Washington’s Missing China Strategy
To Counter Beijing, the Biden Administration Needs to Decide What It Wants
THE reference of M. Briand's European Plan to a special committee of the League of Nations has been called an "honorable burial." As the event will prove, the description does not go very wide of the mark. Its one defect is that it says nothing as to the intrinsic merits of the proposal.
There can be no doubt that the demand for a "United States of Europe" rests on a misunderstanding, or, if one prefers, on a false analogy. As the European looks across the ocean to the United States of America, he sees a tremendous continent constituting a single economic unit without customs barriers and functioning with a uniform system of transportation, with uniform markets and business methods, and with a highly specialized production of uniform commodities. Hasty and hazy thinking at once leads to the conclusion that the same type of organization can and should be transported to Europe. For some decades past this slogan has been playing its rôle in the literature of the peace movement. Now M. Briand has tried to bring it for the first time within the scope of practical politics, and its real character at once stands revealed: it is a phrase, a slogan -- and nothing more.
The states of Europe and the states of the American Union, in all that relates to constitution and inner structure, have little in common with each other except the name "state." The American states are not states in the European sense of the term. In the European sense they are "provinces" with an unusually high degree of local self-government. That this autonomy extends to spheres of legislation which in European federations are, as a rule, reserved to federal governments, does not in any way invalidate the distinction here drawn. The vital point is that in the case of the American Union there is a federal legislature and a federal executive to which the legislatures and the executives of the individual states are, in certain capital regards, subordinated. They all take for granted that questions touching the specific predicates of sovereignty belong within the jurisdiction of the Federal Government: diplomacy, armaments, regulation of foreign commerce, regulation of interstate commerce. Actual developments are forcing the Americans to a wider and wider extension of federal control over the domains of business and finance at large -- now it is a question of taxation, now of transportation, now of trusts or monopolies, and so on.
There is, and can be, nothing of this kind in Europe. In calling for a European customs union we must realize that what we are actually calling for is a revision of modern concepts of state and nation, concepts which, in their essential presumptions, are as well established in America as in Europe. We are demanding, no less, that the European nations voluntarily divest themselves of their status as nations and consider themselves self-governing provinces of a common super-state -- a European federation. To recognize the Utopian character of such a notion, one should consider the political argument and not only the economic one. If all economic interests were unanimous in favor of a European customs union, the scheme would none the less meet shipwreck on Europe's political boundaries.
All proposals of free "trade" presuppose that governments -- the state -- shall refrain from any interference in economic matters. The World War and the years following have found Europe moving in a precisely opposite direction. The war revolutionized the relations of state and economic life from the ground up, and especially in those countries which lay within the blockaded zone of Central Europe. Just as the war for the first time in history established the principle of universal military service, so for the first time in history it brought national economic life in all its branches and activities to the support and service of state policies -- made it effectively subordinate to the state. For the first time the laws of capitalistic economics were, or at least seemed to be, superseded. Not supply and demand, but the dictatorial fiat of the state determined economic relationships -- production, consumption, wages, costs of living. People for the most part fail to realize that this fact is today determining, and in any visible future will continue to determine, the course of events in Europe. But for the same fact Bolshevism would be as unthinkable as an open or underground economic war between the European countries is unthinkable, or a weakening of liberal forces in the British Empire.
Pray let us just remember this: during the war, the state (at least in Central Europe) commandeered all food supplies, all raw materials, all manufactures and accessories to manufacture. The state regulated production; it regulated buying and selling; it regulated and rationed consumption. The state took over all railroads and all shipping; it forbade investments of capital save in state enterprises; it ruled as master over currency and media of exchange. But, at the same time, and for the first time, the state made itself responsible for the physical welfare of its citizens: it guaranteed food and clothing not only to the army in the field but to the civil population. As the economic freedom of the individual is gradually and comprehensively extinguished, it follows as a matter of course that all economic, social and political initiatives and complaints must be addressed to the state, as the one collective personality capable of buying, selling and acting.
So much for the war. And since the war? Let us consider developments in two stages.
After the armistice we see maintained all the restrictions laid upon economic life during the war. Russia refuses of her own accord to "fit in with" the scheme of world free trade. Furthermore, the blockaded zone in Central Europe is cut off from world markets by impassable barriers. The first remedies for the economic crisis are sought not by the freed initiative of business men but by negotiations between government and government. The first importations of food-stuffs and raw materials, along with the first credits, are arranged through governmental channels. Demobilization forces the labor market under state control. Restrictions on imports and exports allow national boundaries to acquire an economic significance hitherto unknown to the business world. The depreciation and collapse of currencies, and countless other unsolved problems of finance, establish the omnipotence of the state over business, at a time when the emergency of military defense has long since passed.
