Geoeconomics, the use of economics as an instrument of state power, is often discussed these days in light of U.S. competition with China. But what do we really mean by the word? It cannot simply mean the tactical application of economic instruments to achieve foreign policy goals—sanctions here, tax breaks there, rhetorical flourishes everywhere. Edward Luttwak, in his original definition of geoeconomics for The National Interest in 1990, described it in Clausewitzian terms as the logic of conflict in the grammar of commerce, among nation-states. Luttwak was writing in the heady years before 9/11, when threats from non-state actors and terrorism had not yet moved to the top of the policy agenda, complicating his predictions about the waning importance of military power. But Luttwak correctly foresaw, against the grain of other optimists of the time, that states were not simply going to wither away and allow for untrammeled corporate globalism. He recognized that states would continue to maximize their economic and technological power for domestic reasons, and in their relations with other states take an even more zero-sum approach, using economic strength as a base of power. He understood that a geoeconomic approach has to be truly strategic.
Robert Blackwill and Jennifer Harris, in their 2016 book War by Other Means: Geoeconomics and Statecraft, have elaborated on Luttwak’s ideas. They define geoeconomics as “The use of economic interests to promote and defend national interests, and to produce beneficial geopolitical results,” which, of course, is precisely what China has been doing for decades as jingji waijiao, economic diplomacy. As if to follow Blackwill and Harris’s lead, other books, essays, articles, and papers have issued forth with a roll call of Chinese economic statecraft machinations and manipulations—everything from huge globally consequential moves, such as the WTO Accession and the Belt and Road Initiative, to seemingly minor ones, such as the buying of $300 million worth of low-interest Costa Rican bonds by the Chinese State Administration for Foreign Exchange for Costa Rica’s derecognition of Taiwan.
Still, more historical context is needed to fully understand geoeconomics—to see how it was once employed, to grasp how it was seemingly lost as an instrument of statecraft, and to understand how it can be regained. To that end, it helps to look at Dwight D. Eisenhower’s strategy as President.
After Sputnik launched, Ike famously created powerful R&D government agencies, later renamed NASA and DARPA, that would carry payloads of subsequent American innovation. But it’s just as important to recall what he didn’t do. He didn’t—to the surprise of many in Congress—seek a huge increase in defense spending. He didn’t immediately associate Sputnik with a military threat. Indeed, his Democratic critics did precisely that. They harped on a missile gap that even McNamara later admitted was fiction. They howled for a bigger defense budget, for a “flexible response” of the sort that helped to bring us to debacle in Southeast Asia.
Ike’s decision was consistent with his “Great Equation” strategy that long predated Sputnik’s blips. Running for the presidency in 1952, he set forth the formula to his friend Lucius Clay: “Spiritual force multiplied by economic force multiplied by military force is roughly equivalent to security. If any one of those factors fell to zero, or nearly so, the resulting product does likewise.” That there was a threat that required vigilance, there was no doubt. But that threat had to be contextualized, made part of a greater strategic framework. The purpose of the Great Equation strategy was to seek balance, to ensure a harmonious relationship between economic growth and military spending, and to utilize primarily economic means—the real strength, after all, of the United States.
Ike’s formula for defense budgeting reflected this not-so-subtle approach. Simply put, he imposed a budget cap on defense. The military services couldn’t exceed it, but had to divvy up what they were given among themselves. Compared to the maddeningly intricate resourcing and budget system that his New Frontiersmen successors designed, the “Planning, Programming, Budgeting and Execution System” (PPBE) that we still have today, it perhaps looked hopelessly naive and unsophisticated. In many ways, it was. But Ike’s approach reflected a basic wisdom about priorities: subordinate your military capabilities to national economic well-being; control and balance your economic and military instruments of power; when you can, choose the former over the latter.
The term “Great Equation” more aptly describes Ike’s strategy than the “New Look,” which was its military expression, and which many associate near-exclusively with “massive retaliation.” Ike did seek to save dollars by focusing on nuclear rather than conventional forces. But he also sought to prevent the more immediate, short-term, militarized solution by, according to John Lewis Gaddis in his Strategies of Containment, holding out the specter of nuclear war in the interests of “not getting there,” and thereby restraining one’s own impulses to see every foreign policy nail as needing a military hammer.
