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Rethinking Interdependence

For a long time, economic interdependence seemed a bit like motherhood and apple pie. At least in the West, most of us assumed that the more of it we had, the better. This was implicitly based on the ideas of liberal international-relations theorists, who argued that a high level of interdependence leads to greater inter-state co-operation and is therefore a force for stability. It was even thought that interdependence could transform international relations from a zero-sum game to a win-win game. Of course, realist theorists always disagreed and argued that, since states seek to control what they depend on and to lessen their own dependency or exploit other states' dependency on them, increased interdependence leads to instability and conflict. But the events of the past three decades seemed to support the liberal argument.

However, in the last few years since the financial crisis that began in 2008, we have seen a darker side to interdependence that is leading to a rethink. The crisis showed that huge, unrestricted capital flows could create volatility rather than stability. As a result, the International Monetary Fund has dropped its opposition to capital controls. There is even a rethink taking place within the euro area – the ultimate zone of interdependence. The euro crisis revealed how the European single currency had produced divergence rather than convergence and in particular a divide between surplus countries and deficit countries. Cyprus has now imposed capital controls, which some economists argue shows the single currency is disintegrating. Imbalances, both within the eurozone and the international economy as a whole, illustrate a danger that realist theorists had pointed out: interdependence is rarely symmetrical.

At the same time as the economic effects of interdependence are being re-assessed, there are also increasing concerns about the way that interdependence can undermine national security. A House Intelligence Committee report into the activities of Huawei and ZTE published last October highlighted the potential security threat posed by the involvement in US wireless network infrastructure of Chinese telecommunications companies that have ties to the Chinese government or military – in particular the possibility of cyber espionage. US lawmakers are now debating whether to limit the involvement of companies such as Huawei and ZTE in US telecoms supply chains. The British parliament's Intelligence and Security Committee has also raised concerns about Huawei. So now that we are aware of the risks of interdependence, do we need to limit or even think about reversing it? Would we even be able to?

For a long time, economic interdependence was driven by technology. The internet made it easier to spread manufacturing over longer distances and even around the world. In short, it stretched and diversified supply chains. However, the next stage in technological development could actually go in the other direction – in words it could make it commercially advantageous to limit or even reverse interdependence. In particular, additive manufacturing, commonly known as 3-D printing, could change the manufacturing works and lead to a wave of “reshoring” – in other words, a reversal of the familiar process of “offshoring”. In short, it longer seems as if interdependence is an inexorable process that could not be stopped even if we concluded it was a bad thing in some cases.

One of the most incisive thinkers on this question is Thomas Wright of the Brookings Institution, who is currently writing a book about the rethink of interdependence that is now taking place and recently gave a fascinating talk about it at the European Council on Foreign Relations in London. In particular, he argues that we need to distinguish between “good” and “bad” interdependence. Good interdependence is the kind that produces stability – for example, trade, most foreign and direct investment and educational exchanges. Bad interdependence, on the other hand, is the kind that can produce instability – for example, financial imbalances, energy and cyber. In these areas, Wright argues, it might be necessary to limit or even “unwind” interdependence by creating what he called “zones of autonomy” to prevent states exploiting interdependence.

As Wright points out, this is particularly important and interesting in the case of the relationship between China and the United States. Over the last 30 years after China opened its economy, China and the US have become “thoroughly, inescapably interdependent”, as Hillary Clinton put it in a speech last year. The hope was – and still is – that this interdependence would transform China into what Robert Zoellick called a “responsible stakeholder”. However, at the same time as the relationship is becoming more competitive, a shift is now taking place in both the Chinese and the US economy. China is seeking to shift away from export-led growth to domestic consumption and indigenous innovation. Conversely, in part because of the energy revolution, manufacturing is returning to the US. In short, both countries are for different reasons unwinding to some extent the economic interdependence between them.

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One interesting question this raises is: could unwinding be a way of hedging against the possibility, however remote, of war? Liberal international relations theorists argue that interdependence makes war less likely: states that trade are less likely to invade each other. Realist theorists disagree and think interdependence actually makes war more likely and inevitably point out that interdependence did not prevent World War I even though it meant it was commercial suicide, as Norman Angell famously put it. But precisely because the example of 1914 hangs so ominously over their attempt to create a “new type of great-power relationship”, China and the US are acutely aware that there is at least a possibility of war despite interdependence. Might they therefore each decide it is in their interests to reduce interdependence as a form of protection – in other words, to make it less suicidal for them to fight if they have to?

[NOTE: this post has been updated since original publication. - eds]