The Cold War’s end during the 1989-91 period, whatever else it meant and did, ignited a massive transformation of the global economy that, accompanied by dramatic if pent-up technological change, came to be known generically as globalization. Like all great changes, this one produced both discrete events and shockwaves. Thus, by 1998 the People’s Republic of China had taken possession of Hong Kong, one of the world’s leading financial centers; the Asian currency crisis, followed shortly by the Russian debt crises, had roiled all major world capital markets. The latter toppled the government of Boris Yeltsin, bringing Vladimir Putin to power. To capture the essence of the still-swirling shift, one scholar coined the term geo-economics to suggest that global economic relations would drive international politics in a way that military power had done heretofore.
While the shift seemed to many to be historically singular, it was not so. Here is how the dean of American grand strategy, Alfred Thayer Mahan, described what he saw at the turn of the previous century:
The unmolested course of commerce, reacting upon itself, has contributed also to its own rapid development, a result furthered by the prevalence of pure economical conception of national greatness… This, with the vast increase in rapidity of communications, has multiplied and strengthened the bonds knitting the interests of nations to one another, till the whole now forms an articulated system, not only of prodigious size and activity, but of an excessive sensitiveness, unequalled in former ages… The preservation of commercial and financial interests constitutes now a political consideration of the first importance, making for peace and deterring from war.
What was true by the end of 1991 is that a geopolitical landscape dominated by two competing economic systems had begun ineluctably to merge into one system of competing economies, all depending on the architecture devised and managed mainly by the United States during the Cold War.
No one should look nostalgically on the Cold War era, but the new dispensation has created a vastly more complicated set of policy challenges concentrated at the intersection of economic and strategic domains. In virtually every current national security challenge, international economic considerations are playing critical and in some cases decisive roles. Despite this profound shift, U.S. strategy continues to take an ad hoc approach to applying economic power to national security interests. To leverage our strengths and avoid undermining our long-term competitive position, the next Administration needs to conduct a strategic assessment of the intersection of economics and national security policy and how best to reorganize the institutions tasked to advance American interests.
At the end of World War II, the United States made a concerted effort to shape the postwar economic landscape. U.S. statesmen quickly established the structure of monetary policy, finance, and trade that its allies would employ to reconstruct thriving economies. Bretton Woods and its institutions, the IMF and the International Bank of Reconstruction and Development (eventually folded into the World Bank), established the U.S. dollar as the free world’s reserve currency. The General Agreement on Tariffs and Trade (GATT) usurped the UN’s attempt at an International Trade Organization to shape the rules of international commerce. These global institutions became critical components in forming strong alliance bonds that tolerated and encouraged the creation of highly competitive economies that shared a common national security purpose.
The Soviets balked at the U.S. effort. Its representatives walked out of Bretton Woods in 1945 and later refused participation in the Marshall Plan. By the end of the 1940s, two independent economic systems were in place: the Soviet command system and the free market U.S. system. The two systems did not directly compete economically but sought to exploit their benefits to compete politically and militarily with the other. The Soviet decision to detach itself from the U.S.-led economic system greatly simplified both the economic and the national security dimensions of U.S. containment strategy. The West could compete in its own economic sphere among allies without undermining a cohesive national security strategy against its common adversaries.
To leverage our strengths and avoid undermining our long-term competitive position, the next Administration needs to conduct a strategic assessment of the intersection of economics and national security.
This separation allowed the U.S. government to construct the physical infrastructure needed to support both its military strategy and the global free market economic system that served to enhance the wealth and economic capacity of the United States, its allies, and its friends. The U.S. Navy guaranteed safe conduct of international commerce. Allied governments helped foster uniform trading policies that determined elements as mundane as the size of shipping crates and protected Western technological advancements through export control regimes such as CoCom. Led by the United States, the West vastly expanded the deployment of undersea cable and satellites to facilitate communication for both economic and military objectives. The U.S. government developed global navigational tools such as Loran and later GPS, and eventually standardized information-based communication through the deployment of the Internet Protocol. With little financial or commercial incentive to deviate from the free market economic system, the United States and its allies could remain confident that any economic differences would not undermine national security.
