A Requiem for Economic Diplomacy

Putin might want Nord Stream 2 [the natural gas pipeline between Russia and Germany, financially advantageous to both nations, which will presumably be scuttled if Russia invades Ukraine], but … he definitely wants Ukraine more than that pipeline.

  • Kadri Liik, senior policy fellow at the European Council on Foreign Relations, on January 28, 2022, at an event held by the Carnegie Endowment for International Peace.

As this is typed, there are reports of an imminent invasion of Ukraine by Russian troops and materiel massed at Ukraine’s borders with Russia and Russian satellite Belarus. Putting aside – if one can – the human loss and destruction of freedom which will attend any Russian attack, I would submit that Russia’s bellicosity despite the allied democracies’ threat to apply what Russian President Vladimir Putin undoubtedly understands will be truly punitive economic sanctions on the Russian economy and people provides a final debunking of the notion of Economic Diplomacy:  the theory that forging economic interdependence between nations will discourage them from engaging in military and other provocative actions likely to earn the enmity of other nations with whom they do business to sustain their respective economies.

Economic Diplomacy didn’t seem like a bad idea in the 1990s, when China was desirous of expanding its economy and providing at least marginally greater freedoms for its citizens, and Russia’s fledgling democracy was seeking economic stability after the fall of the Soviet Union.  It was seemingly based on the belief in some liberal democratic economic quarters that economic priorities would become the dominant driver of world affairs.  More money for everybody would make it less likely that anybody would want to threaten the golden goose.  In retrospect, it appears that its adherents underestimated the strength of other prevalent motivations among states and their leaders, such as national aspirations, power, religion, patriotism, and ancestral antipathies.  With the benefit of hindsight, I would venture that a fundamental underpinning of the premise that economic interdependence would facilitate equilibrium among traditionally contentious powers was the assumption that Western-style liberal democracy would inexorably sweep across the globe.  If such sweep had continued – bringing forth an international system where most militarily- and economically-powerful nations were governed by officials who were dependent upon the support, and thus at least to a certain extent the economic wellbeing, of their respective citizens to stay in power — perhaps economic interdependence would have indeed salved political frictions between nations.  It didn’t, so it hasn’t.  Instead, the global meshing of the economies of democratic and authoritarian nations has inadvertently created an asymmetric advantage for the autocracies. 

The most blatant indication that Economic Diplomacy has failed – and has, indeed, provided a strategic advantage to authoritarian powers — is the muscular disdain which China presents a world disturbed by its established human rights abuses, its unapologetic subjugation of Hong Kong, its flouting of other nations’ corporations’ intellectual property rights, etc., etc., etc.  The Mainland regime’s flagrant disregard of the credibility of Hong Kong – for over a century, one of Asia’s foremost financial centers — shows that it thinks first in political, not in economic, terms.  It doesn’t care what the world thinks.  In theory, a nation hosts the Olympics to create a positive image, generate economic opportunity, and foster worldwide goodwill.  If that was originally China’s aim, it is clear that such is no longer a strategic goal; instead, visiting athletes and the nations they represent figuratively tiptoe at the Games rather than risking offending the Chinese government.  Chinese President Xi Jinping and his government don’t need to heed international concerns or the preferences of ordinary Chinese citizens to stay in power.

Contrast this Chinese indifference with the political and economic attitudes in the democracies.  The world was outraged for a period after the 1989 Tiananmen Square massacre … but it came back.  Recently, the Wall Street Journal reported that major movie studios now scrupulously avoid casting China or Chinese as villains in their films, lest they be cut off from Chinese consumers.  Apple, Tesla, Google, and other global corporate icons comply with Chinese government demands rather than lose access to the China market (and in Apple’s and Tesla’s case, critical Chinese manufacturing resources), which would probably result in significant reductions in their stock prices.  Such price declines not only affect the careers of these organizations’ senior executives; they also affect the prospects of politicians dependent upon the votes of citizens alarmed at losses in their nest eggs.  Recall that former President Donald Trump’s last trade arrangement with China was primarily designed to reinstitute China’s purchase of produce raised in states that strongly supported Mr. Trump.  Maybe Chinese citizens would truly be angry if their government terminated their access to Google Search, Apple phones, American films, and Tesla EVs.  Mr. Xi doesn’t need his citizens’ approval to keep his job.  Democratic leaders do.

