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An Illusion for our Time

The false promise of globalization.

This week’s TNR cover story by James Mann deals with the vexing problem that China poses to the community of nations—and to the young Obama administration. Mann observes that, even as China has opened up economically, it has pursued an aggressive foreign policy. Writing in TNR thirteen years ago, Peter Beinart anticipated this situation. Taking issue with globalization optimists like New York Times columnist Tom Friedman, Beinart wrote, “Like Imperial Germany before World War I, China’s links to the world economy are making its leaders more interested in the accumulation and projection of military power, not less.” With a debate still raging in Washington over our approach to China, his piece remains essential reading even today.

"International finance has become so interdependent and so interwoven with trade and industry that ... political and military power can in reality do nothing.... These little recognized facts, mainly the outcome of purely modern conditions (rapidity of communication creating a greater complexity and delicacy of the credit system), have rendered the problems of modern international politics profoundly and essentially different from the ancient." These words come from perhaps the best-selling book on international relations ever written. That book, The Great Illusion, sold more than a million copies in seventeen languages. Its author, Norman Angell, was knighted, and won the Nobel Peace Prize. In the years following the book's publication, close to 100 organizations arose to spread its message: that the world had entered a new era in which economic interdependence made war unthinkable. The Great Illusion was published in 1910.

On March 20, 1997, New York Times columnist Thomas Friedman wrote that we have entered a "new world of globalization--a world in which the integration of financial networks, information and trade is binding the globe together and shifting power from gove rnments to markets." In his December 8, 1996, column, Friedman wondered whether "a country, by integrating with the global economy, opening itself up to foreign investment and empowering its consumers, permanently restricts its capacity for troublemaking and promotes gradual democratization and widening peace." And on February 14, 1996, in a column on the impending Russian elections, he wrote: "Sure, a Communist or radical populist in the Kremlin would be worrying. But their room for maneuver would be constricted--much more than we realize and much, much more than they realize. Russia today is connected with the global economy."

The conventional wisdom about post-cold war American foreign policy is that there is no conventional wisdom--no unifying theory that traces disparate phenomena to a single source. But one candidate for conceptual preeminence may be breaking from the pack , and it is Friedman's candidate, globalization. The idea is that technology has led to unprecedented and irreversible economic integration among countries. The only way governments can survive is to do what global business demands: observe the rule of law at home, and act peacefully abroad. For the United States that means abiding by the imperatives of the global economy and informing others that they must do the same. It is a foreign policy vision for a world where politics barely matters.

And it is a vision that the Clinton administration has embraced. On June 19, in a speech prior to the summit of the eight industrial powers in Denver, President Clinton said, "Protectionism is simply not an option because globalization is irreversible." On June 6, in a speech arguing that trading with China would make it less dangerous, National Security Adviser Samuel Berger explained that "the fellow travelers of the new global economy--computers and modems, faxes and photocopiers, increased contacts and binding contracts--carry with them the seeds of change." A couple of years ago an unnamed State Department official told The Washington Post: "People who trade don't fight. They have shared interests in a way that autarchic economies do not."

The globalization doctrine builds on an idea popular in the early years of the Clinton administration: that American foreign policy should seek to widen the international community of democracies because democracies don't go to war with one another. But it goes a crucial step further. The earlier idea implied American pressure on democratization's behalf. For that reason, as the Clintonites discovered when they tried to apply it to China, it provoked real conflicts. The new doctrine, by contrast, does not require the United States to levy sanctions and create diplomatic rows. Globalization--powered by the inexorable march of technology and trade--will do democratization's work more effectively than State Department pressure ever could. America need simply warn renegades that if they menace neighbors or torture dissidents, they will be disciplined by the all-powerful global market. Foreign policy becomes an exercise not in coercion but in education.

This is globalization's appeal to a country both obligated to keep the world safe and increasingly reluctant to do so. It allows American elites to imagine that the security won for this country in struggle is now protected by a force both unstoppable and benign. And it allows them to imagine that rising and aggrieved powers will embrace a world governed by free trade as well, even though it locks them into a position of political and military subservience. Globalization is the narcissism of a superpower in a one superpower world. It allows America to look at the world and see its own contentment and its own fatigue. And it has provided the same false comfort to lone superpowers in the past. That's where Norman Angell comes in.