Now for the second stage. Many new states have come into being in virtue of the principle of nationality. These new states have first to organize themselves as economic and political powers, and to create their political, military and economic apparatus. Meantime a social readjustment is taking place in all of them whereby relatively new interests come into dictatorial control of the governments. With the new bureaucracies a new national bourgeoisie steps forward, and in ways quite unforeseen takes advantage of the remodeling of the governments to gain control, overnight, of positions of business leadership which in those countries had formerly been held by people of a different nationality. Such is the sociological significance of that "nationalization" of industries and banks which took place in all the countries in question. It is only a natural consequence of all this that these same countries should continue to manifest dictatorial tendencies in their economic life; and that, from the organization and strengthening of armaments, they should go on to the completion of their industrial equipment and to the founding of industries which are the direct or indirect basis of national security.
Bolshevik Russia, Fascist Italy, the whole swarm of new-born countries that spread from the Baltic to the Ægean, all without exception live as states on the principle that state and nation are one and the same thing, and that as against that "oneness" neither personal freedom nor economic freedom has any force whatever. In all this complex of nations, which embraces the larger portion of Europe, the principle of economic liberalism stands in irreconcilable conflict with the principle to which these nations, as actually organized, owe their origin and present existence.
But even if the inner texture of the various European states did not make their external unification impossible; even if the irrational (and in the long run untenable) boundaries erected by the peace treaties, not only between victors and vanquished but even between victorious Powers, did not constitute barriers for the moment insuperable, there would still remain a decisive obstacle arising from the historic map of Europe. Here we have dozens of nations differing one from the other in history, language, law, manners and customs, concepts of life. Americans can scarcely imagine what this means for Europe. The Americans are a colonial people, with their traditions still to create. They have not yet come to look upon every tree, every stone of their land, as something eternally sacred. Whereas the European is bound in every fibre of his spirit to every inch of his home soil. Suppose it were possible to overthrow customs barriers and tariff walls. Suppose the European governments could be restrained or excluded altogether from interference with business and commerce. Even then Europe would be infinitely far distant from any possibility of union in the sense in which union is understood in America. The free interchange of material values would in no wise correspond to a free intercourse of peoples. The linguistic and cultural walls between the European nations would remain undisturbed.
M. Briand's démarche, whatever its diplomatic motivation from the French point of view, is at any rate a frank recognition that the present situation in Europe can be regarded only with uneasiness; and it further indicates that Europe is becoming aware of a rapidly widening divergence between her own course of development and that of the Americas.
Before the war there was a definite world-wide tendency toward an equalization of standards of living among the civilized nations. Even then states and nations sometimes developed with amazing speed; but counter-forces, working toward a general leveling, were tremendously strong as compared with anything we see today. Specially noteworthy among such counter-forces were the migrations of capital and labor. Differences in interest rates could not become too great, for variations of one percent, or even of half of one percent, were sufficient to set large amounts of capital in motion. Interest regulated the flow of capital. England and France, as the two great sources of supply of world capital, but even Germany to a certain extent during the first decades of the century, fertilized the whole world with their surpluses. Russia, the Balkan states, the Near East, not to mention Austria-Hungary and Italy, all profited by this flow of wealth. Governmental influences did, to be sure, play their part in giving direction to the flow, but they were not the decisive factor. And a flow of commodities always followed the flow of capital. Countries which received loans used them to buy the commodities which the lending nations supplied to them for their development. Just as interest rates could not fall off-balance in this free movement of capital, so standards of living could not vary too greatly. The safety valve was the United States of America, where rising wages and an increasing demand for labor attracted the great body of emigrants. This checked the fall of standards of living in the home countries of the emigrants, by taking up the surplus of labor. At the same time it checked any exaggerated rise in standards of living in the United States, since the influx of immigrants set limits to the rise in wages.
All this has changed since the war. The free movement of capital has ceased. So has the free movement of emigration. Men and money both lie shackled under the might of the state. And the result has been that the automatic tendency toward equalization of standards of living among the nations has been replaced by a rapidly accelerating tendency toward differentiation in standards of living. The fact is crudely apparent in the relations between the United States and Europe; but it is apparent, even if in more moderate degrees, in the relations between one European country and another.
