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Should we become entangled with our adversaries?

David Beckworth has a very interesting interview with Paul Tucker, a former governor of the Bank of England. Tucker has a new book on international affairs, and had this to say:

[W]e need peaceful coexistence with China, and that can probably include some trade with China, but that should not include trade with China where we would be overly dependent in vulnerable ways.

There are good arguments here on both sides, but I lean toward engagement with our adversaries (i.e. China, Iran, Cuba, Venezuela) and embargoes aimed at our enemies (Russia.)  An enemy is an adversary that has turned violent.  Regarding China, I see three important considerations:

1.  Engagement with our adversaries is hugely beneficial to both countries when not at war.

2.  Engagement with our adversaries gives both sides a strong incentive to avoid war.

3.  Engagement with our adversaries can turn out to have negative effect if a war breaks out.  That is, if our adversary becomes our enemy.

The fact that two of the three factors point toward the benefits of engagement is not in and of itself decisive.  The third factor might be more important.

Perhaps the most famous example of the third factor in action is the case of European gas imports from Russia.  Indeed, I’d argue that this single case is far more important to Europe than all the other economic effects of the Ukraine War combined.  Nothing else even comes close.  In retrospect, it probably would have been better if Europe were less dependent on Russia gas. 

Thus the case of Russian gas imports is far and away the best example one could cite for disengaging from economic interaction with our adversaries.  (Oil is much different, as it is a fungible commodity that can be traded globally with relatively low transportation costs.  The effect of the Ukraine War on the global oil market has little or nothing to do with the fact that Europe previously imported lots of Russian oil.)

I won’t argue that, in retrospect, Europe was wise to rely on Russian natural gas.  But what I find so striking about this example is that it doesn’t seem to support either of the arguments made by foes of economic entanglement:

1.  The argument that reliance of Russian gas would push Europe toward appeasement of Russia.

2. The argument that reliance on Russian gas would have devastating consequences for Europe’s economy in the event of war. 

Neither prediction panned out.  Economists keep telling non-economists that markets are surprisingly good at doing a workaround when their are shortages, and non-economists continue to not believe us.  And this outcome occurred despite the fact that public policies in Europe (subsidizing wasteful use of gas) actually made the situation worse.

Here’s another point to consider.  Russia is currently being aided by economic sanctions that reduce oil output from its competitors, including Iran and Venezuela.  Thus if we are going to contrast two policy regimes, it ought to be free trade with Russia and Iran vs. economic sanctions against Russia and Iran.  Instead, we ended up with the worst of both worlds, aiding our enemy (Russia) by sanctioning our adversary (Iran) in such a way as to benefit Russia (with higher global oil prices.)

Now let’s return to the three factors that bear on the question of whether or not to become entangled with our adversaries.  I cannot be sure how the three factors net out, but I am pretty confident in making the following two claims:

1. We know that US–China trade is hugely beneficial to both countries, and we also know that richer countries tend to be more peaceful.

2.  We know that the number one example of the dangers of entanglement, cited by almost all pundits that are opposed to entanglement, did not turn out to have either of the negative consequences that was predicted.  Europe did not appease Russia and the European economy was not devastated.  And again, this is the best example that anyone can cite; in most other industries the effects of the Ukraine War on European welfare have been trivial.

That doesn’t mean that the foes on entanglement are always wrong.  Nordstream 2 was probably a mistake.  But the fact that even the European natural gas situation turned out to be much more benign than expected suggests to me that the weight of evidence points toward the benefits of entanglement outweighing the costs, at least in the vast majority of cases.  One exception to this generalization might be trade in goods with clear military applications.  But with pundits now calling for the banning of TikTok and laws against the purchase of US farmland by the Chinese, I think it’s fair to say we’ve gone far beyond the national security argument.


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