Let’s move to Russia.  It has been widely reported that the most influential member of NATO reluctant to confront Russia in the Ukraine crisis is Germany, to the point that Germany has even in some ways obstructed other NATO nations’ support of Ukraine.  Despite Russia’s illegal annexation of Crimea from Ukraine in 2014, Germany authorized the Nord Stream 2 pipeline between Russia and Germany in 2018.  Germany’s dilemma is clear:  as it is winding down its coal and nuclear power sources to address climate change concerns, it is becoming ever more dependent on Russian natural gas.  While Germany has come under increasing pressure to be more supportive of NATO’s efforts against Russian aggression, German Chancellor Olaf Scholz, as a democratic leader, obviously needs to be responsive to the needs of his citizens.  (In fairness, while I strongly support the defense of Ukraine, it is cold in Madison, WI as this is typed.  If our heat was dependent upon Russian resources, would I be as aggressively calling for my government to confront Russia?  I hope so, but would certainly have a measure of pause.)  On the other hand, although democratic sanctions and loss of German natural gas revenue will certainly inflict hardship on the Russian economy and people, Mr. Putin has already weathered national demonstrations related to his unjustified imprisonment of his chief domestic political opponent, Alexei Navalny; he is obviously not worried about being ousted by Russian citizens as a result of the loss of revenue and resources from allied democracies.

If counseling Mr. Biden, I would indicate that it falls to him to accelerate the dismantling of America’s economic interdependence in areas in which such now places our nation at a strategic disadvantage.  I would advise him to completely recast the thrust of his Build Back Better Plan toward national security concerns, broadly conceptualized.  While the following suggestion would undoubtedly irritate progressives [and elicit strong pushback from someone very, very close to me  😉 ], at this juncture I’d be less concerned with domestic challenges such as early education, child care, health care expansion, etc., and would instead seek legislation to accelerate our preparations where our most advanced military capabilities are lagging and in areas where we are currently strategically exposed, such as sophisticated microchip design and production and rare earth mineral mining and refinement capabilities.  (Reflect:  while these pages have noted Mainland China’s ancestral territorial desires to control Taiwan, one should not overlook the strategic technological vulnerability for liberal democracies that could be created by any Chinese takeover of the Taiwan Semiconductor Manufacturing Company — described by Time Magazine as the company “that makes the world’s tech run.”) 

I admit that these suggestions have a hint of parochialism – a bit of, “Buy American,” or at least, “Buy Reliably Democratic.”  Such measures would increase good-paying American jobs, but right now finding workers, not opportunities, is obviously our economic challenge.  It might well perpetuate if not exacerbate our currently uncomfortable inflationary pressures.  In some instances, it might even slow global climate change efforts – for example, if Germany sought to reduce its current and projected reliance on Russian natural gas by slowing its plans to move away from its nuclear energy and carbon fuel resources.  Even so, insurance costs money.  Even if Mr. Putin ultimately stands down rather than have his forces invade Ukraine, I would suggest that he will do so not because he fears democratic economic sanctions or the loss of German natural gas revenues but because he discovered that NATO had greater military resolve to resist his advances than he had anticipated.  He, and particularly Mr. Xi, will learn from this incident and look for other means to probe democratic vulnerabilities.  It is up to Mr. Biden and other democratic leaders to move aggressively to counteract such likely future endeavors.

One thought on “A Requiem for Economic Diplomacy

  1. I was wondering what your take on this was – thanks for the insights! A couple of comments. I agree with changing the focus of the BBB effort away from social programs, but I would continue to include a historic effort aimed at addressing climate change. Driving production of critical products to on-shore or at least reliably democratic countries seems important as well. Historically, that might have been something in industry’s court to direct. Issues caused by supply chain disruptions have already created that incentive and at least some measure of action. Intel is building two new US factories and making chips for the first time. I’m leery of government control over the production of goods. In addition to semiconductors and rare elements, should solar cells and batteries also be included? To combine metaphors, just one more question of “Where to draw the line?” on the “Slippery slope.”


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