Courtesy Reuters

Economic Sovereignty at Bay

Thirty-six years ago, the President of the United States observed that the U.S. tariff was "solely a domestic question," a subject inappropriate for international bargaining. This view, archaic as it now may seem, stirred no public outcry, no editorial protest in the nation's leading dailies.

But that was another era.

Today, the commitments among the principal non-communist countries of the world cover the subject of tariffs, import and export licenses, and subsidies; the level of foreign exchange rates and the price of gold; the price and quality of international air service; the price of coffee, wheat, sugar and tin; safety-at-sea standards, deep-sea fishing and whaling rights; and the international use of the ether waves. There is a pooling of foreign-aid funds through the World Bank and various regional banking institutions; a pooling of international technical assistance efforts through numerous U.N. agencies. More important still, through institutions such as the International Monetary Fund and the Organization for Economic Coöperation and Development (OECD) there are well-entrenched habits of international consultation and international persuasion on "domestic" subjects of the most sensitive sort: on internal interest rates, on budgetary and fiscal policy and on employment and incomes policy. And within the European Economic Community and the European Free Trade Association both the commitments and the consultations go deeper still. A decent respect for the opinions of mankind now seems to require a willingness on the part of sovereigns to expose many critical national economic policies to the collective scrutiny of a jury of peers.

To be sure, the millennium is still far distant. Nations still take it for granted that "the vital interests" of any sovereign, as the sovereign perceives them, will take precedence over any international obligation. The fifty or sixty new countries that have erupted out of their colonial status into national independence over the past twenty years especially treasure their sovereign rights to independent action. Still, as far as the advanced countries are concerned, the generalization holds: the pattern of coördination, consultation and commitment has evolved to such a point that freedom of economic action on the part of those nations is materially qualified.

How far will this trend go? As one looks back at the history of international economic relations, there is some basis for the view that the trend has been with us for a long time, pushed almost inexorably by advances in the technology of transport and communication, from the ocean- going windjammer to the airborne jet. But history suggests also that the responses of nations to the near-inexorable pressures for increased contact have been punctuated at times by subtle resistance or savage reaction, enough to throw the process back on its heels for protracted periods. All the elements of both the integrative process and the resistant counter- reaction are present today.


The persistence of man in reaching out beyond his national boundaries to exploit the economic opportunities in other lands is amply documented by history, from the Phoenicians' investments in the tin mines of Cornwall to Fiat's commitments in the Soviet Union. For many decades before World War I, international economic ties were critical to the economies that today are thought of as "advanced." Migration was high; capital was flowing across international boundaries at impressive rates; and there were considerable movements of goods among these countries.

From World War I to World War II, the technology of international transportation and communication steadily advanced. But with the characteristic perverseness that punctuates the history of human institutions, the advanced nations demonstrated that they were not the passive pawns of technological change and were quite capable of resisting the implications of such change for a decade or two. While world production went up something like 40 percent in the interwar period, nations managed to suppress the growth of world trade so that it increased by only half the production rate. International investment also was restricted; after an ebullient period of growth in the 1920s, the flow of investment was curbed and reversed in the 1930s.

In general, the interwar period was an era of early Keynesian experimentation, an interval in which many nations turned inward to learn if a proper mix of autarkic national policies could generate full employment and reasonable rates of growth. As part of the disposition for each nation to try to fend for itself, there was a rash of competitive devaluations and export subsidies, coupled with national policies aimed at propping up internal demand and floating national economies off the shoals. To implement these policies, it was necessary for governments to restrict trade and control capital movements, irrespective of the integrating pressures created by the advances in transport and communication.

The restrictive initiatives of governments between the two great wars were abetted by equally restrictive undertakings on the part of international business. By World War I, leading national firms in different countries had already begun to have painful encounters with one another in international markets. Part of the contact was by way of competition in international trade, especially for new products in the fields of chemicals, transportation, electrical equipment and machinery. But part of the contact took place by even more intrusive means. A few scores of U. S. enterprises invested in overseas manufacturing subsidiaries, locating them in many instances within the markets of their principal international competitors; a smaller number of European firms did the same. Somehow, as many businessmen of the era saw it, the bruising contacts between business interests from different countries had to be arrested and contained. Accordingly, wherever a few large firms or a few strong producer associations controlled national industries, the industries concerned set about creating agreements that divided world markets on national lines or shared them pro rata among the producers from different nations, thereby limiting the flow of international trade and investment.

