Getting economic and national security policy right


Author: Editorial Board, ANU

The United States and China are locked into a trade war and strategic rivalry that complicates international policy choices for the rest of the world. How do countries like Australia, Japan or the ASEAN countries balance their security interests alongside their economic interests and avoid seeing them as a trade-off? Can countries avoid a binary choice between the United States and China?

A cargo ship loaded with containers to be shipped abroad berths on a quay at the Port of Qingdao in Qingdao city, east China's Shandong province, 15 May 2017 (Photo: Reuters).

Economic policy was never separate from security considerations. The recipe for a secure country — a strong economy that’s globally integrated through trade and investment and cooperation — hasn’t changed. But economics and security are increasingly entangled in a way that is damaging to both, creating a dangerous trade-off and a negative feedback loop.

Economic engagement between countries strengthens national security by reinforcing and habituating a rules-based order that creates a bigger and broader plurality of interests. This is the mutually beneficial win-win trade and investment relationship that is the basis of economics. It’s about building national wealth and power but also broadening the range of strategic policy options available to policymakers. There are market-based solutions, mixed interest games and ways to have risks borne by those other than government or society that can avoid binary all or nothing security decisions.

Economic exchange always involves risks, including national security risks and sometimes the possibility of coercion. ‘If you open the window for fresh air, you have to expect some flies to blow in’, warned Deng Xiaoping. Those risks have been managed and minimised under a US-led multilateral rules-based system that allowed decades of deepening economic ties, including for China with the rest of the world.

The risks of international exchange are beginning to dominate the calculus for some policymakers as the world has become more complex and uncertain. There are three main reasons for this: the rise of China, the rise in protectionism in the United States, and new technologies for which international rules don’t exist.

The United States underwrote a rules-based order over the past 70 years that helped manage risks from economic engagement and reduced the costs of national security. President Trump’s America First protectionist agenda and the US–China trade war are the biggest threat to the multilateral trading system on which the world relies for both prosperity and security.

The difficulty in managing China’s rise as the world’s largest trader and its second largest economy has been further complicated by President Xi’s consolidation of power domestically and a more assertive foreign policy.

New technologies like 5G telecommunications and the growing importance of digital trade raise new economic opportunities and security challenges for which no clear rules exist. Multilateral rules in the WTO may cover trade in goods adequately but are mostly non-existent for a large proportion of international commerce in the 21st century as services, investment, data flows and new forms of technology proliferate. The patchwork of rules from smaller agreements leave major gaps at best and cause economic fragmentation at worst.

If countries don’t get the frameworks right to manage strategic policy making in these new circumstances, there will be a return to economic and security policy of the interwar period. That was a period of unilateralism and bilateralism centred on protectionism and raw national power. The multilateral system born at Bretton Woods moved the world to cooperative outcomes with rules that avoided the prisoner’s dilemma or lose-lose outcomes.

Economic policy deployed for geopolitical purposes, sometimes called geoeconomics, inevitably produces misguided policies that damage both economic and national security. Economic exchanges are then thought of as tools for zero-sum or negative-sum outcomes instead of creating mutually beneficial outcomes. The most brazen recent example is the US tariffs on steel and aluminium, and tariffs threatened on automobiles in the name of national security, that makes the United States poorer and weaker.

China’s supposed deployment of economic coercion for geopolitical purposes has been checked by multilateral rules in the case of the rare earths dispute with Japan. But the economic sanctions deployed against South Korea over the Terminal High Altitude Area Defense (THAAD) system largely lay outside the discipline of multilateral rules.

In the pursuit of national power and security, governments need to be able to operate in a world beyond binary choices: security or economics; and China or the United States. Agreement and commitment to principles and rules that avoid lose-lose outcomes and taking interactions and engagement beyond bilateral interaction to those that necessarily include compromise and a broader plurality of interests help to expand the policy space and options available.

It is possible to find ways to mitigate and spread risks by deepening engagement, not avoiding engagement.

If security concerns and policies dominate economic choices, the policy space is narrowed significantly and leads to binary choices. It is the important job of security agencies to look for and mitigate risks but not their job to balance those against society-wide benefits.

As Gordon de Brouwer explains in this week’s lead essay, ‘mitigations to a security risk might lie in economic or social domains.’ For example, ‘strengthening domestic governance, market systems and people-to-people connections support cooperation rather than confrontation’.

The world has changed and de Brouwer suggests ‘the challenge is to draw on the full toolkit to assess risk clearly and mitigate risk creatively and strategically. It is time for countries to engage rather than withdraw’.

Different countries are grappling with these challenges in different ways. Japan’s National Security Secretariat in the Prime Minister’s Office has created an Economic Group and its key ministries have new economic security divisions whose challenge will be to attempt to integrate economic and security policy. The structure of interests and decision making in these are yet to be seen.

Getting the balance in strategic policy right involves recognition that economics and security are linked but that they can enforce a positive or a negative feedback loop. The world is in danger of sleepwalking into a negative feedback loop.

Economic engagement enhances national security but inevitably involves some security risk. That risk can be mitigated through international cooperation, multilateral rules and strong domestic laws. More economic engagement and integration into markets increases the costs of harmful behaviour. International rules prohibit the harmful behaviour. A priority is to work towards the creation of those rules where none currently exist.

Reducing trade or investment to avoid security risks is not the right answer in a world of integrated markets and economies, unless countries want to be poorer, weaker and live in a less certain and stable world.

These are shared challenges and opportunities for countries navigating a more complex world. This week we launch the latest issue of the East Asia Forum Quarterly on Economics and Security which explores what is happening, why, and how to respond to these challenges and opportunities.

The experience of economic and political cooperation in Asia offers insight into how to navigate the new diplomacy.

Both China and the United States naturally prefer to deal with countries bilaterally because they are larger, forcing the world into even harder choices. The United States and China left to their own devices may try to decouple their economies and fracture the global economy. But it’s the response of the rest of the world that will be important to how that threat pans out.

Small and middle powers will need to get the balance of economics and security right in strategic policy making and work together to avoid a binary world of zero-sum or negative-sum outcomes. Acting strategically and plurilaterally, beyond bilateralism, is the sensible way forward.

Strategic deployment of regional and plurilateral coalitions can help create rules from the bottom up that engage both China and the United States. At a time when the multilateral system is under threat, regional and plurilateral initiatives and agreements need to complement, preserve and strengthen multilateralism, not substitute for it.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.

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