cable (1995) - what is international economic security

What is International Economic Security?Author(s): Vincent CableSource: International Affairs (Royal Institute of International Affairs 1944-), Vol. 71, No. 2(Apr., 1995), pp. 305-324Published by: Wiley on behalf of the Royal Institute of International AffairsStable URL: http://www.jstor.org/stable/2623436 .

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JJWhat is international

economic security?

VINCENT CABLE

The author takes issue with the proponents of the idea of 'geo-economics', a concept based on a confrontational model of international economic activity that has gained some currency in the United States, Japan and Europe. Examining the arguments that have been put forward on the ground of economic security for protecting domestic supplies, technologies, and markets, he demonstrates that contemporary global conditions often callfor a cooperative rather than confrontational pursuit of an economic security that is a shared condition rather than a goal of individual states.

The demarcation lines between international economic and security concerns are becoming blurred. The disappearance of the Soviet Union as a superpower is partly to blame. The Soviet Union provided a clearly defined, and bounded, military security threat. Its economic system was also fundamentally different and economic intercourse was protected through special rules like COCOM. In the Western world, instruments of economic integration-GATT, the Bretton Woods institutions and the EU-were justified not only in economic terms but also as cementing relationships between capitalist and democratic states and security and economic objectives were not fundamentally in conflict. Now, however, it is no longer clear who the 'enemy' is and what 'security' involves. Theodore Sorensen writes of a 'conceptual vacuum'.'

In the absence of a clearly defined security agenda, economic integration has a momentum of its own. All economies are becoming more interdependent through improved communications, capital flows and trade. There is a near- universal and voluntary acceptance by governments the world over-including former communist countries-of reduced self-sufficiency and increased economic integration. In a liberal international economic system, vulnerability to external economic events and dependence on foreigners are a necessary consequence of immersion in global markets. They are the source of opportunities for improved living standards, not threats to be avoided. It is not obvious, in such a world, that the concept of 'economic security' any longer has much

Theodore Sorensen, 'Rethinking national security', Foreign Affairs, 69: 3, I990.

International Affairs 71, 2 (I995) 305-324 305



Vincent Cable

content. Indeed, one of the defining characteristics of liberal capitalism is uncertainty and risk. That is the basis of economic freedom and choice. One necessary corollary is a sense of insecurity for individuals, firms and nations.

Yet the idea that economic policy should have a security dimension will not go away. It repeatedly surfaces whenever defence procurement involves dependence on foreign suppliers as in the UK with Westland. The I99I Gulf War prompted some policy-makers to resurrect the question of whether fuel choice should be influenced by 'security of supply' considerations and preference for indigenous energy sources, whether coal or nuclear power.

A contemporary spur to defining and identifying economic security threats is the existence of large military and intelligence gathering establishments looking for a new role. Recent reviews of CIA priorities have emphasized the importance of countering a wide variety of 'grey area' threats to national security2 which could be seen as aspects or side-effects of increased international economic integration: the narcotics trade; diffusion of military technology embodied in sophisticated equipment; the use of espionage or sabotage in international business; money-laundering and organized crime; politically orchestrated disruption of oil and other imports; internationally transmitted environmental damage; economic or environmental refugees; poaching in territorial waters. With an agenda as wide as this, there is much to keep intelligence-gathering agencies employed (and they have every intention of remaining so employed, if we are to judge from the current attempt of the National Security Agency in the US to attach an encryption product, the Tessera, to the Internet system in order to eavesdrop on users suspected of being drug barons, money launderers or terrorists).

There is, however, a question as to how many of the 'grey area' issues are indeed security threats in any meaningful sense. Why should national security agencies of the state be involved in protecting private companies from commercial espionage? Why should law enforcement be treated as a security concern? It is, moreover, one thing to observe, eavesdrop, monitor and analyse. What is much less clear is what governments should do with the intelligence they acquire. At what point do national security concerns justify intervention in commerce? Are there national economic interests which transcend in importance the sum of private transactions?

When a concept is employed by so many different people in different countries to mean different things it is useful to start with some definitions. First, economic security can refer most obviously to those aspects of trade and investment which directly affect a country's ability to defend itself: freedom to acquire weapons or related technology, reliability of supplies of military equipment, or threats of adversaries acquiring a technological advantage in weapons. The issues involved in practice are, however, becoming more complex and difficult, particularly with 'dual' use technologies. Few would argue that

2 Ernest May, 'Intelligence: backing into the future', Foreign Affairs, 7I: 3, I992; Max Manwaring, ed., Grey area phenomena: confronting the new world disorder (Boulder, CO, Oxford: Westview, I993).

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Hhat is international economic security?

free and non-discriminatory trade in weapons is a sensible objective. There are good, prudent, reasons for not applying GATT principles to armaments. But, in practice, regulation by governments is a confused mixture of prudential concerns over weapons falling into the wrong hands and mercantilist trade policy (exporting more of 'our' weapons; importing less from foreigners). And, as inconclusive attempts to renegotiate COCOM have shown, the definition of new security threats is very ambiguous.

A second approach to defining economic security is in terms of economic policy instruments which are used for purposes of aggression (or defence): trade and investment boycotts; the restriction of energy supplies. Security needs have often been defined in terms of 'security of supply'. Western governments have been considerably exercised by the security of supply of oil (to a lesser extent gas) and some rare minerals and specialised technologies. Considerable resources have been tied up in stockpiles and high cost alternative supplies. How relevant are 'security of supply' concerns in a post-Cold War environment? What is the most cost effective way of meeting them?

A third usage is more oblique: the idea that relative military capacity, or projection of power, may be undermined by relatively poor economic performance and requires an economic policy response. Fear of relative decline has fed the current interest in 'geo-economics', which posits a state of economic 'warfare' between leading countries. It is argued that the US, the EU, Japan (and increasingly China) are essentially adversaries though the weapons in countering threats to national security are economic policy measures rather than Cruise missiles and Stealth bombers. These measures involve aggressive government support for domestic producers as agaisnt foreign competitors. By combining a 'realist', Machiavellian, approach to international relations with the language of security and the economic insights of 'strategic trade theory', advocates of a more mercantilist approach have achieved some intellectual respectability and made some impact, in the US especially.

