Don't Panic: How Secure Is Globalization's Future?

Gilpin's most interesting claim is that the open world economy is fundamentally a creature of the Cold War. The Soviet threat, he argues, fostered cohesion among the capitalist democracies and provided the political glue that held the world economy together. Over time, an elaborate American-led political order emerged that was built on two pillars: the U.S. dollar and the American security umbrella. The American military guarantee to Europe and Asia provided a national-security rationale for Japan and the Western democracies to open their markets. Free trade helped cement the alliance, and in turn the alliance helped settle economic disputes. In Asia, the export-oriented development strategies of Japan and the smaller Asian tigers depended on America's willingness to accept their imports and live with huge trade deficits; alliances with Japan, South Korea, and other Southeast Asian countries made this politically tolerable.

The reserve and transaction-currency role of the dollar also solidified the open postwar system. The dollar's special status, Gilpin writes, gave the United States the rights of "seigniorage": it could print extra money to fight foreign wars, increase domestic spending, and go deeply into debt without fearing the pain that other states would experience. Other countries would have to adjust their currencies, which were linked to the dollar, when Washington pursued an inflationary course to meet its foreign and domestic policy agendas. Because of its dominance, the United States did not have to raise interest rates to defend its currency, taking pressure off its chronic trade imbalances. In the 1960s, French President Charles de Gaulle understood this hidden source of American hegemony all too well and complained bitterly. But most of America's Cold War allies were willing to hold dollars for fear that a currency collapse might lead the United States to withdraw its forces overseas and retreat into isolationism.

In this postwar bargain, extended military deterrence and the American dollar bound the allies together and created the institutional supports of the open world economy. Markets served a larger political purpose. Historic compromises between business and labor were politically possible -- and led to the building of domestic social safety nets that buffered swings in world markets. In short, America's leadership in creating a stable and open world economy was an offshoot of its Cold War leadership. And because the U.S. economy dwarfed other industrial countries, it did not need to worry about controlling the distribution of gains from trade between itself and its allies.

Today, Gilpin laments, this postwar bargain is breaking down as the Cold War recedes into history. The United States is still the dominant power, but it no longer needs to lead a global alliance. Europeans and Asians have stopped worrying about the security implications of economic disputes. The loosening of Cold War bonds has been matched by the rising salience of regional economic groups in Europe, East Asia, and Latin America. The European Union (EU), the Asia-Pacific Economic Cooperation forum (APEC), and the North American Free Trade Agreement (NAFTA) are all evidence that global multilateralism has lost its primacy. Gilpin cites the Single European Act of 1986 as the start of competitive regionalism, as each region attempted to enhance its position in relation to the others. Driven by both market forces and government policies, regionalism has now become reinforced by differences among Asian, Anglo-American, and continental European capitalism, accompanied by regional corporate groupings and production networks. Japan's strategy in Asia, for example, has encouraged government and business to work together and foster regionalism by directing the flow of trade, aid, and foreign direct investment. If the global reserve and transaction role of the dollar cedes to regional dominance of the euro and the yen, Gilpin fears, the world economy will be pushed in the dangerous direction of competing regional blocs.

In the meantime, the expansion of trade and investment has put new demands on this increasingly shaky postwar framework. More and more economic activity takes place outside rule-based regimes and is becoming increasingly chaotic, thanks to the dramatic speed and volume of international capital movements. Economic globalization has far outpaced political globalization and desperately needs new rules and institutions, Gilpin concludes. But his view of how order is built and sustained -- which requires a benign hegemonic leader for stability -- makes the prospects for governance look quite uncertain.

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But is the open world economy really as unstable as Gilpin suggests? One of the biggest surprises since the end of the Cold War is how little relations among western Europe, Japan, and the United States have changed. Economic disputes have remained quite muted. It is difficult to argue that the conflicts between the United States and its European and Japanese trade partners over bananas, Fuji film, or other issues during the 1990s have been more frequent or intense than such spats were during the Cold War. Gilpin's review of Cold War-era trade and monetary relations -- which covers such disputes as the Nixon administration's unexpected abandonment of the gold standard, its unilateral import duties, and the subsequent disputes over oil price controls -- unintentionally shows that the Cold War allies did indeed wage economic battles among themselves.