This bifurcation offered still other advantages to national security planning. Bureaucratic institutions could focus on either national security or economic considerations. The U.S. commercial and military supply chains remained mostly within the U.S. alliance system. Strict export control regimes prevented the diffusion of sensitive technologies. The core value-added elements of Western economic might remained securely within our national security sphere of influence. If we were protecting our allies, we were also protecting our economic supply-lines. Although oil posed challenges, the dollar remained OPEC’s transaction currency, and petro-dollars were invested largely in U.S. assets, benefiting American economic prosperity. The Soviets offered no viable alternative. They could not exert leverage over the conduct of economic affairs in the West.
By the 1980s, both the Soviet Union and the People’s Republic of China were forced to recognize the futility of their economic model. In 1990, the U.S. alliance system represented nearly 75 percent of total global GDP, a percentage vastly larger than its respective share of global population. More importantly, the pace of technological change in the West suggested that, over time, the gap would grow even further. The long-term ability of the Communist state-controlled economies to compete militarily, short of nuclear, war would continue to atrophy without a radical economic adjustment. The only alternative available to the communist bloc was to join that which they had rejected 45 years earlier.
Former U.S. adversaries quickly joined the economic architecture the United States created. They accepted the U.S. dollar as the primary reserve currency and the currency of global trade. They sought entry to the major trade and economic institutions that helped manage international economic activity, including the G7, GATT, WTO, IMF, and the World Bank. Our former adversaries also adopted our information architecture to power their economies and compete with ours. The United States gained clear advantages from this adoption, but it also created long-term economic and strategic challenges that increasingly bleed into the conduct of U.S. national security policy.
Despite the shift in the economic balance toward former U.S. adversaries, the United States remains in an enviable security and economic position. The U.S. dollar dominates global trade and finance transactions. The size, liquidity, and openness of U.S. capital markets are unparalleled. We have the most favorable demographic trend in the developed world. Our natural resource position, especially when including access to food and water, outpaces most of our major economic competitors. International economic institutions that the U.S. government helped to create, such as the G-20, World Bank, IMF, and WTO, continue to play central roles in preserving the rules of conduct for international trade and finance. Our military is the only power capable of protecting the architecture constructed to facilitate the unencumbered flow of money, goods, services, and information globally. Most nations and economic actors are content to free-ride on the international economic system the United States constructed. But we should expect current and future adversaries to challenge that system if they believe doing so will serve their economic or national security position. We should pursue a strategy that encourages the former and deters the latter.
Despite the shift in the economic balance toward former U.S. adversaries, the United States remains in an enviable security and economic position.
To ensure that United States sustains its competitive advantage, the next Administration needs to conduct a long-overdue strategic assessment of the impact that economic and commercial activity now has on the conduct of foreign policy. This assessment needs to certify that we are using effectively the full panoply of tools available to us. It should start by recognizing four key elements of U.S. international economic power and assessing the risk to those assets to either external challenges or internal misuse or neglect.
The first of these is the dominance of the U.S. dollar in the conduct of global trade and finance (roughly 80 percent of trade finance, 40 percent of international payments, and 65 percent of foreign exchange reserves are conducted or denominated in U.S. dollars). The second is the size, liquidity, and openness of our capital markets. The third is the key role international economic institutions such as the G-20, World Bank, the IMF, and the WTO play in preserving the rules of conduct for international trade and finance,a s well as the vital role the United States plays in these institutions. The fourth is the physical, financial, and information architecture that the United States has constructed to facilitate the unencumbered flow of money, goods, services, and information.
The next Administration should also conduct an assessment of the strengths and weaknesses of our own economic position and those of our potential adversaries. Many pundits have a tendency to overestimate our weaknesses and the strengths of our competitors. For example, when the Cold War ended, conventional wisdom held that Japan would prove a long-term economic juggernaut. In the end however, Japan Inc.’s focus on strong state-managed industrial policy and an export-focused economic strategy created profound deficiencies masked by top-line economic data.