Finally, there is an even looser concept of economic security which captures the fear of global economic, social and ecological instability. As noted above, some degree of insecurity is inherent in any market economic system. But there are some elements of insecurity which can perhaps be isolated as calling for the involvement of security services. Potential threats include international crime syndicates, pornography traffickers, narcotics smugglers, dumpers of toxic waste, peddlers of plutonium. Creating a national-let alone a global-security agenda from such a list of nefarious activities is, however, difficult. Not all are illegal everywhere. Some illegal economic activities in some countries arguably do no harm, or more good than harm, let alone threaten 'national security': the smuggling of consumer goods; foreign exchange arbitrage; arguably, illegal immigration. Different societies have different tolerance levels for, inter alia, drugs, pornography and weapon ownership. The concept of economic security is necessarily very slippery.

The slipperiness of the concept of economic security is compounded by attempts to extend it to global problems. It is easy to see that the economic

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policy of the West towards Russia, or of the United States towards Mexico, or of the EU towards North Africa is governed by a complex nmixture of economic and security concerns which we can call 'economic security'; but to stretch the definition to world poverty, population growth, global warming and the stability of the international banking system, as do some recent contributions,3 is perhaps to make the concept so wide as to be unmanageable.

In this paper I shall look at how each of these distinct concerns-all making use of the vocabulary of security-enter the current policy debate and how valid the concerns are. I shall start with 'geo-economics', not because it is the most important aspect of security in the econormic sense indeed, in some respects it could be said to be a bogus concept-but because it has, at least in the United States, moved to the centre of the debate, perhaps crowding out more legitimate issues more directly linked with traditional notions of security.

Geo-economics, primacy and competitiveness

Governments do not treat national econoniies only as means of enriching their citizens. The British economist, Hawtrey, wrote of a world where 'the major concern of the state is prestige. The means to prestige is power. Power is economic productivity capable of being applied as a force.'4 Samuel Huntington has expressed the same point in a modern idiom: 'Economists are blind to the fact that econonmic activity is a source of power as well as well-being. It is, indeed, probably the most important source of power and, in a world in which military conflict between major states is unlikely, econonmic power will be increasingly important in determining the primacy or subordination of states.'5 The model which is implicit in this view is a kind of zero sum game in which the gains of one country (primacy) are seen as cancelling out the losses of another (subordination) even if both achieve growing prosperity. It has been called 'geo-econonmics' by Edward Luttwak6: 'the pursuit of adversarial goals with commercial means'. National security involves winning this economic war .

'Geo-economics', or what Theodore Moran calls 'an economics agenda for neo-realists',7 is heavily influenced by US concerns over Japan and US assumptions aboutJapanese economic thinking. Samuel Huntington, who sees the central issue being a loss of US 'primacy' to Japan, declares: 'Japanese strategy is a strategy of econonmic warfare ... Japanese strategy, behaviour and declarations all point to the existence of a cold war between Japan and the United States.'8

Jessica Tuckman Matthews, 'Redefining security', Foreign Affairs, 68: 2, Spring I989; Nicholas Eberstadt, 'Population change and national security', Foreign Affairs, 69: 3, Summer I990; Theodore Moran, 'International economics and national security', Foreign Affairs, 69: 5, I990.

4 Quoted and discussed in Charles Kindleberger, Power and money, (London: Macmillan, I970). Samuel Huntington, 'Why international primacy matters', International Security, I7: 4,. Spring I993, p. 72.

6 Edward Luttwak, 'Disarming the world's economies' (Washington DC: Centre for Strategic and International Studies, unpublished CEO Paper, I990).

7 Theodore Moran, 'An economics agenda for neo-realists', International Sectirity, i8: 2, I993.

8 Ibid., p. 76.

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Hhat is international economic security?

Within this context, attention has been focused on the idea of national 'competitiveness' and on the persistent US trade and current account imbalances which are seen as leading to the accumulation of external debt and inward foreign investment and ownership (leading to 'dependence' on foreigners, especially the Japanese, for 'strategic' technologies).

Deficits and mercantilism

From a 'geo-economic' standpoint, the US external deficit originates in an uneven playing field for trade. The solution is to be found in forcing open foreign markets (or restricting imports) so as to balance trade. This view has had some impact on US-Japan relations, which have been dominated by the size of the bilateral deficit and US demands forJapan to set quantitative performance targets to help reduce the deficit (so far resisted with unexpected vigour by the Japanese).

By contrast, the mainstream economic interpretation of the US deficit, largely shared throughout the OECD, is that the external deficit is a mirror image, and consequence, of the internal imbalance between savings and investment and should be addressed not by trade policy but by government deficit reduction and, where possible, encouraging private savings. There is a fundamental difference between the 'geo-econoniic' and the mainstream economic approach to external deficits: the latter implies that external balance 'cannot be accomplished by external assertiveness. It is an external manifestation of an internal problem and cannot be corrected other than by the United States itself redressing its balance between savings and consumption.9 The current congressional and presidential preoccupation with the US budget deficit, and the reduced emphasis on aggregate trade targets for Japan (as opposed to specific grievances about construction, cellular telephones and cars) suggests that the mainstream view has prevailed. In practice, a key role has also been played by self-correcting market forces through the yen-dollar exchange rate. The acquiescence of the US authorities in the further slide of the exchange rate in I994 has squeezed the profit margins and the market share in the US ofJapanese exporters; and it has devalued the claims of foreigners on the US.

In the longer term, however, there is more to this issue than a technical disagreement about policy: a fundamentaliy different view of what matters and how the world works. In the geo-economic view of the world, a trade deficit is intrinsically undesirable, not merely for its own sake (imports 'destroy' jobs) but because it is balanced by capital inflows-foreign investment or the acquisition of claims on the US federal government-so that the 'US becomes dependent on imports of goods and money fromJapan' and 'vulnerable to Japanese threats'. The alternative view is that dependence is also interdependence. Japanese investors have acquired US assets but have also taken a commercial and foreign exchange

9 Ibid.

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Vincent Cable

risk on their US investments which, we can see with hindsight, has cost them dear. Indeed, the world at the beginning of I995 makes the geo-economic interpretation of a few years ago look strikingly dated. There is still a large current account deficit (over $I5o billion in I994); but there is now minimal Japanese inward investment, and it is US investors who are diversifying overseas. Far from 'exporting' jobs, the US is close to full employment. The US car industry, seen as the principal target of the Japanese geo-economic offensive, is booming. The Japanese have suffered a stock market collapse and serious recession.