He complemented this restrained military strategy with a view that government should foster economic growth and, when needed, should intervene significantly to do so: as Stephen S. Cohen and Bradford DeLong point out in their book Concrete Economics, the National Defense Highway Act of 1956 was the biggest public works project “between the Egyptian pyramids and the great Chinese urbanization at the turn of the twenty-first century.” And during the Suez Crisis, Ike had no compunction about using economic leverage by directing his Secretary of Treasury to dump sterling to pressurize the Brits into stopping what he thought was a foolish and misguided military action.
How and why did the notion of Great Equation strategizing get lost? The culprits are many: a Keynesian-inspired notion that government spending is a free-floating wealth generator, with little regard for the mountain of debt it creates; a laissez faire disdain for government involvement in the private sector that became Republican Party dogma; a bipartisan belief in free trade and the inevitable victory of private enterprise and liberal ideals; a post-Vietnam, draft-free, retooled American military that became the world’s best and mightiest. All the while, the corporate world detached itself from the public sector while Chicago School-inspired economics made “shareholder value” the alpha and omega of corporate existence.
It all metastasized near the end of that annus horribilus, 2001. From September 11 on, the U.S. military became involved in a $2 trillion, near-two-decade effort that immersed the world’s most sophisticated military in a vast, counterinsurgent, nation-building effort in two desolate countries. Of even more long-term consequence, the United States paved the way for China’s accession to the World Trade Organization, which occurred on December 11, three months to the day after the Towers fell. From that point, three-quarters of a billion workers became China’s shock troops in the economic campaign that sucked out America’s manufacturing base over the remainder of the decade with astonishing speed and ease. The disjunction of national security, economic security, and military might was complete.
Not everyone who championed China’s WTO accession believed that it would act as a panacea to neutralize the threat of a rising China; the Pentagon, after all, hardly defunded during these years. But the belief system behind the WTO push often reflected a naive faith that the world was headed to a free market, no-trade-barriers singularity. “China is not simply agreeing to import more of our products,” said Bill Clinton in touting the policy, “it is agreeing to import one of democracy’s most cherished values: economic freedom.” In any event, China’s accession did not augur the triumph of globalization. It brought instead the resurgence of state capitalism: the capitalism of state-owned enterprises, special economic zones, and sovereign wealth funds. State capitalism became the script for the new millennium. The state—often autocratic, nationalistic, and downright xenophobic—had returned.
Since WTO accession, China has become increasingly ambitious, as seen by its 2013 Belt and Road Initiative and even more so by its Made in China 2025 plan, announced in 2015. That plan seeks, in incremental, decade-long steps, to become the world’s leader in ten industries, from aerospace to IT to agribusiness. No nation in the era of American dominance has laid out such a vision so ambitious, nor thrown down a gauntlet so obviously. Perhaps China has overplayed its hand, but if the announcement of Made in China 2025 was America’s Sputnik moment, we have failed to launch in return.
During his first term of office, Barack Obama tried to reorient the nation onto a path of internal economic innovation-driven policy, and thereby to rebuild a devastated manufacturing base. A major part of the policy Obama sought to promulgate was the “ManufacturingUSA” network of over a dozen public-private partnership manufacturing institutes, roughly modeled on the German Fraunhofer system. Ten years ago, in this very magazine William Bonvillian wrote, “If [Obama] cannot operationalize his campaign rhetoric on innovation and energy, there will be no foundation for innovation-based growth… He must succeed.”
That he didn’t helps to explain why Donald Trump is President. Some of the blame can certainly be placed at the feet of a Republican Party ideologically wedded to a no-government approach to private industry, opposed to anything that smacks of—pick your phrase—“picking winners and losers” or “industrial policy.” But Obama failed as well. His 2011 “Asian pivot” was more style than substance. Events in the Middle East came to dominate his foreign policy, even as America largely became energy independent from the region. This was supremely ironic, for as Bonvillian noted, Obama predicated his innovation policy on energy concerns, not explicitly on national security, nor on what was being done to the U.S. industrial base by China.