While governments and enterprises were busily attempting to clamp down the flow of international transactions, the objective conditions for the growth of those activities perversely continued to improve. World War II accelerated the trend spectacularly. It shrank the Atlantic crossing from four days to seven hours. It turned transatlantic tourism from a rich man's indulgence into a middle-class need. It opened up the possibility for international consultations on a day-to-day basis not only between the officials of governments but also between the engineers, controllers, salesmen and strategists of private firms.

In the years immediately following World War II, before the prewar international cartels could effectively regroup, American businessmen rediscovered Europe; at the same time Europeans began to rediscover one another and the American market. This time, however, the contacts were not confined to a few hundred firms on each side of the Atlantic, but were spread over some thousands of enterprises.

The full force of the acceleration in international contacts did not emerge, however, until the early 1960s. By that time the improvements in transportation and communication had been assisted by a wholesale dismantling of governmental restrictions on trade, payments and capital movements among the countries of the advanced world. It was then that the magnitude of the explosion in the international exchange of goods, money, people and ideas really began to be evident. From 1953 to 1965 the volume of international trade in manufactured goods among the advanced countries almost tripled, outrunning the expansion of production by a very considerable margin. Symptomatic of one of the factors behind the increase was the spectacular growth in international air freight, which rose steadily by 20 percent or so per year (in ton-miles). The arrivals and departures of international travelers in North America and Europe grew about 10 percent annually. And direct investment by U. S. interests in the other advanced countries rose annually by about the same percentage.

It was not merely the quantum jump in international contacts that mattered; it was a change in the quality of those contacts as well. The development of a Eurodollar market abroad is illustrative of that qualitative change. Here is a market in which the sale of several billion dollars' worth of paper, denominated in U. S. currency, is being transacted annually between principals who have no ties of residence or nationality to the United States. Commercial banks throughout Europe use Eurodollars with aplomb, often for purely local purposes. Sometimes, for instance, these instruments are used by banks to lay off the surplus funds of their local economies, sometimes to acquire needed funds for local loans.

The quality of the interpenetration and interdependence of the advanced countries is suggested by many other indices, some quite subtle in character. Young Europeans feel detached from the concept of the nation- state: "We are all German Jews," chorused the French student militants as they marched on the National Assembly. There is a willingness to place on the agenda of the OECD and other international organizations such sensitive domestic issues as the monetary and fiscal policies of member governments. And there is a proliferation of private organizations, such as the multinational enterprises, with structures that take only casual account of the way in which sovereign states have drawn their national boundaries.


The multinational enterprise provides a striking illustration of the extent to which modern means of communication permit an integrated organization to link resources in different national economies in order to serve a common set of organizational aims. The term "multinational enterprise" is sometimes confusing and always imprecise; but what I have in mind here is simply a cluster of corporations of diverse nationality joined together by ties of common ownership and responsive to a common management strategy. That kind of definition serves well enough to characterize Ford or Nestlé, IBM or Philips.

Nothing is altogether without precedent in human institution-building; but the multinational enterprise, as I use the term here, comes very close to lacking a relevant precedent.

It was not until the latter part of the nineteenth century that nations began to allow businessmen, as a routine matter of right, to create corporations without limit of life or size of function. And it has only been six or seven decades since most jurisdictions permitted corporations to own other corporations. Because businessmen were not slow to exercise their new prerogatives, it rapidly became commonplace to find clusters of corporations linked together by a common parent, sharing a common pool of resources, and adhering to a common strategy.

Already before World War I there were a few international clusters of corporations containing entities of diverse nationalities within a common organizational structure. Two dozen oil and mining companies, several scores of manufacturing companies and a few banks and insurance companies made up most of the list. Not all of these, however, pretended to administer their far-flung subsidiaries in accordance with a common strategy. As long as the time-cost of face-to-face consultation among corporate affiliates in different countries was so high, there was neither much need nor much opportunity to develop a tight, continuous and integral strategy among them. Accordingly, the subsidiaries remote from the parents that had created them often fell under the effective control of local strong men.