Competitiveness

Another part of 'geo-economics', the concern with 'competitiveness', seems to have penetrated popular thinking. The popular notion of competitiveness-that, in the words of President Clinton, 'each nation is like a big corporation competing in the global market place'-has been widely used to create a sense that the US and Europe are 'losing' (to each other, Japan or everyone else) in some kind of knock-out competition. Lester Thurow's Head to head: the growing economic battle amongJapan, Europe and America,'0 Michel Albert's Capitalism versus capitalisme,I Ira Magaziner's The silent war,'2 Geoffrey Garten's A cold peace: America,Japan, Germany and the struggle for supremacy'3 and many other publications of recent vintage leave their readers in little doubt as to what the 'competitiveness' debate is about: an economic equivalent of the Cold War.

Economists spend a lot of time explaining that the analogy between countries and firms (or football teams) is not valid; that countries, unlike firms, cannot all 'make a profit' on their external transactions; that international trade and investment is not about 'winners' and losers'. To a large degree, the reality of policy, as opposed to the rhetoric of debaters, implicitly recognizes this distinction. Indeed, most of the 'competitiveness' debate is quite innocuous. 'Competitiveness' is often used as a synonym for productivity, and the conclusion reached is that the job of governments is to facilitate productivity growth by raising the quality of public education; increasing the efficiency of infrastructure; making markets, including labour markets, more transparent and flexible; and improving the climate for investment, including foreign investment. After several trips through the EU Council of Ministers, this is essentially where Delors' White Paper on competitiveness came out, with a list of productivity raising initiatives which would have not been out of place in a report from the OECD or the World Bank.'4

'? Lester Thurow, Head to head: the coming economic battle amongJapan, Europe and America (New York: Morrow, I992).

Michel Albert, Capitalism versus capitalisme (Paris: Editions du Seuil, I992). 12 Ira Magaziner and Mark Patinkin, The silent war: inside the global business battles shaping America'sfuture (New

York: Viking Books, I990). 13 Geoffrey Garten, A cold peace: America,Japan, Germany and the strugglefor supremacy (New York: Times

Books, I992). '4 Commission of the European Communities, Growth, competitiveness, employment, White Paper, Brussels and

Luxembourg, I993.

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"hat is international economic security?

Is the 'competitiveness' issue, then, a non-issue? If politicians prefer to call a spade a digging instrument, and believe that human beings are more easily motivated to improve productivity by a sense of international competition-like schoplchildren organized into 'houses'-why should it matter? Paul Krugman, among others, regards the obsession with competitiveness as 'dangerous'.'5 Krugman's concerns are several. One is that this obsession will lead to wasteful spending on quasi-economic activities designed to enhance 'competitiveness', much as superpower competition in the security domain led to massive 'overkill'. In practice, this has not happened. The main initiatives taken to advance infrastructure provision in the interest of'competitiveness'-Mr Gore's information 'superhighway' and the less clearly articulated European equivalent under Mr Bangemann-have essentially been steps to accelerate deregulation.

A more serious concern is that governments will be tempted to use trade policy to try to reverse adverse tendencies in competitiveness. As Krugman puts it, 'the focus on the supposedly competitive nature of international economic relations greases the rails for those who want confrontational, if not frankly protectionist, policies."6 Laura Tyson argued before her appointment to the Chair of President Clinton's Council of Economic Advisers that comparative advantage in 'strategic' high-tech industries 'can be created by government action'.'7 These industries which include microelectronics, biotechnology, new materials, telecommunications, civilian aircraft, machine tools, and computing hardware and software-have no natural home, she argues, other than an assemblage of innovators and technologically attuned brains. There is concern that the US, and also Germany and the UK, have seen their share of world high technology exports shrink in relation to Japan and the Asian NICs. A 'geo-economics' perspective leads to the conclusion that adverse trends can be countered by active government promotion of 'strategic' industries.

There is, however, serious doubt as to whether most governments are very good at picking future high-tech industries or know how to nurture them until they are fully competitive. One recent study concludes that whatever advantages may have accrued in the past, or to countries like Japan when they were technological followers, 'techno-nationalism ... does not work very well any more' .i8 That is not to say that governments are unimportant; there is a useful, if elusive, mixture of policies to promote quality education, scientific enquiry, government-business relationships in advanced technology sectors and fiscal or institutional support for venture capital which can be important in getting high technology industries off the ground. If the competitiveness debate were simply about countries trying to improve such a mix of policies it would be

'5 Paul Krugman, 'Competitiveness: a dangerous obsession', Foreign Affairs, 73: 2, March/April n994. 6 Ibid., pp. 4I-2. '7 Laura D'Andrea Tyson, W/ho's bashing whom: tradse conflict in high technology industries (Washington: Institute

for International Economics, I992). ,8 R. Kuttner, The end of laissez-faire: national purpose and the global economy after the Cold War (New York:

Knopf, I 99 I).

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uncontroversial. But, in practice, such subtleties are of little interest to those hungry for the red meat of geo-economics. Increases in productivity and living standards are not important for their own sake: 'under geo-economics, private commerce ... would have to precariously exist with the currently subsidised exports, government tended technology programmes, enticing low interest credit, one-sided licensing restrictions ... of states bent on economic aggrandisement. That all such practices are apt to reduce the living standards of economic aggressors even before they reduce those of their victims is [unlikely] ... to dissuade geo-economic ambitions."9 While it is difficult to see much evidence that Western governments are

moving decisively towards 'geo-economic' thinking, there has been a powerful upsurge in populist forms of protectionism, fed by the idea- promulgated by the likes of Ross Perot and, more recently in Europe, by Sir James Goldsmith-that foreign trade is a threat to jobs and living standards. The fallacies embodied in these ideas have been set out in considered detail elsewhere.20 The practical consequence of their popularity is that geo- economic ideas can become embedded politically, in particular the belief that international economic integration is a win-lose, zero-sum game. Thus the groundwork is laid for protectionism in all its forms.

