American economic power is potent but unstable


(Reuters Breakingviews) - For the past 15 years, the iPhone has been a totem of U.S. economic power. The global popularity of Apple’s (AAPL.O) ubiquitous smartphone serves as a worldwide reminder of Silicon Valley’s ingenuity and technological expertise. Yet in some eyes, it now appears to have become a threat. China recently told staff at central government agencies to stop using the devices at work, Reuters reported on Thursday, and the ban could spread to regional authorities too.

Although the reasons Beijing has soured on Apple are unclear, the symbolism is hard to ignore. The iPhone owes much of its success to low-cost manufacturing in China. If the country is cooling on the $2.8 trillion company, it’s a potent indicator of increasingly frosty relations with the United States. It also underscores the difficulty of reversing two decades of economic integration.

When China joined the World Trade Organization at the end of 2001, many political leaders hailed the move as a big step forward, not just for the global economy, but also for peaceful coexistence. Countries with shared economic interests were less likely to become adversaries, or so the thinking went. Over the next two decades, however, the United States increasingly wielded its dominant position in global technology and finance as a foreign policy weapon, eventually prompting others to retaliate.

The theory that economic interdependence deters conflict has a long history. Back in 1909, the English historian Norman Angell published “The Great Illusion”, which argued that European countries had too much to lose by going to war. Within a few years, that dream died on the battlefields of northern France, alongside millions of men.

When the Cold War ended in 1989, the concept made a comeback. As new nations joined the capitalist international economy and barriers to trade and finance fell, markets and multinational companies seemed more powerful than many governments. The conflict would threaten the lucrative cross-border flow of money and goods. In 1996, the New York Times columnist Thomas Friedman articulated what he called the “Golden Arches Theory of Conflict Prevention”. The tongue-in-cheek hypothesis stipulated that two countries that were sufficiently developed to support a McDonald’s would not fight each other. Russian President Vladimir Putin, among others, later proved him wrong.

Even as advocates of globalization celebrated, interconnected systems became a theatre for bitter battles. Perhaps most significantly, the U.S. government realized it could use the internet to spy on adversaries and the financial system to subdue them.

U.S. online dominance enabled it to eavesdrop on phone calls and emails from around the world, a process that went largely undetected until the National Security Agency contractor Edward Snowden blew the whistle in 2013. Meanwhile, the U.S. Treasury realised it could exclude enemies such as North Korea and Iran from the global dollar-based payments system, while forcing financial institutions in other countries to enforce its policies.

Henry Farrell and Abraham Newman vividly describe this shift in “Underground Empire: How America Weaponized the Global Economy”. The authors, respectively professors at Johns Hopkins SAIS and Georgetown University, explain how the unseen network of computer protocols and undersea cables was not built deliberately as a tool of state power. Indeed, U.S. officials were initially reluctant to exert their authority over foreign banks and fund managers. But the Sept. 11 attacks on New York and Washington, just three months before China formally joined the WTO, amplified the urgency of pursuing America’s enemies.

The phenomenon the authors call “weaponized interdependence” has expanded ever since. Years before the Chinese government expressed doubts about iPhones, the United States used financial and technological sanctions to attack Huawei, the Chinese maker of telecommunications equipment. U.S. regulators imposed a huge fine on BNP Paribas (BNPP.PA), the French bank, for circumventing sanctions on Sudan, Iran and Cuba. When Putin invaded Ukraine, America, and its allies initiated a huge barrage of penalties, kicked most Russian banks out of the SWIFT payments network, and opened a new front by freezing a large chunk of Moscow’s central bank reserves.

More recently, the Biden Administration has imposed controls on technology exports to prevent China from developing sophisticated semiconductors. Far from escaping the clutches of government control, “U.S. intellectual property turned out to be a long and nearly invisible fishing line, with shiny lures and baited hooks that foreign businesses snapped at and swallowed,” write Farrell and Newman. The tendency of capitalism to produce a handful of giant companies, many of them headquartered in the United States, helped successive administrations exert their authority.

The problem with arming the passageways of global commerce, however, is that it encourages others to fight back. China’s iPhone ban, however limited in scope, is the latest in a series of attempts to reduce Beijing’s dependence on U.S.-made technology, including Intel (INTC.O) chips and Microsoft’s (MSFT.O) Windows software. The country also has flexed its muscles by restricting exports of gallium and germanium, used to make microprocessors. The financial warfare waged on Russia has given new urgency to so-far halting attempts to develop an alternative financial system that does not depend on the U.S. dollar. The European Union is also exerting its will. France, Germany, and others joined the United States in punishing Putin, but their officials also worry about a future U.S. president, perhaps a returning Donald Trump, using the same tools against his erstwhile allies.

It’s unclear where this confrontation will end. Even as authorities have dropped talk of the United States “decoupling” from China in favor of the more benign “derisking”, politicians are still primed to see potential weapons and vulnerabilities in every aspect of interdependence. The United States and Europe are building more capacity to make their own semiconductors while worrying about becoming overly reliant on Chinese-made batteries for electric vehicles.

A complete severing of economic links between China and the United States is hard to imagine. The status quo is also fragile. “There is no visible exit from the underground empire,” Farrell and Newman conclude. “Every tunnel that seems to lead out ends up turning back in on itself.” The system that emerged after the Cold War was supposed to lower the danger of conflict, but instead the risk of an expensive confrontation keeps growing.

Follow @peter_tl on X

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)


“Underground Empire: How America Weaponized the World Economy,” by Henry Farrell and Abraham Newman, was published by Allen Lane on Sept. 7.

Editing by Jeffrey Goldfarb and Aditya Sriwatsav

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