Thursday, December 08, 2005

Challenging Orthodoxies, Part II

Continuing now to Barry Lynn's arguments.

Lynn notes that besides globalization, there has been a second major revolution: the restructuring of the global industrial system as the vertically-integrated firm has disintegrated in favor of outsourcing production and services and as firms eliminate large amounts of inventory in favor of "just in time" suppliers from a single source (the "Toyota System").

This has created an effective but extremely fragile global economic system susceptible to extreme disruptions.

In the case of the U.S.-China relationship, you have a situation unprecedented in human history where two potential competitors have, in effect, merged their industrial system into a single commons. Does this automatically mean, however, that this will lead to harmony, that both sides will make the positive compromises to avoid conflict?

What would happen if there was a Tiananmen Square II? What happens if certain segments of the Chinese leadership conclude that, over time, we are exporting industrial goods to the U.S. and we are importing "paper" (debt obligations)--and decide to test whether they have leverage over U.S. policy? What good will U.S. military alliances in East Asia be if U.S. supply lines are running deeper and deeper into China?

A utopian stance does not facilitate policy discussion. We need a sober industrial posture, Lynn says. This is not a call to protectionism, but to diversify supply chains so that there are multiplier suppliers in multiple locations for key goods and services, and to limit the percentage obtained from any single country. This way, risks can be spread out.

China is becoming a minority shareholder in America, Inc. The utopian view is that China will be no different than Canada, Great Britain or the Netherlands in how it uses this influence. But will China continue to fund the U.S. fiscal and trade deficits if it perceives the United States acting against its fundamental interests?

What ever happened to industrial policy? Lynn is right--this is not a call for protectionism--but shouldn't the United States continue to invest to keep key industries up and running here? What about alternative fuels? It has been said that the first country to achieve energy independence from petroleum will have a major advantage in the 21st century.
I've had a chance to see an advance copy of the Hank Greenberg piece on China that will appear in the same issue with Lynn--expands on his Financial Times editorial of earlier this year. Interesting because like Lynn he concludes that the current disequilibrium between closer economic integration with China and the politics of China-bashing is not sustainable, but he goes in a different direction, essentially urging a more cooperative relationship based on mutual interest. It seems that the next several years will either vindicate Greenberg or Lynn.
Thanks to Greg Priddy over at RealistDem for his take on the Challenging Orthodoxies lunch:

Challenging Orthodoxies

I had the opportunity to attend a very interesting event at The National Interest last Thursday, in which authors gave presentations previewing two articles from the upcoming Winter 2005/2006 issue.

The first, "Prone to Violence: The Paradox of the Democratic Peace," by Jack Snyder (Columbia University) and Edward Mansfield (University of Pennsylvania) takes aim at something which has been largely accepted in recent years -- the "democratic peace theory" -- arguing that states undergoing transitions to democracy are actually more inclined toward belligerent behavior. In particular, states with "stalled" transitions toward democracy are much more likely to become engaged in warfare, both internal and external.

Transitions to democracy, historically, have been more likely to fail than to succeed. Not surprisingly, the degree to which a state has the prerequisties for democracy -- economic development, high rates of literacy, a large middle class, etc. -- has a lot of influcence on its chances for success.

States in transition to democracy, the authors argue, also are often characterized by heightened ethnic and sectarian tensions, and politicians looking to build a base of support often "have an incentive to play the nationalist card." It's easy to imagine this happening, for example, if Arab states moved toward premature transitions to democracy -- it would be difficult to win a free election in Egypt or Jordan without promising to be "tougher on Israel" than the existing authoritarian regimes.

What does this mean for U.S. policy? As far as I'm concerned, it implies that 1) we should be selective about democracy promotion, not see it as a panacea, or as something appropriate in all circumstances, and 2) in states where successful transitions to democracy are unlikely in the short-term, we should focus on promoting things like economic reform and the development of a strong civil society and the rule of law, rather than trying to push authoritarian regimes toward premature transitions which are likely to turn out badly for our own interests.

The second article was by Barry Lynn (New America Foundation), on "Trade, War, and Utopia," pointing out the vulnerabilities we face as a result of deepening economic interdependence, particularly vis-a-vis China, and challenging the "utopian" view that such interdependence necessarily promotes peace.

He points out that many companies have adopted the "Toyota model" of production, with components outsourced to single-source suppliers for "just-in-time" delivery. With so many things available from only one source (in the short-term, at least), and no inventory to speak of, a disruption of trade brought about by instability or conflict could be devastating for the world economy. Lynn also argues that we may face vulnerabilities from China specifically, where they could have the ability to coerce us by withholding access to certain items not readily available elsewhere. He is not advocating protectionism, just that we should diversify sources of supply, so as to limit these vulnerabilities.

While I think Lynn is very convincing in terms of diagnosing the problem, I think it would be difficult to operationalize a solution. He mentioned Dell in his presentation as a company which has diversified its suppliers as a way of mitigating political risk, but I think most companies would tend to lean away from giving up the cost advantages inherent in the "Toyota model," which means that some sort of government regulation would be required, and it's difficult to envision that being "politically doable," in the near-term. It would likely take a crisis of some sort, and the economic consequences thereof, to get us motivated to do something about this.
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