The United States has enforced its restrictions on immigration with great severity. Protected from an undesirable competition of European man power by these governmental barriers, American labor has sought to give itself, as it were, a "scarcity value" (at least as compared with European conditions). On the other hand, great providers of emigrants, such as Russia and Italy, have withheld passports of emigration from their citizens, now become serfs of the state. As a result, the flow of labor and the flow of capital are now determined, not by strictly economic pressures, but by political pressures. Memories of war experiences are still fresh in all minds -- depreciation of currencies, confiscations of private property, national bankruptcies. While the devastation incident to the war has left behind it an unprecedented need of capital, political misgivings are still strong enough to paralyze the allurements of the dizziest interest rates. Quite aside from Russia, almost all of Central and Eastern Europe is excluded from the capital markets of the world. For Poland, Austria, Hungary, Rumania, Jugoslavia, Bulgaria, Greece, and not only for these -- for Italy, and now, for a year past, for Germany, the negotiation of a foreign loan is a long and painful process. Most of these countries are admitted to the sources of capital only in exceptional circumstances; and France, the most important purveyor of capital in Europe, the country evidently with the greatest surplus of ready money, is still refraining from foreign loans almost altogether. Yet, as every one must see, the measure in which such exceptions to the rule are allowed determines the measure of differentiation in international standards of living and the rapidity of world recovery from the war.
The choking of free movement in man power and capital is being intensified by the choking of free movement in commodities. One symptom of this situation is that there are today ten thousand miles of new customs barriers in Europe; a second symptom is that tariff walls the world over are now being raised far above their former high points; a third, and most decisive one, is that protectionist policies are being supplemented and, in fact, far surpassed in importance, by administrative safeguards to domestic commerce. The possibilities of such "administrative protectionism" and the instruments available for practicing it are virtually unlimited. Only during these recent years has general attention been drawn to such devices. They comprise, among other things: taxes, railroad rates, shipping subsidies, importation quotas, regulations of public sales, building regulations, regulations on the nationality of directors and majority stockholders in corporations and important industries, passports, and especially the control of labor supply. For countries of unstable finance, we must add currency control and the like.
This complication of economic disturbances to world business is intensified to the highest degree by gigantic "political payments" between country and country. I am thinking, for instance, of the German reparation obligations and the inter-Allied debts. However one may judge the legal and political bases of such payments, from the purely economic point of view they are all on a par. The inter-Allied payments of interest and amortization are themselves, from that point of view, payments without consideration. It is true that the United States at one time actually loaned the Allies the amounts now under interest and amortization, either in money or in goods. But the American war credits accorded to the Allies differ from the normal loans that formerly passed between country and country in this respect: that they were purely consumption credits. The foreign loans made by European financiers before the war, now to South America, now to Russia, now to the Balkans, usually had productive purposes in view. They served to build railroads and electrical plants, to open up natural resources, to finance new industries. They could be paid, both in capital and in interest, out of the profits of the investments. The goods made available through war credits had an entirely different purpose: they were virtually all devoted to positive destruction of values. That fact alone makes such payments today a disturbing element in world commerce which the old-time payments could never be. This applies all the more seriously to the reparations payments, since they exceed the inter-Allied payments in amount and must be made by a single country, where, in consequence, capital resources must be more and more compromised and the standard of living further depressed. What the reparation debts actually mean may be grasped by remembering that they correspond to more than half of the entire private capital investment of the United States on long term loans and investments abroad (from 13 to 15 billions of dollars, according to the computations of the United States Department of Commerce in 1929). However, I cannot go very deeply into the question of international debts just here, though, under pressure of the world crisis in business, the discussion of them has flared up anew during the months just past. I will note simply that the debts in question hold the key to many of the riddles which the current depression has been propounding for a year or more.
So, of late, there has appeared in the political relations of the different countries a new element that was unknown before the war: we may call it a class struggle of nations. The peoples as yet are not really conscious of it. It is none the less real on that account.
In spite of everything, the general trend in international relations before the war was toward democracy. The war was fought, ostensibly, to "make the world safe for democracy." Its actual effect has been to create antagonisms of class as between nation and nation which would have been thought impossible twenty years ago.
There is nothing surprising about this, really. It is the natural consequence of the shifting of power between nations and continents brought on by the war, and the logical fruit also of the establishment by the peace treaties of the principle of brute force in international relations. The treaties divided the nations of Europe into two groups with differing privileges: victors and vanquished, fully sovereign Powers and half-sovereign Powers. Such a situation could survive for long only in that same atmosphere which has deprived men and capital of all freedom and roused unquenchable antagonisms between those with different degrees of wealth and different standards of living. Just as the treaties have engendered increasingly bitter and increasingly dangerous tensions in the political relations of states, so also differences in wealth and prosperity are inducing increasingly dangerous tensions in the economic sphere. No nation can allow too great and too irritating differences in wealth and in the opportunities for enjoying life between the different classes in its population. So the world cannot tolerate for any great length of time too violent distinctions of class between its component countries. It revolts against such a thing -- a moral revolt, but also an economic revolt.
To this, at bottom, the economic crisis which is today shaking the world bears eloquent witness. It is a crisis brought on by the redistribution of political, social and economic power resulting from the war. In this sense, the crisis of democracy, which almost all European countries are experiencing, is a super-national crisis. The question which America must ask herself before all other questions is whether a single people, a single country, however great and powerful it may be, can isolate itself from, immunize itself against, the radiations of such a crisis. I need hardly say that the whole problem of American destinies is involved in such a question.
