Imperial Grand Strategy and Global Trade Dynamics

"We cannot carry on trade without war, nor war without trade." This infamous comment from the notorious Dutch imperialist Jan Coen underscores the extent to which the rise of capitalism was entangled with imperialism on the global stage. Military and political power have always been the major forces shaping global markets and trading systems. Global trade networks are not just economic phenomena between decentralized market players competing to win the game of supply and demand. And they don’t just spontaneously emerge and survive because of Ricardian comparative advantage or economies of scale and network effects, as the New Trade theorists hold. Trade systems are, at a fundamental level, political projects shaped by imperial and geostrategic considerations. Global trade dynamics have always been subject to imperial grand strategy on the geopolitical chessboard. Political and military power are not somehow exogenous phenomena that impede on autonomous economic systems from the outside. They are foundational constituents of any stable global trade order. 

Trade Dynamics in War and Peace

Trade dynamics have always been driven by grand strategy during wartime. In 1806, Napoleon launched the Continental System against Britain, hoping to choke off European trade with the British. Enforcing the continental blockade proved to be a monumental effort that the French could never master, so violations among subject nations were common. Russia's repeated violations were a major reason for Napoleon's decision to launch a disastrous invasion in 1812 (see Figure 1). During World War I, the Royal Navy enforced a massive naval blockade against Germany, cutting it off from international trade and contributing to major shortages of consumer goods in the German economy. But wars are not just important because they constrain trade during a phase of intense violence. They also structure post-conflict trading regimes, as the dominant victors rewrite the rules and institutions of a regional or global order. To the victor go the spoils of trade. 

Figure 1: Painting by Jean-Charles Langlois depicting the Battle of Smolensk in 1812. Napoleon invaded Russia with nearly 600,000 troops in June 1812, hoping to force Czar Alexander I back into the Continental System. Less than 100,000 troops survived the ensuing campaign.

Beyond war, imperial powers tend to embrace open trade in their ascendant phase and then turn against it on their way down. Britain embraced free trade in the middle of the 19th century when it dominated global manufacturing, then increasingly turned against it later on as competitors like Germany and the United States caught up. Economic historians like John Nye have pointed out that Britain's relationship with free trade in the 19th century was more complicated than what conventional wisdom holds. Britain mostly removed or reduced tariffs on manufactured goods, an area where it had massive comparative advantages and thus faced no real competition from anyone else in the world. But it still kept many tariffs on consumption goods, like rum, sugar, and most importantly French wine, which faced huge entry barriers to the British market. These wine tariffs were a major reason why British people drank far more beer than wine for several centuries. Only the Cobden-Chevalier Treaty in 1860 eliminated the major tariffs that both sides had slapped on each other, but Britain continued to impose tariffs on many goods and items throughout the 19th century, and its average tariff rates exceeded those imposed by France for most of the century. 

The United States also embraced free trade after World War II when it dominated global industry, as much of Eurasia lay in ruins from the war and needed lots of time to rebuild. American manufacturing dominated the global economy, so it was easy for American policymakers to support free trade, since it practically meant that other countries would open up their markets to cheap American goods that faced little competition. But as countries like Japan and Germany reindustrialized and went up the value chain, producing increasingly advanced industrial products and vehicles, American companies faced greater competition and lost market share, even domestically in the case of the auto industry, when Japanese cars flooded the American market as cheaper and more fuel-efficient alternatives. Frustrated by its deteriorating position, the United States adopted a more belligerent trade strategy. In the 1980s, the United States pressured Japan to accept the Plaza Accords, designed to strengthen the yen so that Japanese exports would no longer be as competitive as before. The exact consequences of the Plaza Accords on the Japanese economy are still debated, but they signaled a new hostile direction from Washington, which had previously allowed its key puppets some economic leeway as a way of building up a strong bulwark to the Soviet Union in Eurasia. 

The New Cold War and the Decline of American Hegemony

With the fall of the Soviet Union by 1991, the United States was on top of the world, or at least so it seemed. Once Japan faded as a competitor in the 1990s, Washington supported another round of trade expansion, allowing China to join the World Trade Organization in 2001. That opened up the United States to a flood of cheap Chinese goods (the "China Shock") and prompted an offshoring wave from American companies, though rising automation was also a critical factor in the gradual loss of American manufacturing jobs. Few American policymakers, however, anticipated the real scope of China's meteoric rise, and this sudden emergence on the global stage quickly burst Washington's sense of superiority. 

The United States then shifted towards a path of preserving its strategic hegemony, a process that started with Obama's Pivot to Asia and continued with Trump and Biden. Obama was putting tariffs on Chinese tires as early as 2009. Over the past decade in particular, the American ruling classes have come to believe that they need to stop or slow down China's rise at nearly all costs and by almost any means. We are now in the beginning stages of a New Cold War, this time between China and the United States. It's precisely in the context of this wider geostrategic rivalry that America's turn against free trade starts to make more sense, as US elites now believe that the current global trading system is benefiting China more than anyone else, and thus US trade policy has shifted towards the active and deliberate sabotage of the current international system. It's the decline of American hegemony that's responsible for the breakdown of the global trade order. 

Washington's desperate gambit is unlikely to work this time around. China has quickly become the greatest industrial powerhouse in world history. China consumes 30% of the world's energy, produces 55% of the world's steel, nearly 60% of the world's aluminum, one-third of the world's motor vehicles, one-third of global manufacturing output, 51% of the world's coal, over 60% of all electric vehicles, over 80% of the world's solar panels, and the list goes on and on. And because China's domestic market is now enormous, a rapidly increasing share of Chinese manufacturing output is consumed domestically. In addition, China's domination of intermediate industrial parts and goods is so comprehensive that no matter where in the world industrial manufacturers shift their final production of consumer goods, they will still need to import many of the critical components necessary for final manufacturing from China.

Furthermore, China's state capacity is enormous. The Chinese state can easily create hundreds of billions of dollars of domestic demand through monetization via lending from state-owned banks, since the financial system in China is controlled by the government. The world's four largest banks by assets are all Chinese and all owned by the Chinese government. China can easily wash away any lost corporate revenues from this trade war. On top of all this, China is not in Washington's strategic orbit. It's not an American satellite or puppet regime, like most of the countries in Western Europe. That implies it cannot be bullied into submission, which is the fate that Japan suffered in the 1980s. By contrast, the United States is internally divided. Even many Senate Republicans don't agree with Trump’s tariff strategy. There are also deep internal divisions within the Trump administration, not to mention that the country is headed towards multiple political and constitutional crises.

Under these circumstances, a new trade war is unlikely to reverse America's decline. If anything, it will rapidly accelerate it, but what follows the current order is anyone's guess. China is the world's manufacturing superpower, but will it follow industrial might with military might? Will it resort to gunboat diplomacy to expand its trade networks? Will it pressure and coerce trading partners into establishing a new international order? And how will the United States respond? Let us hope that Jan Coen's dictum foreshadows merely a trade war, and not a real one.