It is obvious to any casual observer of international affairs that today's world is far more interdependent than ever before. But it is not true. International trade and investment have indeed been increasing since the 1950s. Yet after four decades of growing interdependence, the world is just now becoming as economically integrated as it was when Norman Angell wrote The Great Illusion. According to Paul Bairoch of the Center for International Economic History at the University of Geneva, merchandise exports by the industrial countries were 13 percent of their Gross Domestic Product in 1913. In 1992, they were 14 percent.

As for financial integration, Bairoch estimates that by 1993 Foreign Direct Investment as a percentage of gross product had risen to roughly the level of 1914: around 11 percent for the industrial countries. A more elaborate study by the U.S. Trust Company's Robert Zevin, which examines financial integration by measuring "crossmarket correlations between asset price movements" concludes that "every available descriptor of financial markets in the late nineteenth and early twentieth centuries suggests that they were more fully integrated than they were before or have been since."

So Norman Angell was right that he lived in a highly interdependent world. He considered this the result of technology, of "the incredible progress of rapidity in communication." All around him he saw technology forging a global economy that forced states to fit a single, fiscally responsible mold. "Just note what is taking place in South America," he wrote. "States in which [debt] repudiation was a commonplace of everyday politics have of recent years become as stable and as respectable as the City of London." "[C]ircumstances stronger than ourselves are pushing us," he insisted, and for those countries that resisted, "punishment is generally swift and sure."

But Angell's interest in the global economy was not merely descriptive. He sought to convince his fellow Britons, some of whom feared the outbreak of war with Germany, that the German threat was an illusion. After all, Britain and Germany were probably the two most economically interdependent nations on earth. Germany was Britain's second largest trading partner, and Germany sold more goods to the United Kingdom than to any other country. And even trade doesn't reveal the true depth of Anglo-German economic ties, since the City of London largely financed German industry. A Committee of Imperial Defence study noted that, since Lloyds insured the German merchant marine, it would have to pay the Kaiser for any lost ships, even if they were sunk by the British navy.

Under such circumstances, Angell argued, the key to preventing war was awakening people to their self-interest. He rejected suggestions that Britain contain Germany through military preparation and balance-of-power diplomacy. Any German penchant for aggression, he insisted, was "founded upon illusions which she would be bound sooner or later to shed." To speed up this inevitable process, Britons should forge ever deeper economic links with Germany while teaching people in both countries that war was self-defeating.

In Britain, a country ideologically committed to free trade, Angell's educational campaign struck a chord within the ruling elite. Of the 100 societies which sprang up to do the job, the most prominent included former Conservative Party Prime Minister Arthur Balfour, and Lord Esher, chairman of the Committee of Imperial Defence. If Germany was challenging Britain's industrial supremacy, Britain remained the world's undisputed financial capital, and London's powerful financiers more than counterbalanced the few farmers and manufacturers who wanted tariffs against German imports. Even Benjamin Disraeli, whose Conservative Party had fought for the Corn Laws in the mid-nineteenth century, announced that the Tories were now free traders. "Musty phrases of mine forty years ago," he said, were no longer relevant.

The British elite's enthusiasm for globalization implicitly rested on their country's privileged international position. Britain had been the world's leading military and economic power for close to a century. The relatively open trading system of the late nineteenth century, of which Britain was the chief beneficiary, was sustained by the protective power of the British navy. But Britain's military primacy had gone unchallenged for so long that many in Britain had lost sight of its importance. So Norman Angell, and others in the British establishment, saw globalization not as a fact of politics based on a security system, but as a fact of technology, independent of politics.

In Germany, however, which had been recently weak, divided, and at war, security concerns didn't seem so irrelevant. From Berlin, globalization did not look like a panacea; it looked like British hegemony. Britain's navy controlled the waterways on which German ships traveled, and Britain, through its empire, controlled many of the raw materials Germany's burgeoning industries needed. Britain saw the continent's division as evidence of a stable international order. Germany, which believed it deserved a central European sphere of influence, saw that division as a sign of British domination.