In the Trump era, Luttwak’s ideas about “geoeconomics” are more relevant than ever. Yet we have not, as of yet, seen a major turnaround in U.S. national security strategizing. The lack of a basic vocabulary and cultural framework around geoeconomics helps to explain our reductionist understanding of economic statecraft. It results in what Graham Allison calls an “engage but hedge” approach: State and Treasury engage the world to partner in trade agreements; Defense essentially hedges and plans for the worst. This is a crude good cop/bad cop approach that, compared to the sophisticated economic statecraft of China, looks positively amateurish.
Just as important, geoeconomics, when discussed at all, is almost always outwardly directed, focused on the international arena. An “interiorized” strategic approach that seeks Eisenhowerian “Great Equation” balance gets far less attention. As an example, although Blackwill and Harris discuss the need for internal economic growth in their (overall excellent) book, they don’t devote much substance or detail to it. But there is a rich history of American national developmentalism, as Michael Lind and Robert Atkinson term it, in which the government itself outright has protected American industry from outsiders, has outright intervened to “jump start” American innovation and growth. An understanding of that story must be incorporated into our discussion of geoeconomics.
What we have therefore seen in the last few years are helpful but incomplete diagnoses of the problem. Obama was right to see the problem of a rotting manufacturing and innovation base, but he failed to coherently connect that problem to national security. Contemporary geoeconomists are right to see state capitalism as a threat to America, and they’re right to seek to revitalize economic methods as a way to combat state capitalist threats. But geoeconomics remains undeveloped and often fails to tie statecraft to America’s need to innovate and grow.
As for the current President, Trump has done and said things that his predecessors—for better and worse—never would. We are in the throes of a trade war. China is now openly called a currency manipulator. And in the 2017 National Defense Strategy, China is termed a “revisionist power” engaged in “predatory economics.” All in all, this brashness is a painful, scattered, necessary start. But such sound and fury, while certainly signifying something, has not yet signaled a complete and cohesive strategy of the Great Equation sort.
Take the National Security Strategy: its “Pillar II” is all about national prosperity. There is language like, “The U.S. Government will use private sector technical expertise and R&D capabilities more effectively.” These are nice bromides. Yet even with talk about “establish[ing] strategic partnerships with U.S. companies to help align private sector R&D resources to priority national security applications,” there’s little “interior” language about how to do create wealth inside the United States, and certainly nothing touching upon a full-on industrial style policy. Nearly all of the “action” language is about countering foreign competitors. It’s external economic statecraft, which is not Great Equation strategizing.
In 2019, things appear to be moving in a more promising direction. Early this year, Senator Marco Rubio, in his role as Chairman of the Senate Committee on Small Business and Entrepreneurship, released two reports that offer the most coherent and cogent geoeconomic strategic thinking yet to come from the U.S. government. The first report, Made in China 2025 and the Future of American Industry, is a detailed backward engineering review of those ten industries China seeks to dominate over the next two decades. The report’s analysis is sophisticated and relentless: the United States cannot “escape or avoid decisions about industrial policy”; China’s “whole-of-state industrial planning provides an extreme example of the inevitability of economic decision making.” And the report openly contends that any future U.S. policy must enact “strategic U.S.-China capital flow restrictions and corresponding defensive measures for domestic industries.”
Rubio followed up that February report with another one in May, American Investment in the 21st Century, which provides a detailed look at the state of corporate innovation investment. Rubio diagnoses the problem by way of reference to economist Clay Christensen’s “capitalist’s dilemma.” According to Christensen, companies, in the name of short-term profits, actually cut against their own long-term success by not investing in longer term, market-creating innovation that will create new customers and new jobs. As Rubio points out, there’s no indication that this trend is reversing in any meaningful way.
And, as if to address Ike’s “spiritual element” of his Great Equation, Rubio followed those reports up with a short piece in the religious ecumenical journal First Things. There he quoted papal encyclicals, wrote of “dignified work,” and castigated the political identitarianism that divides the American order: “These terms—capitalism, socialism, and their variants—have deep meanings and histories, but today they are more often deployed as surface-level expressions of political identity. This is a reckless way to think about our national inheritance of business enterprise to mass employment.”
