relative military power and strengthen its economic advantage. And to the extent that one country depends on another country’s technology, it also confers power to the latter. National security considerations and the quest for relative economic advantage therefore provide a rationale for restricting technological leakageto geopolitical competitors, while they do not do so for restricting technological diffusion to its members. [1]

There may be a further a rationale for governments to intervene. Not only do the economic interests of a country’s tech companies often diverge from the broader national security interests as defined by the government – what is good for GM is not necessarily good for America – but companies’ focus on short-term profitability, which may make them more willing to trade market access for (forced) technology transfer may not be in their longer-term commercial interest. Selective restrictions may help companies overcome this dilemma. 

Nonetheless, restricting technological diffusion through export controls and restrictions on inward and outward investment have economic and political costs. Imposing tech transfer restrictions limits the economies of scale of and the profitability of domestic technology companies (and their ability to finance research and development); it may reduce domestic competition and stifle domestic technological innovation; it may lead other countries to retaliate by imposing reciprocal restrictions on trade and investment, hurting supply chains and access to critical technology, causing additional costs; it may induce other countries to seek technological autonomy, which, if successful, eliminates technological dependence and reduces geo-economic leverage.

Next to export control and inward investment policies, outbound investment policy is a crucial instrument in managing the cross-border flow of technology. This policy brief will discuss what factors should inform the design and implementation of an outbound investment.[2]This is a complex task involving important economic and political trade-offs and a detailed understanding of how investment can facilitate technology leakage. This is all the more for a country like Germany that relies on advanced technology exports and is highly dependent on cross-border trade and investment, and particularly with respect to China, the country that will be the primary focus of the new outbound policy in the context of the German government’s recently released National Security and China strategies.[3]

Designing an Outbound Investment Policy

Identify existing and emerging (future) technologies critical to national security and economic-technological leadership. A determination needs to be made which technologies are critical with respect to national security and which are important to economic-technological leadership. In many instances, there will be an overlap. Much depends, of course, on how extensively national security is defined. Technologies should be scored in terms of their present and future potential to affect national security and technological-economic leadership (comprising national competitiveness and productivity). The government should establish a scientific advisory council and consult widely to evaluate the potential of existing and particularly emerging and foundational technologies. Scores should be continuously re-assessed.

Take into account the complex cost-benefit trade-off involving national security and economic leadership. If, for example, a technology has the potential to confer critical and long-lasting military advantage, restrictions should be tighter and higher economic costs will be acceptable. But if a technology is assessed to confer only a temporary economic advantage, restrictions should be limited and associated costs should be kept to a minimum. The cases of short-term military advantage and long-lasting commercial advantage fall in between the above options in terms of the economist cost versus national security benefits and economic leadership trade-off. Determining the (economic) costs and (economic/ military) benefits involves a complex and to some extent uncertain assessment. It will be easier with respect to existing than emerging technologies.

Restrictions should be effective (and efficacious). A measure is effective if investment restrictions curtail the transfer of national technology at the level desired, but they are efficacious if they also help preserve technological advantage. Restricting technology-focused investment restrictions may be effective in terms of preventing another country from accessing indigenous technology on the back of cross-border financial flows. But it may be inefficacious because the country may be able to source the technology from elsewhere or because it leads the country to successfully reverse-engineer existing technology or make greater efforts to pursue emerging technologies. (As will be discussed below, efficacy often requires multilateral cooperation.)

Determine what types of cross-border investment create risks of technological leakage and design rules accordingly. Overseas investment in technology companies is accompanied by financing and, often, so-called intangibles. The financing aspect is far less relevant, particularly in the case of China, which has the ability to direct massive resources in support of technological innovation. More important as far as technology leakage is concerned are the intangibles that accompany investment, such as access to knowledge and capabilities, technological cooperation, greater visibility, access to investors, access to networks and markets and managerial expertise. Investment restrictions should therefore target the transfer of intangibles. At risk of over-generalization, measures should be focused on activist rather than passive investment; they should be more focused on equity investment than debt; and they should focus on more opaque private markets, including private equity, venture capital and joint ventures, rather than public markets. This is so because the incentives to provide intangibles are greater for equity and activist investment than for debt and passive due the greater financial upside (generally) associated with the former compared to the latter. 

Prepare for potential countermeasures by countries affected by technology-focused investment restrictions. Restrictions, particularly if they target specific countries, may lead to retaliation and reciprocal restrictions, targeting technological dependencies. They may also target a country’s geo-economic vulnerability more broadly, including trade or its foreign investment. The German government should assess the nature and costs of potential retaliation and take risk mitigation measures. The greatest vulnerabilities arises, as recent events have shown, from restrictions pertaining to difficult-to-substitute, critical goods, services and technology. The possibility of retaliation should be factored into the cost-benefit assessment discussed above. 