The most pervasive danger in the competitiveness obsession is that it shifts the attention of policy-makers away from those things which affect absolute economic performance and living standards towards the 'threat' of relative decline. Thus Samuel Huntington worries that 'American influence in third countries declines relative to that ofJapan ... Japan has supplanted the US as the largest provider of economic assistance.'2I In this sense, geo-economics is doomed to frustration, since technological catch-up and liberal policy reform mean that emerging market economies are almost certainly bound to grow faster than the US (or EU), which will consequently have a steadily shrinking share of world GNP and trade. Britain has had to get used to relative decline for a century or more and the process is by no means complete. Such relativities should be a matter of indifference but, in practice, states, like individuals, are often more agitated by differential than absolute performance. And in the context of geo-economics relativities trigger alarm because they are seen as affecting the capacities of countries to defend themselves. Geo-economic prescriptions-where this involves protectionism-may, however, actually make the problem, if it is one, worse.

'9 Edward Luttwak, 'Disarming the world's economies'. 20 Brian Hindley, Report published by the Trade Policy Unit of the Centre for Policy Studies, London,

'994. 21 Ibid., p. 77.

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"hat is international economic security?

Security of supply

The more conventional treatment of economic security concerns the degree to which national security is threatened by dependence on external sources of technology, raw materials, food and fuel. Any form of external interdependence can be seen as 'dependence'. But self-sufficiency carries costs, and as DeAnne Julius has put it, 'taken to its logical extreme the quest of economic security implies minimising trade relations with all but one's closest allies and seeking economic self-sufficiency wherever possible.'22 Outside the madhouse of Enver Hoxha's Albania, few modern states have been willing to pay the enormous cost of such self-sufficiency, though 'self-reliance' remains a popular notion in many developing countries (India's Hindu nationalist BJP, for example, has recently adopted as its slogan 'Swadeshi', or 'home-made'). Ideas about 'self-reliance' have had much less influence on Western economies-which have become correspondingly more integrated economically, and richer, as a result of specialization-but they retain some importance in policy-making.

In practice, the 'security of supply' issue involves two separate problems, though they are often confused (and often exist together). The first is that interruptions in import supply-caused by war, revolution, foreign sanctions or accident-could severely disrupt the national economy, or parts of it. The second is that overseas suppliers could acquire a monopoly position through unique ownership or cartel action, turning the terms of trade against the importer. This latter concern is exemplified by the price of oil but is also relevant to new technologies (a major element in strategic trade theory is the advantage in terms of monopoly 'rent' which accrues to a technological leader). These two preoccupations may coincide but are analytically different and have different policy implications.

Threats to economic security from disrupted supply can become a public policy issue (as opposed to a private matter of inventory accumulation or diversification by individual or industrial consumers) under certain circumstances: where there are certain overseas supplies which are vulnerable to sudden, politically inspired disruption, leading to physical shortages or sharp, short-term price increases; where there is a high degree of dependence on a small number of supply sources; and where the impact of disruption is 'strategic' (affecting defence interests but often used more loosely).

One application of the security of supply argument became a cause celebre in GATT. In I975 the Swedish government sought to invoke Article XXI of GATT (which provides for trade restrictions 'taken in time of war or other emergencies in international relations') to justify global quotas on footwear imports. It argued that 'decrease in domestic production has become a critical threat to the emergency planning of Sweden's economic defence as an integral part of the country's security policy. This policy necessitates the maintenance of minimum domestic

22 DeAnne Julius, 'Britain's changing international interests', International Affairs, 63: 3, p. 390.

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production capacity in vital industries.'23 There was little sympathy in GATT and two years later the quotas were withdrawn. But the assumptions underlying the policy have remained influential, even in the very open, free-trading economies of Scandinavia.That example is a good illustration of a more general tendency for policy-makers to evoke 'security of supply' without due care. I develop this point by looking in some detail at these areas where the concept is most frequently employed: for food, minerals, energy and advanced technology.

Food

'Security of supply' has frequently been invoked to justify market intervention through stockpiling and border controls in agriculture. Many governments have taken the view that some public food-stocking is required to cope with possible emergencies, though it is difficult to envisage the circumstances in which this would arise in Europe today or why global markets should not be accessible (the communist governments of the USSR and China, which were never short of security consciousness, regularly topped up grain supplies from the world market). Security concerns have also been used to justify agricultural protection and self-sufficiency. In Germany, the belief in agricultural self-sufficiency was taken (like much else) to extreme lengths under the Third Reich, but it predated that time and continued in the postwar period, having a major impact on the design of the EEC Common Agricultural Policy. There is, in fact, no explicit reference to self-sufficiency or security of food supply in the Treaty of Rome and even the most fervent apologist for the CAP would have difficulty in constructing a defence of its enormous economic cost on the basis of security considerations. Nonetheless, it has been a politically useful supporting argument.

With the McSharry and Blair House reforms beginning to bite, there is now the prospect of some liberalization. As presently conceived, however, the reforms deal with surplus, exportable production rather than opening up the largely closed market of the EU. The concept of self-sufficiency is still widely employed, for example, to extend CAP coverage to Mediterranean products. Ironically, security considerations in a broad sense may prove to be the means of undermining closed markets. The EU's security need for political stability in eastern Europe is unlikely to be met without sustainable economic recovery in the east, which in turn is heavily dependent on the EU opening up its markets to the products of Hungary, Poland, Ukraine and the rest, which will have a substantial agricultural component. Commissioner Brittan is using this opportunity to reopen the possibility of radical agricultural liberalization, but the weight of tradition and self-interest-as well as dated and inappropriate ideas of economic security-stand in the way.24

23 Guide to GATT law and practice, 6th edn, p. 554 (Geneva: GATT). 24 Michael Franklin andJonathan Ockenden, European agricultural policy-ten steps in the right direction, Royal

Institute of International Affairs Briefing Paper, no. 14, November I994.

