For the US and China, Interdependence is a Double-Edged Sword

The Trump administration’s National Security Strategy had identified China as a strategic threat. But the question remained what kind of threat is it, and how much entanglement can the US afford? Repeated relationships can nurture co-operative restraint and reciprocity, while some interdependence, in which a state has a general interest in not upsetting the status quo, is systemic.

With the coronavirus outbreak, nature has reminded us how much the US and China are economically entangled. But politics is also involved as some in Washington form strategies for a second Cold War and economic decoupling.

Economic exchange can produce welfare gains for both sides, but it can also be used as a strategic weapon. The Trump administration’s National Security Strategy identifies China as a strategic threat. But what kind of threat is it, and how much entanglement can the US afford?

Understanding power and interdependence in the US-China relationship depends on understanding America’s strategic objectives. If its relationship with China is zero sum, and China’s long-term objective is to destroy the US much like Hitler’s Germany in the 1930s, then the less interdependence the better, though in the military and environmental domains some will be unavoidable.

However, by focusing solely on the manipulation of economic vulnerability as a weapon, strategists can ignore that fact that interdependence can also have the positive effect of stabilizing deterrence. Punishment and denial are central to the classical conception of deterrence, but they are not the only components of dissuasion. Entanglement is another important means of making an actor see that the costs of an action will sometimes exceed the benefits, hurting the attacker as well as the target.

For example, in 2009 the People’s Liberation Army urged the Chinese government to sell some of China’s massive holdings of dollars to punish the US for selling arms to Taiwan. The People’s Bank of China pointed out, however, that doing so would impose large costs on China. The government sided with the central bank. Dumping dollars might bring the US to its knees, but it would also have devastating consequences for China.

Similarly, in current scenarios that envisage a Chinese cyberattack on the US power grid, the two countries’ economic interdependence would mean costly damage to China as well. Precision attacks on minor economic targets might not produce much direct blowback, but the rising importance of the internet to economic growth increases general incentives for self-restraint. The legitimacy of the Chinese Communist party depends heavily upon economic growth, and economic growth in China increasingly depends upon the Internet.

Critics of crude claims that economic interdependence guarantees peace, point to the first world war as evidence that such ties did not prevent a catastrophic conflict between major trading partners. That is true, but it goes too far in dismissing outright the possibility that interdependence can reduce the probability of conflict. The author Norman Angell and others were wrong to argue before 1914 that economic interdependence had made war impossible. But they were not wrong that it had greatly increased war’s cost.

Of course, conflict is always possible because of human miscalculation. Most European leaders in 1914 incorrectly envisaged a short war with limited costs. And trade between the US and Japan did not prevent the Japanese attack on Pearl Harbor, although that was partly caused by the American embargo on exports to Japan. The embargo manipulated economic interdependence in a way that led the Japanese to fear that failure to launch a risky attack would lead to their strangulation.

Entanglement is sometimes called “self-deterrence,” but that term should not lead analysts to dismiss its importance. The belief that costs will exceed benefits may be accurate, and self-restraint may result from rational calculations of interest. But we should remember that the perceptions of the target, though crucial, are not the only perceptions that matter in deterrence. It should also be a reminder that an international deterrent relationship is a complex set of repeated interactions between complex organizations that are not always unitary actors. Moreover, these actors can adjust their perceptions in varying ways. The economic relationship between the US and China is a good example of this.

As the political scientist Robert Axelrod has shown, repeated relationships can nurture co-operative restraint and reciprocity. In addition, some interdependence, in which a state has a general interest in not upsetting the status quo, is systemic.

It does not follow from this that we should ignore the strategic costs of interdependence. And we should expect some decoupling of the US from China in sensitive high-tech areas that affect national security. Excluding companies such as Huawei from western 5G telecommunications networks is not very different from China’s exclusion of Google or Facebook for the past decade.

But we should not let misplaced fears lead to comprehensive decoupling. Interdependence is a double-edged sword, of course, but carefully wielded it can also contribute to deterrence and strategic stability.