Outbound investment policy must form part of a broader, coordinated national economic security strategy. Outbound investment policies will only be effective in terms of limiting technological diffusion if they are part and parcel of a broader array of policies, including inward investment restrictions and export control policies rules. It naturally makes little sense to deny another country access to critical technologies if the country can simply purchase the technology due to a lack of export control measures or inward investment restrictions. Measures also need to include technology transfer licensing and restrictions on the ability of nationals to work for restricted foreign technology companies. Outbound investment screening needs to be integrated with other foreign economic policies to be maximally effective. Otherwise there is a risk that a country is settled with the economic costs of technology restrictions but none of the assessed benefits.

Strengthen defenses against industrial espionage. Because technology restrictions will increase the economic and financial returns on acquiring critical technology in “non-economic”, illegal ways, it is important to strengthen defences against industrial espionage among national companies developing and producing critical technologies, whether they are located at home or abroad. Defenses should be strong enough to defend against sophisticated, state-sponsored cyber espionage. Here the government has a role to play in terms of supporting corporate cyber-capabilities as well as the sharing foreign and counter-intelligence.

Outbound investment policies should be integrated at the EU level. The harmonization of EU member policies, already proposed and strongly supported by the European Commission, is highly desirable. It increases the efficacy of outbound investment policies; it strengthens the role of the EU in negotiating coordinated policies with third countries (see next paragraph); it helps prevent free-riding and it may help deter third-country retaliation. The challenge will be to convince member states with a small technological base to forego the financial upside of foreign technology investment. Similarly, EU countries that are less immediately concerned about national security will have lesser incentives to go along with an integrated EU policy. The EU has in recent years managed to adapt various geo-economic deterrence and defense policies aimed at deterring geo-economic coercion. It has also pushed for greater coordination of export control and inward investment policies. 

Germany (and the EU) should coordinate its outbound policies with the United States to make the policy more efficacious in terms of preventing technology leakage and minimizing the risk of transatlantic technology fragmentation. A common transatlantic approach makes restrictions more efficacious. The EU is committed to de-risking and Germany has committed to exploring cooperation on an outbound investment regime at the G7 meeting in Hiroshima. In principle, Germany and the United States share similar concerns about technological leadership. However, different levels of international economic dependence and different levels of security competition create different levels of incentives to tighten technology transfer, particularly vis-à-vis China. Being more directly affected by geopolitical and military competition with China and being economically less vulnerable to Chinese geo-economic retaliation, Washington has been substantially more forward-leaning than Germany and Europe. The fact that Washington has not shied away from from putting pressure on allies to fall into line with U.S. policy (e.g. export controls) shows how serious Washington takes the issue. The EU-US Trade and Technology Council is a forum where such coordination should be hammered out. If this fails, and little has come out of the bi-annual meeting, it may be necessary to move the issue of outbound investment (as well as export control and inward investment) coordination to the level of heads of government.

New U.S. Outbound Investment Review Mechanism

Washington views technology as a key domain of geopolitical competition and has tightened restrictions on technology exports[4] and inward foreign direct investment in critical sectors [5] on several occasions in recent year. The Biden administration has for the first time issued a decree that regulates and restricts U.S. outbound investment.[6] Sanctions-related financial restrictions targeting certain Chinese entities already existed[7]. A regime that restricts financial investment in another country’s technology sector has never existed before.

The new policy establishes, for now, a relatively light-touch approach. [8] Treasury is currently working out the precise details, but the decree will “prohibit or require notification” of investments by U.S. persons in three high-tech sectors (semi-conductors, artificial intelligence and quantum information technology) in, or related to, “countries of concern” (China, Hong Kong, Macao). Treasury will have no authority to block or unwind past transactions. 

The decree prohibits equity investments and debt that is convertible into equity stakes, greenfield investment and joint venture in these sectors. Investment in publicly-listed companies, index funds, mutual funds, exchange-traded funds and other types of passive investment, including limited partnership investment and venture capital as long as these investment are minority stakes only, will not be restricted. But US subsidiaries in China as well as venture capital investment, even if organized offshore, will be subject to restrictions. Restrictions will mainly apply to private equity investors and venture capital funds as well as U.S. investors in joint ventures with Chinese firms (wherever they may be located). The decree will also prohibit investment in third-country entities that invest in China in the covered sectors as well as U.S. persons working for foreign entities involved in directing covered investment in the three covered sectors. 

Prepare for a further tightening of U.S. technology-related restrictions, including outbound investment

Rhetoric notwithstanding, U.S. policies seek to preserve and enhance America’s lead in critical technologies vis-à-vis China. [9] This makes sense given that emerging technologies are closely linked to national security. Besides, economic productivity I sa critical long-term factor affecting geopolitical competitiveness.[10]

Despite the high degree of polarization in Washington, hawkish China policies – more so than hawkish Russian policies – enjoy broad bipartisan support and the administration will face little opposition from Congress if decides to further tighten outbound investment, inward investment or export control policy. 

There is disagreement within the administration as to how extensive restrictions should be, pitting national security folks (National Security Council, Defense Department) against Treasury, with the Commerce Department, which oversees export control policy, landing somewhere in between the two sides. The U.S. business community remains, by and large, opposed to restrictions, whether they apply to trade or investment. 