By 1950 over 400 U. S. companies had assets of $1 million or more in foreign direct investments. But even at that late date, it is doubtful that many saw their foreign investments as much more than peripheral to the corporate structure. The domestic U. S. market was still the serious business of most of these enterprises. The requirements of that market usually determined the mix and design of the firm's products, the direction of its technological curiosity and the nature of its preferred production process. The dollar was thought of as the riskless medium of exchange, while all other currencies were thought of as involving special risk. The Americans in the enterprise were the "natives" of the microcosm, while others in the enterprise were the "foreigners."

In the late 1950s there were major signs of change, and in the ten years that followed the change went very deep. Two tendencies in particular became evident. One strong tendency, especially apparent in the corporate clusters headed by U. S. parents, was toward the reorganization of the control and command mechanism. The "international vice president" or his equivalent, brought into being by the first burst of overseas interest, is rapidly being eliminated. This change is not a sign of the downgrading of the organization's interest in foreign markets, but the very opposite. It is a sign of the elevation and absorption of the business done "abroad" into the mainstream of corporate strategy. In some cases it is more; it is the beginning of the obliteration of the invidious distinction inside the corporation between "home business" and "foreign business." It is the emergence of the strategic view that business should find the best markets, employ the best technology, finance through the best channels, irrespective of geography. It would be pushing history more than a little to say that the U. S. parent firms of multinational enterprises have reached the point at which their affinity to the dollar is no greater than to the franc, or that their identification with Italian markets is as close as with American, or even that their executive recruiting system is as partial to Bavarians as to Hoosiers. But that is the direction of the movement.

The second visible tendency in the structure of U. S. parent firms, closely related to the first, has been the in-gathering of foreign subsidiaries, wherever they may be, under the discipline and framework of a common global strategy and a common global control. The headquarters planning of many of these enterprises is more "global" today than it has ever been. It is capable of scanning the world for sales opportunities or production sites or capital supplies or technical skills with greater ease and sophistication than ten years ago. International procurement, cross-hauling and distribution are becoming a commonplace.

One ought not draw the inference from this description that the corporate officers of the subsidiaries are mere puppets of the center, yanked about by computers operating from a distant common post. Many have the discretion to tailor the commands from the center to their local needs. But their conditioning and their objectives are designed to contribute to a common organizational strategy of some sort; otherwise there would be no reason for the existence of the multinational enterprise.

In appraising the possibilities of a reaction to the trend, one has to be aware that the nation-state has sometimes felt threatened by the trend in rather sensitive areas of its existence. So far, multinational enterprises have been concentrated largely in a few industries-in oil and mining, drugs and chemicals, machinery, transportation equipment, and food and tobacco. A few of these industries, as it happens, embrace national activities in which nation-states feel a special vulnerability and insecurity; some of these industries, for instance, relate to the national defense or to irreplaceable national resources or to technological leadership.

To add to the tension, nation-states have come to give credence to some of the more uninhibited projections of the future which picture the multinational enterprise as the overwhelmingly dominant vehicle of the world's business. This kind of projection, one ought to note, is not based on very solid evidence. On the contrary, various studies indicate that with every passing decade, as the world's markets grow, the basic standardized industries, such as aluminum, steel and oil, contain a growing number of firms, not a declining number. More generally, as the technology of any line becomes well and widely known and as the markets for an established product enlarge, additional producers find the barriers to entry less formidable and manage to gain a foothold. It is not foreordained, therefore, that mankind will be swallowed up by the International Colossus Corporation. None the less, that fear exists.

Still another source of the tension created by multinational enterprises arises out of the fact that about four out of five such enterprises are headed by U. S. parents, and that the activity of these enterprises is usually thought of by other nations as an extension of the American hegemony. The notion that the General Motors' subsidiary in France in some sense represents an extension of U. S. economic domination to the soil of France may seem a trifle farfetched to most Americans. The interests of General Motors and those of the United States are usually carefully differentiated and sometimes sharply distinguished by the American political process. To Europeans, however, the distinction is not readily evident.