It is also critical to understand that nations have different perspectives on global economic competition and the risks and challenges such competition creates. China’s current economic model, which in many ways resembles Japan’s, puts China in more direct competition with their Asian neighbors such as Vietnam and the Philippines than it does with the United States for share of the world’s source of low-cost labor. If China’s economic growth atrophies, as recent events seem to suggest it will, this decline may create more tension with China’s main economic competitors and geographic neighbors, exacerbating regional security concerns.
The assessment must also identify the opportunities and risks associated with conducting U.S. foreign policy in an integrated economic system. The bifurcation of bureaucratic domains of expertise between economic and national security priorities is no longer optimal. For instance, the use of financial sanctions by the Treasury Department’s Office of Terrorist Financing and Intelligence to isolate bad actors from the international system was an ingenious bureaucratic innovation made possible by the dominant U.S. position and the greater integration of the global economy.
The Treasury Department used authorizations enabled by Section 311 of the Patriot Act to coerce commercial and financing entities (foreign and domestic) to comply with U.S. financial sanctions or risk losing access to the largest and most liquid capital market in the world. The U.S. government has applied these sanctions against myriad bad actors, including specific individuals, companies, industries and rogue states such as Iran and North Korea. Originally developed by the Bush Administration, the tool eventually became President Obama’s “favorite noncombatant command.”
Given the asymmetric use of digital media for conducting commercial and financial transactions in developed economies, the United States and its traditional allies are far more vulnerable to economic cyber-attacks.
The effectiveness of Section 311 sanctions depends on the dollar remaining the world’s major reserve currency and the preferred currency of international trade. This ensures that nearly all financial transactions (including those in crypto currencies) ultimately dollar clear (convert into dollars from a foreign currency). Dollar clearing assures that virtually all significant international transactions will hit a U.S.-regulated banking entity, thus giving the United States unique insight on global economic activity. The U.S. government, through the Treasury Department, uses this information in coordination with amenable governments to coerce economic actors to abide by U.S. sanctions or lose access to its capital markets. As long as sanctions are targeted at economic entities with a limited economic footprint and are perceived to be legitimate targets of concern, global financial institutions can be easily persuaded. As targets move up the commercial value chain, the effectiveness of economic coercion diminishes.
The U.S. government is able to inflict costly economic damages on smaller targets at very little cost (compliance costs fall on commercial not government entities). But as we have seen with Russia, economic reality often intrudes on the viability of this weapon. U.S. and European exposure to Russian oil, gas, titanium, space lift, and financial holdings of Russian bonds restrain the application of financial sanctions, limiting their impact and potentially sending a signal of weakness. Furthermore, since these sanctions rely on the acquiescence of non-U.S. entities, financial sanction regimes are very difficult to “snap-back.” Critical economic entities can hide behind the fig leaf of UN policy, arms control agreements, or domestic laws.
Overuse of these coercive measures also risks undermining financial sanctions’ effectiveness, or perhaps even undermining long-term U.S. national security interests. Maintaining the dominant role of the U.S. dollar and the global money networks benefits the United States economically and also enables financial sanctions, but the application of this architecture to enforce sanctions discipline erodes confidence in those networks and encourages efforts to circumvent them. Crypto currencies are one such attempt, but so too are efforts by states such as China and Russia to develop alternative money-exchange networks. We should also expect to see others attempt to deploy this economic weapon against U.S. friends. Pro-Palestinian groups, for instance, petitioned SWIFT in 2014 to de-SWIFT Israel. SWIFT refused, arguing that they had no such authority, but implied that they would have to comply with EU law if so required. Still others may seek to use alternative approaches to counter U.S. economic sanctions, such as cyber attacks on U.S. economic interests (see chapter 7.1).