Certainly it is not for me, a European and a German, to supply -- especially in an American review -- an answer which Americans must make for themselves. I may, however, indicate certain elements which in my judgment the true answer must take into account.
There are no miracles in the domain of economics. Even the "American miracle" in business, the occasion of so much astonishment and worship not so long ago, proves not to have been a miracle. American prosperity did not set the laws of economics aside, as it seemed to be doing (down to the autumn of 1929). Far from suspending the so-called "monetary wave theory," the panic on Wall Street has exemplified the working of that law. Quotations rose and rose so long as production and selling could keep on rising, so long as earnings continued to provide capital and enthusiasm for industrial expansion. But there is a limit to such a merry-go-round, and the index of an approach to that limit is furnished by the rates of interest. The American "rise" found its limit in a tightness of money on Wall Street and in a continued raising of discount rates by the Reserve Banks. A wholly normal phenomenon, which rectified itself in wholly normal ways. As earnings fall off or turn into losses, production slows down and then halts, and this means unemployment and lowered wages, just as scarcity of capital means a drop in prices. From these developments comes a relaxation in the credit market which drives interest so low that eventually it encourages new investments and the new "rise" begins. So far, therefore, the American crisis is running entirely true to economic theory.
However, the same American crisis has called attention to two facts which were commonly lost sight of during the period of American prosperity and which are quite generally being overlooked today.
One is the intimate dependence of the world outside the boundaries of the United States on what takes place in America. Whether American consumption rises or falls is equally important (in its bearing on conditions of living) for countries offering raw materials and for industrial countries which are affected by movements in the prices of raw materials and come to feel stronger or weaker competition from the United States in the markets which buy their manufacturing products. The distress which has been affecting South America and the British and Dutch colonies during these past months is, at bottom, a reflex of the set-back which American business has been undergoing since the autumn of 1929.
The other fact is America's dependence on the economic vicissitudes of the world at large. The drop in raw materials could never have gone so devastatingly far if the greater part of Europe had not been economically disorganized and therefore suffering from greatly reduced powers of consumption. The American worker is paying the price of this dependence today in increased unemployment and in a decline in wages. The trend toward an equalization of standards of living which people thought could be avoided is slowly asserting itself in spite of everything. Before the war, however, it was a trend upwards, whereby the so-called backward nations were lifting themselves to the standards of the better developed countries. Now it is a leveling downwards, with the standards of the wealthier nations threatening to fall.
American statesmanship seems to be of the opinion that it can halt this decline by tariff measures. It seems to think that by raising the customs barrier still higher it can stabilize an American price level corresponding to an American wage level, just as it has for a long time believed it could maintain a wage level by checking over-supply of labor through restrictions on immigration. I believe both of these policies mistaken. The consequence of them only can be that the effects of American depression on the rest of the world will be intensified, and that there will be a similar intensification of the counter-effects of world depression upon America. When one is creditor to the rest of the world and the world can, in the last analysis, pay interest and amortization only in goods or in labor, one cannot adopt the exclusion of man power and the exclusion of commodities at the same time. Sooner or later the circle reveals itself as vicious -- sooner rather than later, would be my present opinion!
The discrepancy in standards of living between America and Europe is not by any means the only such discrepancy that is causing international tension, but it is certainly the most important. I have already indicated the inherent difficulties that thwart any project for the unification of Europe. They would serve just as well to thwart any common policy on the part of the European nations against the United States. Americans have no reason to fear that. The danger from the discrepancy in living standards arises from the working of the economic law. America cannot avoid this danger so long as she clings to her isolation and believes she can regulate her economic life all by herself. Tendencies toward class struggles within a nation can be exorcised only by one remedy: democracy. Democracy would seem to be the only remedy available for softening and moderating class differences between nations.
But democracy in this sense can mean only coöperation, a readiness to seek mutual understandings on principles of equal rights. Democracy in international relations can mean only common effort, in a spirit of mutual helpfulness, for the solution of mutual economic and psychological problems. It would be stupid for Europe to combine against America; and such a policy would inevitably fail, since the inner conflicts of interest in Europe are greater and more bitter than the conflict of interest between America and Europe. But that does not obviate the need of international coöperation for the relief of international distress. Such coöperation would be in vain unless it were to include the United States. The world has grown too small to be set off in compartments. To try (as the Pan-European Plan would try) to organize the European continent without Russia, without the British Empire, and without the United States, is to toy with an idle day-dream. America and Europe are meeting today in Russia and in China -- meeting there today as competitors, tomorrow, probably, as partners. Nowhere is it any longer possible to delimit a "sphere" of action for one continent as against a "sphere" of action for another continent. The era of isolations, which only war made still possible, is past. In future the nations of the world must stand or fall together.