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Strategic minerals

Another field where security of supply considerations have been important is metals. Alarm over 'strategic minerals' reached its peak two decades ago, and the simultaneous end of the Cold War and of apartheid have brought into question the continuing relevance of strategic stockpiling. There have, however, been continued warnings that the economies (and defence industries) of the West are vulnerable to serious disruption as a result of the concentration of supply in the hands of a small number of politically unstable exporters,25 and their use in some industries regarded as 'strategic' such as aircraft production: chromium, cobalt, manganese, plutonium and possibly (but less vulnerable to supply disruption) columbium, nickel, tantalum and titanium. The change in the geopolitical landscape has now led to some liquidation of strategic stocks, notably by the US, though Taiwan, France and, to a degree, Japan appear still to believe in their value.

The current process of divestment is, however, itself instructive of some of the considerable hidden burdens of strategic stockpiling. Politically driven decisions, carried out by government officials, have led to large costs to the US taxpayer as stocks have been sold into a falling market. Some minerals acquired on the assumption that they were critical to new technologies (indium, germanium) turn out to be no longer critical because of technological change. The dabbling of the British government in strategic minerals stocks in the early I980s was another case of governments having their fingers burnt. Now that the issue is receding into history, one lesson which should perhaps have been learnt is the danger of credulous politicians being seduced by security arguments into assuming government obligations and risks which should more properly have remained with private citizens.

Oil and gas

That lesson remains vitally important in the altogether more substantial field of energy. The security of oil supplies has been a major cause for concem of Western policy-makers for 20 years, recently given added substance by the circumstances surrounding the Gulf War. The security issue is posed by the fact that one-quarter of world crude oil exports currendy comes from one country, Saudi Arabia, and approximately one-half comes through the Persian Gulf (more if Iraq were back on stream). Net oil imports account for nearly 40 per cent of EU primary energy supply, just under 20 per cent in the US and 55 per cent inJapan. But the 'security of supply' issue is often presented, politically, in misleadingly simple terms. There is a clear distinction in practice between measures to counter supply disruption and measures to counter cartel action; there is a distinction between the very specific actions envisaged by the IEA and national governments to handle

25 M. Lax, Selected strategic minerals: the impending crisis (Lanham, MD: University Press of America, I987).

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emergencies and the looser security arguments advanced to promote alternative fuels and to protect indigenous oil production; and there is a subtle but powerful distinction between oil dependence and interdependence.

In a recent evaluation of past disruptions in I979 and i99i, John Mitchell concludes that the key elements in minimizing disruption have been concerted action by importing countries (to avoid a competitive scramble and to coordinate use of strategic stocks); making full use of market transparency (covering supplies in futures markets rather than the physical market); and the scope for offsetting supplies from other exporters (though this depends on spare capacity ).26

There will remain a case for strategic stocks, given the dependence of importers on a small number of potentially vulnerable suppliers (a dependence which may grow rather than decline): 'There is academic, as well as policy and business, consensus that a high level of oil stocks in importing countries is an essential ingredient of emergency preparedness. Demand restraint, reallocation of supplies and increasing domestic supplies are also potential instruments in the IEA response capabi1ity.'27 What is not appropriate- given that the total cost of precautionary strategic reserves is only $I-2 a barrel-is 'developing an alternative fuel which exceeds oil prices by more than $2-[which is] not economic'.28 By the same token, attempts artificially to create markets for high-cost alternative fuel sources-nuclear, coal or biomass-cannot convincingly be justified on supply security grounds unless there is a plausible prospect of events taking place in the Persian Gulf which are far more disruptive for longer periods than we have experienced in the past.

The idea that the best safeguard of national economic security is to maintain the cooperative, IEA-based, approach to emergencies may seem uncontroversial but is wholly at odds with the prescriptions that would emerge from a geo- economic perspective, which would make implausible the idea of multilateral cooperation between 'enemies'-the EU, the US and Japan-and place much greater emphasis on fuel self-sufficiency, regardless of cost. Experience has, by contrast, shown the value both of markets and of multilateral cooperation in enhancing economic security. If there is any room for useful innovation it probably lies in extending an IEA type of cover to other, growing, importers, like India, China and Brazil.

Is there, however, another possibility: that a threat to 'economic security' might arise from the OPEC cartel being reformed? All current indicators are that the prospects are remote. Crude prices are now lower in real terms than at any time since 1973 and there is still some spare capacity, notably in Iraq. Vulnerability to oil shocks is now much lower for almost all oil-importing countries than in the mid-i97os, mainly because of reduced energy intensity caused by conservation and changing economic structures. The behaviour of leading OPEC countries shows a clear understanding that cartel power cannot

26 John V. Mitchell, An oil agendafor Europe (London: Royal Institute of International Affairs, I994). 27 Ibid., p. 56. 28 Ibid., p. 59.

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be sustained over a long period in the face of alternative energy sources and active conservation policies. They recognize that oil dependence is a two-way street. This is not to say that there will never be future oil 'shocks'; there probably will be price 'spikes' if capacity growth falls behind demand growth, and as there are for other commodities. There is no reason to regard such market behaviour as a security threat.

Natural gas may in future also present security of supply problems, though of a quite different kind fom those in the oil sector.29 Over 30 per cent of the EU's total supplies are imports from Russia and Algeria, and the proportion may grow.30 Gas, unlike oil, is characterized by inflexibility in supply on account of being confined to pipelines (or shipping involving highly sophisticated and expensive infrastructure, for LNG). There is no spot market, as yet. And cross- border trade is regulated. It is quite possible that in future there could be severe disruption of the pipelines from Russia. The main route at present passes through Ukraine, and supplies have already been affected by Russia-Ukraine disputes over trans-shipment charges and off-take. It is also possible that the insurgency in Algeria could lead to disruption of pipeline supplies to southern Europe. Both disruptions could happen simultaneously. If that occurred, there could-in an extreme case-be prolonged interception of supplies to industrial and domestic users, and especially gas-based power stations.