Quite aware that Britain had industrialized before the era of free trade, many Germans regarded London's continual preaching about the immorality of protectionism as rank hypocrisy. Starting in the 1870s, German governments began protecting their industries behind a tariff wall. As Paul Kennedy shows in The Rise of the Anglo-German Antagonism, Germany's reigning ideology was mercantilism. Its leaders knew that trade could be a means to wealth and power. But they also believed that, for a rising power beset by deep social conflicts, unregulated free trade could be a threat to political stability and governmental control. While Norman Angell followed in the tradition of Adam Smith and Richard Cobden, Germany in the late nineteenth century saw a revival of interest in the works of Friedrich List, who wrote in his 1841 classic The National System of Political Economy that the ideology of free trade was a "clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him."

For Germany to climb up, it would have to be strong enough to integrate with the world economy on its terms. So while many Britons argued that globalization was rendering military power irrelevant, the German elite believed globalization made it all the more crucial. Concerned that its trade routes were at the mercy of the British navy, Germany embarked in 1897 on a massive ship-building program. This naval challenge pushed Britain gradually closer to France and Russia, and set in place the alliance system that would turn a local squabble into World War I.

The United States in 1997 differs from Britain in 1897 in obvious ways. Its empire is informal, not formal; its democracy is mature, not embryonic. But its elite shares turn-of-the-century Britain's fascination with economic interdependence. Today, as then, globalization suggests a world in which the imperatives of economic integration overwhelm those of politics. And in today's America, as in Norman Angell's Britain, there is a strong, intuitive sense that globalization is connected to wondrous n ew developments in communications technology: satellites, faxes, the Internet.

But if technological progress by itself produced integration, globalization would have risen steadily during the twentieth century. It has not. The period between 1914 and 1950 saw a revolution in both transportation and communication. The automobile assembly line was introduced in 1913; the first transatlantic flight took place in 1919; and the first commercial radio broadcast was in 1920. But during that time interdependence decreased dramatically. The reasons, of course, were World War I, World War I I, and the economic depression in between. The era's technological breakthroughs did not prevent the rise of aggressive, expansionist ideologies in Germany and Japan. And those forces swamped the supposedly inevitable trend toward a more peaceful, globalized world.

Similarly, the rise in global integration since World War II stems more from politics than from technology. In particular, it stems from two institutional shifts, both made possible by American political and military power. The first was the establishment of a liberal trading and monetary regime in the 1940s. America built the regime--whose key components were the International Monetary Fund, the General Agreement on Tariffs and Trade, the Marshall Plan, and the American nuclear umbrella--both because f ree trade was in the U.S.'s self-interest, and because the U.S. wanted to help Western Europe and Japan recover so they would not fall prey to communism. Economic integration grew because the GATT reduced tariffs, the International Monetary Fund stabiliz ed world currencies, and the Marshall plan rebuilt European industry. From 1950 to 1975, trade among the industrial countries grew twice as fast as their economies.

In 1974, the United States made the second key decision: it abolished its controls on the movement of foreign capital. This decision, like the first, can be traced to American self-interest. Declining U.S. productivity had spawned a trade deficit, which was pushing the dollar down and threatening the fixed exchange rate system. Abandoning both the fixed exchange rate and capital controls allowed the dollar to drop to its natural level, and let in the foreign capital America needed to finance its trade d eficit. The decision was possible because Western Europe and Japan had grown strong enough that they no longer needed fixed exchange rates to stabilize their economies and fend off communism. Deregulating its capital market cemented the United States' position as the world's financial center, and it eventually forced America's competitors to end their capital control as well.

To be sure, by the time America scrapped capital controls, advances in telecommunications technology had already rendered them less effective. But as Eric Helleiner of York University in Toronto argues in States and the Reemergence of Global Finance, the United States could have restored their efficacy had it wanted to. It did not, and the result was an explosion of globalized finance that dwarfs even the rise in trade. In the late 1970s, the industrial nations invested $34 billion a year overseas. By 1990, that figure had reached $214 billion.

So we too live in a highly interdependent world. The problem is the widespread American belief that economic integration, because it stems from technology, is both all-powerful and politically neutral--that is, not identified with the interests of any one country. This leads to soothing assumptions about the restraints the global market imposes on potential aggressors, restraints that only exist if the potential aggressors also see globalization as both inevitable and benign.