Rubio’s work has been inevitably attacked by free marketeers and neo-liberal economists. But taken as a whole, it offers a glimpse at what Great Equation strategizing might look like. Such strategizing would involve a thorough and sober examination of what our great competitor, China has done, is doing, and plans to do. It would assess the geoeconomic tools at America’s disposal. It would seek to harmonize—and when possible to prioritize—economic instruments of power over military ones. And it would take a hard look at our stagnant growth, and frame that problem as a national security crisis.
Of course, we do not live in Eisenhower’s time, and no modern President since Ike has remotely resembled him. Ike, after all, engaged in very top-down, formalist, hierarchically-ordered presidential decision-making that could be slow to respond and even stultifying. One could argue that was precisely the point—such processes were designed to slow down response times, not speed them up, and thus prevent foolish, first-impulse decisions. His presidential successors have tended to be far more free-wheeling, open-ended, decentralized, and sometimes outright chaotic in their decision-making.
The operative point is that geoeconomic strategic thinking will more likely emerge from a variety of actors à la Rubio, and thereby create an environment in which geoeconomic ideas can bloom. Better than another “Asian pivot,” than another grandly orchestrated but hollow “plan” to publicly and privately innovate to get things moving, is to let geoeconomic thinking self-organize and emerge from a multitude of sources public and private. But this has to happen in a bipartisan way.
Indeed, the history of American economic innovation policy in the previous century reveals a slew of policy entrepreneurship approaches that crossed political boundaries. Conservatives in the interwar period, for example, may have distrusted governmental market interventions, but they nonetheless supported “associationalist” methods by which the government served as a coordinating body for private industries to exchange information, set industry-wide standards, and establish trade associations. Liberal New Dealers took up associationalist ideas too. The notion was tarred as a failure after the Supreme Court ruled the National Industrial Recovery Act, New Deal associationalism at its apex, unconstitutional in 1935. But as Michael Lind points out, associationalism in various guises continued onward for many years: industry code authorities were reworked into commissions, for instance. Indeed, according to Lind, the postwar boom economy was, in essence, an “associationalist economy” that encompassed ideas from Herbert Hoover as well as FDR, from progressives as well as conservatives.
Why not, for example, an associationalist act calling together the ruling Big Tech companies (Google, Amazon, Facebook, Apple) and the other, less successful manufacturing industries to determine what collaboration and coordination is possible? Sharing practices could enable the latter to innovate more at the former’s levels, to examine and perhaps overcome the seemingly structural impediments of the capitalists’ dilemma, such as the high hurdle rates that prevent investment. One can call a meeting without invoking the specter of a command economy.
It remains true that economics and national security policy largely exist in different worlds, but it need not be so. Geoeconomics needs to integrate fully into national security strategizing. We could conceivably have a strategy of denial that deliberately closes off particular strategic markets through a series of calibrated moves; we could have a “counter-strategy” strategy, that seeks—as Rubio’s Made In China 2025 report did—to decompose China’s strategies and to thereby exploit weaknesses in them; we could have a strategy that purposefully targets weaknesses in China’s system, such as a targeted information campaign that focuses on China’s rampant corruption and crony capitalism. We could, of course, have a combination of all these.
But this kind of strategic analysis is really grand strategy, fully integrated with the other instruments, to include military power, not just a bundle of policy choices about sanctions or about trade deals centered on international mechanisms such as the WTO. This is not realpolitik per se, but a recognition that geoeconomics is about statecraft and about state-driven interests, and not simply adherence to crude populist appeals on the one hand or idealistic free trade aspirations on the other.
This is a call, in the end, not to arms, but to economics; the end result doesn’t have to be armed conflict. Indeed, a Great Equation-like strategy actively seeks to avert that outcome. Eisenhower didn’t panic when Sputnik flew; he saw the long game and sought to harmonize national security with national prosperity while seeking, when possible, to avoid unnecessarily militarizing problems. We shouldn’t panic either, but we need to acknowledge that China has been largely playing a one-sided game for decades. In confronting that challenge, we could do worse than to take our cues from Ike.