In practice, it is doubtful if the situation merits attention as a major security threat. There is no reason to assume that disruption in Russian or Algerian supplies would be orchestrated. A coincidence would be pure chance. There is large storage in the existing system; reportedly over a year's supply in Italy, for example. There is growing flexibility within the EU gas networks through interconnection (the UK interconnector goes on stream in I998) and the industry has been able to improvise a response to past disruption without being instructed by governments to do so. Nor is there any reason to believe that the Russians or Algerians, or both, have either the capability or any ambitions to act as price-raising, cartel suppliers. Such behaviour would undermine their own efforts to develop sales in the EU market (and in the case of Gazprom, the development of EU downstream businesses, including the UK interconnector in which it has an equity stake). The industry is increasingly governed by competitive market processes and is characterized by interdependence rather than dependence. If there are any genuine, unaddressed, security of supply issues, they are rather limited and localized, such as the question of whether the EU has an obligation in an emergency to help out east European countries like the Czech Republic or Poland which are heavily dependent on Russian gas. As in the case of oil, security of supply risks can easily be exaggerated, the remedies are quite specific and do not call for a protectionist approach to imports or for regulatory controls which impede energy markets and discourage the use of gas.

29 Jonathan Stem, European gas markets: challenge and opportunity in the 1990S (Aldershot, Hants: Dartmouth for Royal Institute of International Affairs, iggo);Jonathan Stem, Third party access in European gas markets (London: Royal Institute of International Affairs, I993).

30 Energy in Europe-a view to thefuture (Brussels: The European Commission, 1992).

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Advanced technology

One area where the concerns of'geo-economics' and 'security of supply' intersect is the degree to which national security is compromised by dependence on foreign suppliers for advanced technology. Overseas suppliers (or foreign investors within the country) might, it is argued, refuse to make supplies available in emergency; might seek to extract monopoly 'rents'; or might even undermine the purchaser's technological advantage by similarly supplying an adversary.

Because of such concerns, dependence on foreign high-technology suppliers has become a controversial issue in the US. In I988 the US Defense Science Board identified 22 areas of critical technologies and judged Japan to be 'scientifically ahead in some niches of technology', specifically in six areas.3' A I990 Commerce Department study argued that Japan had an ascendancy over the US in five of twelve emerging technologies and was gaining in five others.32 While US defence contractors have had no difficulty buyingJapanese technology when they have needed it (for the Gulf War), clearly there is a hypothetical possibility that they might face reluctance to supply.

For countries more dependent on foreign suppliers than the US, the problems are far from hypothetical. Britain's inability to obtain key shells from Belgium during the Gulf War, for example, was well publicized. Most analysts, even those writing from the standpoint of economic efficiency, acknowledge that problems can arise if a country is dependent on one firm or country for supplies, outside its control, for critical defence requirements.33 Yet it is clearly over-simple, and often perverse, to equate 'security' with self-sufficiency in defence technology. Indigenous technology may be inferior, unreliable or produced at a cost which precludes other security outlays. A classic case was the British development of its own Nimrod in competition with Boeing's AWACS. One analyst concluded that Britain's 'inability to reach out for multinational assistance in the face of a rapidly changing set of challenges resulted not so much in any one single technological failure as in a series of delays, price increases and questionable upgrades of capability'.3 Britain was consequently left with inferior sophisticated surveillance technology. It is precisely for this reason that defence procurement controversies can pitch service chiefs-who are employed to be good judges of security in the narrow sense-on the side of foreign suppliers against coalitions of politicians and domestic industrialists. Rational considerations of cost, quality and technological superiority may well lead to a sourcing of defence-related equipment, systems or components with foreign suppliers or foreign-owned companies. Moreover, protected domestic suppliers are more likely to exercise

3 Critical technologies plan (Washington DC: US Department of Defense, March I990). 32 Energizing technologies: a survey of technical and economic opportunities (Washington DC: US Department of

Commerce, Technology Administration, Spring I990).

33 R. Vernon, Multinational industry and national security (London: International Institute for Strategic Studies, Adelphi Paper, 74, 197 1).

34 T. M. Moran, 'The globalization of the defence industry', International Security, 15, Summer I990.

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What is international economic security?

monopoly power than those operating in a global competitive market place. In such cases, appeals to economic security may be at odds with military security.

The issue has come to a head in the US with a clause added to the I988 Omnibus Trade and Competitiveness Act-the so-called Exxon-Florio amendment-which gives the President authority to block mergers with, or acquisitions of, US firms on national security grounds. In practice, the amendment has been lightly used (leading to some congressional frustrations and demands for a more explicit bias against foreign firms). One detailed review of US experience concluded that the gut economic nationalism emanating from Congress undermined rather than helped US security interests: 'By implication, the US defence industrial base is weakened if foreign controlled firms participate in it and national security interests are served by excluding such firms or subjecting them to a draconian regulation. Yet as numerous analyses have concluded, these prejudices are largely unwarranted and unjustified.'35

The authors of that study contrasted US policy unfavourably with the British method of handling mergers and acquisitions affecting defence-related companies, which has 'no preconceived bias against a take-over with a foreign bidder'. It commends the British emphasis on competition as the overriding consideration to reduce the risk of abuse by monopoly suppliers, domestic or foreign, and calls for cooperation to create an internationally harmonized framework for achieving consistency in competition policy. Above all, 'realities ... [such as] that the US no longer enjoys a monopoly in the development of military-critical technologies and that the costs of national defence R&D and procurement will likely continue an upward spiral-suggest that the maintenance of technological superiority over likely adversaries ... requires closer collaboration with, not exclusion of, foreign actors.'36 The interests of economic security are not served by isolation or self-sufficiency.

Taking the 'security of supply' issue as a whole there are, clearly, instances where national security can be undermined by external disruption.But experience suggests some lessons: the importance of countering supply in security through cooperative action among consumers rather than unilaterally; the importance of using market mechanisms rather than regulatory controls; and the potential costs of inward-looking, self-reliance policies.

Security, technology diffusion and weapons proliferation

One of the most striking consequences of the end of the Cold War has been the virtual collapse of strategic export controls. COCOM, the West's multilateral control regime (of seventeen member states), has expired and a more flexible successor is being put together. National controls have been radically liberalized.