Consider the way globalization looks from Beijing. Americans often see East Asia as the vanguard of the new economics-dominated world. But Japan, South Korea, and Taiwan all emerged as major world traders and investors under the protection of the A merican military. The U.S. Navy guarantees the South and East China Sea trade routes on which all three rely. Each has profited from access to U.S. markets, access granted in part to foster prosperity, and thereby to ensure they remained on the American side during the cold war. The United States has promoted growth and economic integration in East Asia, but as part of a broader American strategy to prevent any Asian power from gaining regional hegemony.

If Americans sometimes forget this, the leadership in Beijing--which seeks exactly that regional sphere of influence--does not. What Washington calls globalization, Beijing calls American hegemony, and this difference of perspective helps explain why China is violating globalization's core imperative. Like Imperial Germany before World War I, China's links to the world economy are making its leaders more interested in the accumulation and projection of military power, not less.

As Princeton's Kent E. Calder wrote last year in Foreign Affairs, China's growing international trade has led to a tremendous boom in manufacturing, and in air and car travel. This in turn has made China a net importer of energy. Shell China Petroleum De velopment estimates that by 2015 Beijing will need to import as much oil as the United States does today. This is one reason China has in recent years tried hard to establish a sphere of influence in the South and East China Seas. In January 1995, the Ch inese navy forced a group of Filipino fisherman off Mischief Reef, part of the disputed Spratly Islands. The Spratlys contain considerable oil reserves, and sit astride the South China Sea, through which Middle Eastern oil travels on its way to China (as well as to Japan, South Korea, and Taiwan). In December 1995, Chinese ships were spotted encroaching on the Senkaku Islands (the Chinese call them the Diauyutai) in the East China Sea. The Senkakus, claimed by both China and Japan, are also oil-rich and near key international shipping routes.

Just as China's growing economic interdependence may foster, rather than restrain, military aggression, many of Beijing's economic reformers are also its biggest hawks. The People's Liberation Army, which has grown more powerful within the political hier archy since the Tiananmen Square massacre, strongly favors economic reform. In his book China After Deng Xiaoping, Hong Kong journalist Willy Wo-Lap Lam estimates that there are perhaps 50,000 PLA-owned businesses, in which foreigners have invested over $1 billion. But Lam also shows that the army is one of the most expansionist elements within the Chinese leadership. The PLA pushed the government to be aggressive in the Spratlys, and in November 1992, a group of retired generals reportedly wrote Jiang Zemin and Li Peng a letter demanding a "stern reaction" to American and French sales of fighter jets to Taiwan. In early twentieth-century Germany, many industrialists encouraged their government's challenge to British naval dominance. In China, the industrialists and the admirals are often one and the same.

According to the theory of globalization, it is irrational for China to keep demanding that the U.S. Navy vacate the South China Sea. After all, it is there protecting free trade, which benefits everyone. But to China today, as to Germany in 1900, free trade looks less like a universal good, and more like the expression of a hegemon's self-interest. From Beijing's perspective, it is dangerous to have the U.S. military patrolling its trade routes--not necessarily because China fears the U.S. will cut off access to its key imports, but because it fears America might use the threat to force China to acquiesce in the total opening of its market (something China was forced to do in the nineteenth century).

To see how "American" free trade can look, consider Beijing's relations with multinational corporations. In America it has become fashionable to say that today's multinationals have no national identity. On this view, it is self-defeating for the Chinese to insist, as they do, that, as a condition of selling in China, multinationals transfer technology to Chinese companies. After all, this raises the cost of imports for the Chinese consumer.

But the men who run Beijing don't think multinational corporations lack a national identity. They see them as the agents of the United States and its allies, which is not altogether unreasonable. In 1991, only 2 percent of the corporate directors of American multinationals were non-American. As Louis W. Pauly of the University of Toronto and Simon Reich of the University of Pittsburgh have shown, multinationals are deeply tied to their home countries in corporate style, ownership, and the production of their highest value components. Beijing knows this, and it fears Western multinationals will not give it the knowledge it needs to move from making toys to making microchips unless China insists on technology transfer as the price of increased trade.