But the administration has nevertheless sufficient leeway if it feels the need to tighten restrictions further. The recent tightening of export control and inward investment policies as well as the establishment of an outbound investment regime has all been done via executive decrees, leaning on the International Emergency Economic Powers Act.[11] The Senate is also pushing for a wider sectoral coverage and the House, and unsurprisingly, and more particularly the Select Committee on Strategic Competition between the United States and the Communist Party, is hawkish with respect to any types of investment in China, including passive investment by large U.S. financial companies. The reality is that parts of Congress are more hawkish the administration.

Therefore, ss geopolitical competition intensifies, Washington will further tighten restrictions related to technology exports and technology-related financial flows, including both in- and outflows. And where U.S. policies require multilateralization to be sufficiently efficacious, Washington will seek the cooperation and support of its major allies in Europe and Asia. If transatlantic cooperation and coordination cannot be reached, Washington will tune up the pressure for its allies to fall into line. Washington, and particularly U.S. Congress will not find it acceptable if allies take advantage of commercial opportunities that open up as a consequence of U.S. restrictions. Washington will then likely restrict foreign companies’ and investors’ access to the U.S. market and technology if they fall afoul of U.S. restrictions. This represents significant risks for German and European companies, which continue to rely not only on the U.S. market but also on American emerging technology. 

Germany should push for a more integrated policy at the EU level and engage Washington more forcefully on coordinating outbound investment policies, particularly before U.S. restrictions become tighter, possibly including the unwinding of investments, which may, directly or indirectly, negatively affect German investment in China. For now, U.S. rules are made via executive decree. But should rules be legislated by Congress, it will become more difficult to influence U.S. policies. The U.S. administration will be more amenable to compromise than Congress because it needs to take into account its broader relationship with Germany and Europe. 

Germany, as a country that is very dependent on both China and U.S. has an incentive to nudge U.S. policy away from maximalist policies to the extent that these maximalist policies will sooner or later negatively affect German economic interests by forcing German companies to abide by U.S. rules or risk penalties or even market exclusion. Whether nudging is possible remains to be seen. But without a relatively cohesive EU position on how to regulate technology-related export control and investment policies and without the ability to offer Washington to help make its policies more efficacious in exchange for making them more narrow, Washington will simply forge ahead and lay down the rules, including effectively “secondary” measures that would affect German and European economic interests.

References:

[1] Cooperation should be facilitated by what International Relations scholar call the favourable security externalities of intra-alliance foreign direct investment flows.

[2] See also Markus Jaeger, A More Strategic Approach to Foreign Direct Investment Policy, DGAP Policy Brief, February 7, 2023: https://dgap.org/en/research/publications/more-strategic-approach-foreign-direct-investment-policy

[3] Federal Ministry of Defence, National Security Strategy, October 31, 2022: https://www.bmvg.de/en/national-security-policy; German Federal Foreign Office, Strategy on China, July 13, 2023: https://www.auswaertiges-amt.de/blob/2608580/49d50fecc479304c3da2e2079c55e106/china-strategie-en-data.pdf

[4] Congressional Research Service, U.S. export controls and China, March 24, 2023: https://crsreports.congress.gov/product/pdf/IF/IF11627

[5] Congressional Research Service, The Committee on Foreign Investment in the United States, 2023: https://crsreports.congress.gov/product/pdf/IF/IF10177

[6] White House, https://www.whitehouse.gov/briefing-room/statements-releases/2023/08/09/president-biden-signs-executive-order-on-addressing-united-states-investments-in-certain-national-security-technologies-and-products-in-countries-of-concern/

[7] White House, https://www.whitehouse.gov/briefing-room/presidential-actions/2021/06/03/executive-order-on-addressing-the-threat-from-securities-investments-that-finance-certain-companies-of-the-peoples-republic-of-china/; Office of Foreign Assets Control, Issuance of Chinese Military-Industrial Complex Sanctions Regulations, February 15, 2022: https://ofac.treasury.gov/recent-actions/20220215

[8] U.S. Treasury, Provisions pertaining to U.S. investments in certain national security technologies and products in countries of concern, August 14, 2023: https://home.treasury.gov/system/files/206/Treasury-ANPRM.pdf; White & Case, President Biden orders establishment of new program to restrict outbound investment in certain tech sectors in China, August 16, 2023

[9] Jake Sullivan, the national security advisor, was quoted as saying “We must maintain as large of a lead as possible.”White House, Remarks by National Security Advisor Jake Sullivan at the Special Competitive Studies Project Global Emerging Markets Summit, September 16, 2022: https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/09/16/remarks-by-national-security-advisor-jake-sullivan-at-the-special-competitive-studies-project-global-emerging-technologies-summit/

[10] Markus Jaeger, The Economics of Great Power Competition, DGAP Policy Brief, May 2, 2022: https://dgap.org/en/research/publications/economics-great-power-competition

[11] Congressional Research Service, The International Emergency Economic Powers Act, March 25, 2022: https://crsreports.congress.gov/product/pdf/R/R45618