35 Edward Graham and Michael Ebert, 'Foreign- direct investment and US national security: fixing Exxon- Florino', The World Economy, I4: 3, September I99I.

3 Ibid., pp. 267-8.

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Superficially, at least, there have been favourable results from liberalization. While conventional arms business has declined (from $38 billion in deliveries in I989 to $22 billion in I993) there has been a substantial growth in civilian high- technology trade with indirect security applications telecommunications; advanced computers-to China and the ex-Warsaw Pact area. There has been a drastic reduction in administrative controls and in the economic cost of production restraint. Moreover, the contraction of the control system has enabled priority to be focused on countries seen as particular threats (Iraq, Iran, Libya, North Korea) and on particularly dangerous weapons systems (nuclear components, chemical weapons, long-range missiles). This still leaves a substantial number of countries which may emerge with dangerous weapons capability. Recent assessments suggest that in addition to nuclear weapons threshold states, 20 countries have, or are developing, weapons capabilities and at least I S will soon be producing their own balistic missiles.37

The problems associated with controlling trade involving military technologies are very familiar, notably establishing the military risks in 'dual use' technologies and defini'ng target countries. The new arrangements (or lack of them) do have some serious limitations, two in particular. The first is that, in those areas where controls now exist, non-proliferation mechanisms are often ineffective: not only have these regimes been imperfect, but they have been undermined to a considerable degree by the operation of a market involving both licit and illicit businesses.38 The participants in the WMD (weapons of mass destruction) market form supply networks that are able to circumvent complex, multi-layered export control regimes and move the most advanced technology to the consumer state with near impunity. The British embarrassment over Matrix Churchill and the evidence of an active plutonium market in western Europe give a small inkling of what appears to be much more extensive circumvention of controls.

These problems are compounded by another: that a major consequence of the breakdown of COCOM controls has been the nationalization as much as the liberalization of policy. There has been a breakdown of multilateral discipline. 'Geo-economic', mercantilist thinking, which validates the idea of inter- governmental competition to promote exports, would further undermine the commitment to multilateral regimes. Multilateral discipline is partly a question of subordinating national competitiveness considerations to security but also involves finding an appropriate level for cooperation: sufficiently comprehensive to prevent evasion through non-meinber countries, yet sufficiently tight to have enforcement powers. This points to the need for a strong multilateral successor to COCOM, which reinforces the work of the existing suppliers' clubs (the Missile Technology Control Regime, the Chemical Weapons Convention and

37 Inter alia, Martin Navias, Ballistic missile proliferation in the Tlird World (London: International Institute for Strategic Studies, Adelphi Paper, no. 252, Summer I990).

38 Phil Williams and Stephen Black, 'Transnational threats: drug trafficking and weaponis proliferation', Contemporary Security Policy, I5: i, April I994, pp. I27-5I.

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the Nuclear Suppliers Group). It would have to cover key 'dual use' technologies which could be misused by 'rogue' countries; it would have to target those countries; and it would have to coopt potential new sources of supply (like the Asian NICs, the countries of eastern Europe, Russia and China). Of course, such things are easier said than done, as is quickly apparent when specific problems present themselves (like the problems of coopting China into arrangements which prevent North Korea acquiring a nuclear weapons capability). Broad participation in a comprehensive regime will require a structure of incentives to join and stay and disincentives for defections. Access to [advanced] technology and certain financial tools could be used.'39

A radical, if pessimistic, view would be that global markets and communications in weapons of mass destruction are so well developed that it is impossible to stop proliferation through control systems, however well managed and targeted they are. That is the counsel of despair; but it does underline the necessity for alternative approaches, notably that of a regime which is able to apply significant carrots and sticks of trade and finance to influence the behaviour of states tempted to acquire or use weapons of mass destruction. It also underlines the main danger of geo-economics which is a confrontational approach to trade which would undermine an already tenuous set of multilateral disciplines.

Drugs and criminalization of the global economy

There are perhaps question marks to be raised against treating the drugs trade, and international crime in general, as a 'security' problem. If by so doing we encourage the idea that drug smuggling and other manifestations of organized crime are a 'foreign threat', then harm is done, since many of the problems originate in domestic policy. The United States in particular has been much more confident with assertive policies to persuade or instruct drug-exporting countries to cut supplies, than in tackling the trickier and more sensitive domestic policy demand-management issues. There, a bizarre and lethal combination of criminalization of drugs distribution and liberalization of weapons ownership is a recipe for trouble. Similarly, it is easier for the Russian authorities to believe that they are victims of a globally orchestrated mafia than to address the (admittedly many and complex) domestic policy temptations to organized crime in a period of transition.

Nonetheless, many governments have come to regard the drugs-and specifically narcotics-trade as a security problem. Intelligence and military (especially naval) personnel are already heavily involved in countering it. There has been a strong link with more conventional security matters (as in the ousting of General Noriega through the invasion of Panama). And there is a large area of overlap between the narcotics trade, money-laundering (an estimated $I 00-200 billion 'laundered' every year in the US alone) and illicit trade in weapons.

39 Ibid.

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Various lessons are being painfully learned from attempts to manage the drugs problem. The most important is that the international crime syndicates are highly sophisticated global businesses. The so-called Cali 'cartel' controls 70 per cent of the world's cocaine business, which is worth $I 5-20 billion in the US alone (by comparison, the US imports of all forms of foodstuffs total around $35 billion). These businesses demonstrate commercial flexibility, entrepreneurial flair (including a capacity for imaginative product innovations like 'crack' cocaine), an ability to build alliances and sensitivity to market forces which would be eulogized if employed in legitimate business. Like the best modern businesses, they are networking organizations rather than rigid hierarchical structures. They are having to be countered by national law enforcement and security agencies which have the management style of public-sector bureaucracies and a national security ethos which is traditionally suspicious of foreigners and innocent of economics. The problems are compounded by the weakness of many states and the 'anarcho-capitalism' which is characteristic of ex-communist and developing countries in transition from socialism to market economies. Such weak states provide a perfect cover for the production of illicit substances (in such relatively lawless places as Afghanistan, the border areas of Burma, Thailand and Laos, Colombia, Guatemala and Bolivia) and trans- shipment (via the former Soviet Union or Nigeria).

