The Weaponization Of Comparative Advantage
By Mike Mina (03/23/04)
In the upcoming book "At the Abyss: An Insider's History of the Cold War," Thomas Reed, former Secretary of the Air Force, gives us a candid look at what he calls "cold-eyed economic warfare." In a recent Washington Post article, David Hoffman shares some of the details.
The year was 1982. At the same time that the United States was trying to prevent Western Europe from importing natural gas from the Soviet Union, the Soviets were trying to steal Western technology. One item they sought was software that would run the pumps, turbines, and valves of the gas pipeline that would supply the Europeans. Once the CIA became aware of this, President Reagan approved a plan to give the Soviets a version of that software that had been modified so as to eventually, but not immediately, produce pressures beyond pipeline tolerance.
The result, as Reed said, was "the most monumental non-nuclear explosion and fire ever seen from space." The damage done to the Soviet economy by the explosion was significant.
There were other covert technology transfers to the Soviet Union that contained malfunctions as well. In time, the Soviets realized that they had been tricked, and they had no way of knowing which of the technologies they had stolen were sound and which weren't. Since it was ultimately the collapse of the Soviet economy that led to the collapse of the Soviet Union, it is clear that economic warfare was a contributing factor.
Lesson number one in geopolitics: Countries that are economically dependent upon other countries can get hurt. Very badly. It could be argued that the Soviet Union had no choice but to get this software from other sources because its centrally planned economy did not (and perhaps could not) produce the innovations characteristic of a first world economy.
Perhaps, but what's our excuse? Given the way our government engineered the explosion in the Soviet Union, why would we allow ourselves to become increasingly dependent on others for, of all things, software development?
We're constantly told that offshore outsourcing results in a net gain for our economy. Secretary of State Powell was in India recently, assuring Indian leaders that the Bush administration would not try to stop the outsourcing of jobs to India, many of them in software development. A proper response to this outsourcing, Powell said, is pressing India to lower its trade barriers.
Secretary Powell should reconsider. Perhaps the proper response is to understand how foreign-developed software can be used to help cripple economies. A previous Republican administration understood this.
Many insist that free trade has been good for America, and that in total, we gain more than we lose. But "free trade" in this context is a misnomer. Congressman Paul (R-TX) correctly observed that "Genuine free trade would involve low tariffs and no subsidies. Export-Import Bank funding, OPIC, and trade development subsidies to our foreign competitors would never exist.... A true free trade policy would exclude the management of trade by international agencies such as the WTO and NAFTA." What we now have more closely resembles centrally planned trade on an international scale than free trade.
Even so, some insist that the current trade regime creates more winners than losers, or at least more gains than losses, even if unevenly distributed. After all, consumer goods are available more cheaply than they otherwise would be. Even the Pentagon saves tax dollars by buying what it needs more cheaply from foreign sources.
But consumer goods are one thing, and goods critical to national defense are another. Free traders would have told the Soviets not to develop the pipeline software themselves, but to buy it from the United States. Would that not still have kept them dependent upon us, and vulnerable to the deliberate introduction of product defects?
President Bush's 2002 National Security Strategy says that "the concept of free trade arose as a moral principle even before it became a pillar of economics." And yet that which we incorrectly call free trade has not only had an adverse impact on American workers, but on national security as well. Some of the technologies needed for the M-1, F-16, F-18, the F-117 Stealth fighter and the Tomahawk cruise missile are only available from foreign sources. During the 2002 West Coast dock strike, Tomahawk missile components sat in their containers, unloaded and unavailable to the military. Even basics such as hard drives and flat computer panels are not manufactured in America.
During Operation Iraqi Freedom, the Swiss government, objecting to the war in Iraq, stopped a shipment of smart bomb components to the United States. They also stopped a shipment of about twenty five thousand grenades to the British army. Luckily, an American manufacturer was able to supply the necessary components for our smart bombs.
As a result of ill-considered trade policies, the United States and Britain became dependent upon Swiss manufacturers for military materiel. Depending too heavily upon foreign powers for critical goods or services when there is no alternative is risky, as the former Soviet Union learned. Depending too heavily upon foreign powers for critical goods or services to save a buck is folly.
Free trade dogma is based upon the principle of comparative advantage. The term was coined by the economist David Ricardo. Generally speaking, the idea behind comparative advantage is that two countries will gain more from trade if each specializes. For example, if Country A makes Product 1 just as effectively as Country B does, but makes Product 2 twice as effectively as Country B does, it makes sense for Country A to put more effort into developing Product 2, and sell that product in order to earn enough to buy Product 1 from Country B. Even if Country A is better at making both products than Country B is, both countries can gain through trade when each produces according to its comparative advantage.
Comparative advantage does enable gains resulting from specialization in trade, but what if the parties involved do not trade? The Aztecs and Incas had comparative advantage in the mining of precious metals vis a vis the Spanish, who had comparative advantage in the production of weaponry. The result was not trade, it was conquest.
The problem with our current trade discourse is that it is dominated by economists. We have heard that war is too important to be left to the generals. Perhaps in some cases, economics is too important to be left to the economists. Even Adam Smith, the father of capitalism, believed in protecting defense-related industries. These days, that includes software development and more.
As production and innovation leave America, we will become more dependent upon foreign countries for both. The problem goes beyond the loss of jobs, and may actually lead to the loss of capabilities. We've lost jobs in agriculture, but we can still grow our own food. We've lost jobs in steelworking, but we can still make our own steel. But when we lose the ability to produce our own weapons systems, and when we jeopardize our ability to innovate, then we endanger our future. We must work against these trends.
Yes, that would be a violation of free market economics in the purest sense, but so is preventing the sale of nuclear weapons to the highest bidder. When we learned how to produce nuclear weapons, we did not sell them, we kept them and became a superpower. And when the Soviet Union started to produce nuclear weapons, it kept them and became a superpower as well.
It should surprise no one that when trade and investment decisions are divorced from national security objectives, we will occasionally witness trade and investment decisions in disharmony with national security objectives. What does surprise is the unwillingness of successive presidential administrations to rectify the problem.
David Ricardo was a brilliant economist, but he could not have known that many years after his death in 1823, Lenin would observe that capitalists would sell the rope with which their enemies would hang them. And today, we realize that they would also offer to relocate the rope-making facility.
India is not our enemy, but neither is Switzerland. This is another lesson learned: We should not expect only our enemies to use their economic leverage against us, even neutral countries upon whom we depend may try to degrade our military capabilities if they disagree with the policies of our government.
The next time you hear so-called experts discussing trade, you should hope against hope that there is a defense analyst or a historian among them. Self-sufficiency in critical industries is the sine qua non of true independence. At one time, Americans knew this. When foreign powers cut off our access to commodities upon which we have chosen to become dependent, we will remember.
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