The increase in cyber attacks is a costly problem for almost all businesses, especially financial institutions. Given the asymmetric use of digital media for conducting commercial and financial transactions in developed economies, the United States and its traditional allies are far more vulnerable to economic cyber attacks. The government cannot solve this problem without the support of commercial entities. The U.S. government, therefore, needs to make fundamental adjustments to the way it views this challenge. For instance, the Justice Department’s focus on the criminal and litigious element of cyber attacks has stymied private-public cooperation, which in turn has complicated identifying and undermining attacks. U.S. law needs to establish effective safe-harbor provisions to ensure strong private-public cooperation on cyber security.
The President should also restore the Eisenhower-era National Security Planning Board that integrates input from a broader set of departments, such as Treasury, Commerce, and Agriculture, into national security policy planning.
The U.S. government should also evaluate the use of its Article I powers under the Constitution to issue Letters of Marque and Reprisal. While allowing outright privateering is unwise, effectively deputizing, incentivizing, and managing the private sector to hack back not only to block attacks but to force individuals, groups, or states that condone hacking to a pay a price, deserves consideration.
The next Administration should also evaluate rescinding the Obama Administration’s decision to endorse the Montevideo Statement on the Future of Internet Cooperation in the wake of the Snowden debacle. Further internationalization of internet governance does not serve U.S. national security interests.
Financial sanctions and cyber concerns underscore the changing nature of the private sector in the post-Cold War era. Private companies now have extensive business ties with countries whose national security interests differ materially from those of the United States. U.S. companies often see greater growth opportunities outside traditional U.S. spheres of influence, and many consider themselves “post-national” entities, not necessarily U.S. corporations, thus undermining the symbiotic relationship between economic and security institutions of the Cold War. The termination of many CoCom restrictions allowed greater technology diffusion and manufacturing know-how. Large and critical portions of the U.S. commercial and national security supply chain, including critical raw materials and finished electronic goods such as semiconductors, are now located outside the traditional U.S. alliance network. This increasing globalization will likely create opportunities as well as challenges to national security planning in times of conflict and crisis. Understanding supply-chain vulnerabilities, the cash cycle of global trade, and the nature of sovereign debt funding will become increasingly important in determining when we or others are best advantaged or disadvantaged to exploit economic leverage to achieve national security objectives.
Function and structure are co-dependent. Hence the roles, responsibilities, and domains of expertise of many government departments and agencies must evolve to align themselves with a changing environment. This evolution should occur from the top down with an evaluation of the way the National Security Council integrates economic considerations. It should start with the symbolic gesture of making the Treasury Secretary a statutory member of the NSC. The President should also restore the Eisenhower-era National Security Planning Board that integrates input from a broader set of departments, such as Treasury, Commerce, and Agriculture, into national security policy planning. This will likely prove more effective than a dual-hatted NSC-NEC deputy at providing the President with the necessary understanding of how economic and commercial considerations affect national security policy and vice versa.
Given the evolution and integration of the global economic framework over the past quarter century, the next U.S. Administration needs to lay out a strategy for preserving U.S. economic preeminence. That strategy will need to better coordinate our economic and national security objectives and capabilities. The goal remains the same: secure the economic prosperity of the United States through the benefits derived from free and open commerce. But the methods require adjustment. The United States has made an exceptional investment over the past 70 years to ensure a dynamic and secure global economy. As Mahan observed 113 years ago, “The preservation of commercial and financial interests [is] now a political consideration of the first importance.” Conducting a realistic and open assessment of our economic position will help the U.S. government construct a strategy to sustain the value of our investment and ensure that our policy is also “deterring from war.”
(51) Alfred Mahan, “Considerations Governing the Dispositions of Navies,” in Retrospect and Prospect: Studies in International Relations, Naval and Political (Little Brown & Company, 1902), pp. 143-44.
(52) David E. Sanger, “Global Crises Put Obama’s Strategy of Caution to the Test,” New York Times, March 16, 2014.
(53) For an in-depth analysis of Section 311, see Juan Zarate, Treasury's War: The Unleashing of a New Era of Financial Warfare (PublicAffairs, 2013).