There are several specific implications for the international security regime which has to emerge in order to address the problem (or set of problems). The first is that it has to be cooperative. Assertive, nationalistic, 'geo-economics' is utterly inimical to the building of alliances among intelligence-gathering and enforcement agencies, without which effective management of the problem is impossible. Furthermore, the growing and refining areas, especially for heroin, are so diverse that the aggressive use of leverage on supplier countries to introduce export controls is bound to be ineffective, even if it were consistently applied. Interdiction appears to be of limited effectiveness (though harassment adds to trafficking costs and is therefore useful). By contrast, a cooperative infrastructure is being established through Interpol, the recently negotiated Vienna Convention covering drug trafficking, the OECD's and the Commonwealth's work on money-laundering and the Bank of International Settlements common approach to bank supervision.

A second implication is that policy has to be alive to the possibilities of working with rather than against the grain of markets. 'Sting' operations like operation 'Green Ice' using front companies is one model. So is the cooperation between British customs and freight-forwarding businesses whereby the former gives accelerated treatment in return for information.

A further conclusion relates to the importance of domestic economic policy. One recent example of a sophisticated linkage between economic policy and secunty concerns was the pressure on the Russian government-from domestic economic reformers and from Western agencies-to scrap the system of oil export quotas which was, notoriously, a major source of 'rent' for Russian organised crime and was spilling over into Western markets with destabilizing effects.

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Domestic policy in consuming countries is also critical to trade in narcotics; arguably more important than interdiction and action against suppliers. Law enforcement agencies and medical professionals alike point to the damaging consequences of prohibition and criminalization rather than subtle methods of changing behaviour which do not create large 'rents' for criminal gangs. Treating narcotics as a security issue deflects attention from hard political choices which may involve a move to decriminalization.

The wider security agenda and policy response

While the issues raised above are large and go well beyond security issues narrowly defined, some would argue that the perspective is still far too narrow. Jessica Matthews redefines security to include the environment, since some environmental problems are global in character (global warming and ozone depletion) and potentially life-threatening. The emerging 'black market' in CFCs (circumventing the terms of the Montreal Protocol) could, in this sense, be seen as much as a security threat as narcotics smuggling. The two most convincing examples of large-scale environmental refugee movements-Haiti and the Horn of Africa-have both helped to create political upheavals into which major military powers have been drawn.40 Population change has similarly been treated as a security problem because both changes in demographic proportions and (arguably) aggregate population growth can be sources of conflict. In much the same vein, poverty-and the problem of global development-is a security issue because it may lie behind many conflicts. With a very high proportion of modem conflicts taking place within societies rather than between them, each with the capacity to generate external nilitary intervention, it becomes important to understand the reasons, be they economic, environmental or rooted in questions of cultural identity and nationality.

While it is likely to be frustrating, and not immediately helpful for operational personnel, to be told that security involves dealing with complex, intangible, multifaceted international problems, it is a necessary step to understanding. Today's security threats are more blurred than in traditional confrontations between nation-state alliances. It is becoming more difficult to draw clean dividing lines between governments (it is not clear who adversaries are; or adversaries in one context are allies in another); between levels of decision- making (some threats are transnational, like the international drug and organized crime syndicates; some are sub-national, like terrorist groups); and between military, economic, ecological and other concerns.

Some general conclusions, however, do emerge. One is that many of the new security threats require cooperative, multilateral solutions. Threats of disruption of oil supplies; drug-smuggling and the laundering of the proceeds; trafficking

40 Phil Williams, 'The international drug trade: an analysis', Low Intensity Conflict and Law Enforcement, 2: 3, Winter I993, pp. 397-420.

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in weapons of mass destruction; evasion of controls instituted to tackle life- threatening environmental hazards: countering all and any of these requires a high level of mutual trust and practical collaboration between countries that are not necessarily neighbours or traditional allies. The threats, in terms of disruption or cartel pricing, potentially posed by high levels of dependence on overseas (or foreign-owned) monopoly suppliers of advanced technology, gas or food grains are best met not by costly self-sufficiency, but by a diversity of supply and an open, competitive system. Such a system which in turn requires a strong multilateral commitment to free trade and capital movements and consistent competition rules.

Of course, 'cooperation' begs the question of at what level and with whom. Some forms of economic security are best dealt with in like-minded clubs of countries which can maintain collective discipline, as the IEA and COCOM successfully did in times of crisis. In practice, the breaking down of old alliances and the blurring of boundaries between 'rich' and 'poor' (reflected in the widening membership of the OECD and Russia's semi-membership of the G7-8) means that clubs and alliances have to be more inclusive. Proposals have been put forward for an Economic Security Council, variously conceived of as a free-standing global body to replace or supplement the G7, or as an economic counterpart to the Security Council within the UN.4' It could create a global forum to deal with those aspects of economic security-like, for example, narcotics or global environmental hazards-which cannot be satisfactorily dealt with at a lower level. In practice what is slowly emerging is a complex hierarchy of institutions and informal arrangements at national, regional and global level (and points in between) to deal, case by case, with various economic security threats. The outcome is messy, and no doubt frustrating and time-consuming for the officials involved. But this is the future shape of international relations.

These requirements are the very opposite of those implied by the idea of 'geo- economics', an interpretation of economic security which entails a mercantilist and confrontational approach to economic relations between leading industrial countries and a preference for unilateral action over multilateralism. 'Geo- economics -a current of thinking that is well represented in the US administration, in Japan and in parts of Europe-leads not just to dubious economics but to a neglect of security both in its traditional and its more complex contemporary forms.

The new interest in redefining security is an understandable and healthy consequence of the end of the Cold War. There is, however, a danger that the debate is being hijacked by concepts like geo-economics which have little to do with security in any meaningful sense.

4' Ourglobal neighbourhood, Report of the Commission on Global Governance, ch. 4 (Oxford: Oxford University Press, I995).

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cable (1995) - what is international economic security

Documents

economic terms

ground of economic security

economic objectives

economic intercourse

increased economic integration

external economic events

security concerns

jstor terms