China's rulers are mercantilists. They believe economic engagement can help make their country powerful, but they also believe unregulated commerce can sow instability. They know tariffs played a key role in the industrialization of the United States and Japan, and they suspect that American insistence on free trade today is a clever attempt to prevent China from adopting the same tested formula for national greatness. That's what Beijing hears when American officials say that free trade will undermine Beijing's current authoritarian regime and foment a democratic revolution.

This raises a question that Thomas Friedman and other globalization enthusiasts seldom bother to ask: Why is globalization such an attractive theory in this country at this time? The answer is that the U.S. is in a position only one other country h as known in the last two centuries. Like Victorian Great Britain, the U.S. today is the world's lone superpower. Its old rivals are dead, and its new ones are not yet born. Its security is so assured that it suspects military power has become irrelevant. And so America can afford to dream of a world without conflict, of an end to History.

But globalization reflects not only America's success. It also bespeaks its quiet fears. It is possible to be the world's only superpower and also be in decline. That decline has been impressively obscured in the past decade, by the Soviet Union's collapse and by economic troubles in competitors like Germany, France, and Japan. Most of all, it has been obscured by American industry's return to international preeminence over the past decade. But from a long-term perspective, America's economic decline re lative to other nations is indisputable. In 1950, the United States represented 39 percent of world GNP. In 1995, it represented 26 percent. In 1953, the United States accounted for 45 percent of the world's manufacturing output. In 1990, it accounted for 22 percent.

This decline in global economic dominance is making it harder for the United States to sustain its apparatus of political and military power, even though the challenges to that apparatus are currently quite minor. America has recently closed a number of embassies and consulates. According to a recent study by UNICEF, it now ranks lowest among twenty-one industrial countries in the percentage of GNP it devotes to foreign aid. The percentage of World Bank lending underwritten by the U.S. has fallen by half since the institution was founded. Between 1989 and 1995, America's troop strength in the Pacific fell 15 percent.

To the superpower's worry that it cannot maintain its security system with declining resources, globalization offers a reassuring answer: it isn't the security system that keeps the peace, but rather the global market. And while military power waxes and wanes, the expansion of the global market--as Thomas Friedman and Bill Clinton never tire of saying--is unstoppable. American foreign policy can content itself with helping globalization along, and with reminding other countries of the restraints it imposes.

This is the story of the Clinton administration's policy toward China. In 1993, Bill Clinton took office threatening sanctions to force China to be less repressive at home and less aggressive abroad. In 1994, Warren Christopher took this message with him on a trip to Beijing, and was publicly humiliated. America's allies and American business rejected any effort to isolate China, and the United States backed down. The Clintonites realized that they lacked the power to change China's behavior, at least its domestic behavior. From this realization came "engagement"--globalization in policy form. The policy assumes that China's growing integration with the world economy will tame it, even without U.S. pressure. This is what Friedman means when he writes that, "Hong Kong will be a largely self-sanctioning diplomatic problem." When Christopher returned to China in November 1996, he told his hosts that, "history shows that nations with accountable governments and open societies make for ... better places for foreign investment and economic growth." In other words, China's desire for wealth will improve its behavior, and keep it from becoming a threat.

These are dangerous assumptions. The better response to America's relative decline would be to get our increasingly wealthy allies to accept a greater share of maintaining the security system from which they benefit. In East Asia, that means putting trade conflicts with countries like Japan, South Korea, and Indonesia on the back burner, and giving them more say in how the U.S. deals with China. Since those countries have no interest in China's internal affairs, America would have to downplay human rights considerations. But it has done so anyway. This is a price worth paying in order to convince China's neighbors to assume more of the burden of thwarting China's hegemonic push. America would base its policy not on the imperatives of the global market, but on a renewed balance of power. And this would mean accepting, though we would rather not, that neither the march of technology nor the spread of wealth can keep us safe absent the mobilization of national resources and national will.

In 1939, with one world war past and another looming, the renowned British historian E.H. Carr reflected on why events had proved Norman Angell wrong. He wrote in The Twenty Years' Crisis: "To make the harmonisation of interests the goal of political action is not the same thing as to postulate that a natural harmony of interests exists; and it is this latter postulate which has caused so much confusion in international thinking." The theorists of globalization, then and now, are not wrong because they believe peace is possible. They are wrong because they believe peace is possible without politics.