Basing their reaction on an amalgam of fact, fear and fancy, therefore, many governments view the multinational enterprise with a sense of acute discomfort. Few governments would be able to say precisely how and when they expect the global interests of the enterprise to conflict with the national interests of the economy; many of the illustrations that are used to document the fear are patently exceptional or farfetched. But as long as the multinational enterprise has the power, difficult or improbable though its use may sometimes be, to dry up technology or export technicians or drain off capital or reduce production or shift profits or alter prices or allocate export markets, there is a latent or active tension associated with its presence. As long as they are predominantly headed by U. S. firms, there is also a fear that they may be the instruments of U. S. policy. For some governments the tension can be tolerated perfectly well, but for others the sense of loss of control has been much more difficult to abide.


Although it is unlikely that the business of the advanced world will be dominated by a few large firms, it is more than probable that the economic links between the national economies of the advanced world will become even deeper and more intimate. The increasing intimacy of these ties presents challenges of a new order to the individual nation-state.

Picture the economy of any of the advanced countries of North America or Europe as I have sketched it. It is an economy that draws a considerable part of its technology from outside its boundaries, even while it exports a continuous flow of information to others; it relies upon the plants of other nations to provide a flow of critical products, while relying also upon their markets to absorb substantial proportions of the products it generates; it draws on the savings of nationals in other countries for some purposes, while exporting quantities of its own savings to satisfy the needs of others; it offers sanctuary to enterprises which frame their strategy in global terms, while expecting some of its own nationals to establish themselves in other countries in pursuit of a global strategy.

One cannot easily trace out all the consequences of this pattern of interpenetration. Some of those consequences, however, are reasonably clear. When the rediscount rate is hiked in New York, the cost of money rises in Brussels; when the United States runs a large budgetary deficit, inflationary pressures build up in Europe; more generally, when Italy has an earthquake, dishes rattle in Holland.

From the point of view of national governments, such a degree of openness on the part of national economies is disconcerting enough. Whatever happens in any economy becomes the pressing business of all the others: a general strike in France; a fall of government in Britain. Regardless of the complex political jockeying that may be going on at a moment of economic crisis, there are compelling pressures on each country to help douse the other's fires. The French disdain of British economic management before their own May fiasco did not altogether exempt them from the need to assist the pound sterling in crisis. The wry American satisfaction at de Gaulle's discomfiture did not permit the U. S. Government to disregard the need to support the franc.

The interdependence of the advanced nations has made them especially vulnerable to the consequences when one of them decides to place a block in the system. When the United States began imposing restrictions on the export of its capital, the Government of Canada felt threatened. The remedy for Canada's problems was in some sense even more disconcerting for the nation-state concept than the original threat had been; in order to continue receiving the necessary flow of capital from the United States, Canada undertook to restrain the reëxport of capital to third countries.

Those same United States restrictions led to largely unanticipated consequences for European capital markets. The subsidiaries of U. S. enterprises, eager to continue building their European business, searched the European economies for idle cash with which to finance their expansion. To help them in the search, American investment bankers made complex partnerships with European financial interests. Coupling American mass selling expertise with European savoir faire, these transatlantic syndicates sold some billions of dollars of bonds on the European market, thus changing rather dramatically both the channels and the instruments to which European savings were being drawn.

There is still another implication of the close ties among the economies of the advanced nations, one which in the end may prove the most disconcerting of all. A considerable part of the international flow of money, goods and services among these economies can no longer be thought of as arm's-length transactions. Many of these transactions take place between the sister affiliates of multinational entities. For instance, close to one-third of U. S. exports of nonmilitary manufactured goods, about $6 billion annually, is shipped to the overseas affiliates of U. S. parent firms, while over $5 billion are returned annually to the United States by such affiliates in the form of dividends, interest and royalties.

Apart from the international transactions that take place under the mantle of multinational enterprise, there are also the transactions that take place among the members of more informal international alliances. For instance, the commercial banking and investment banking systems of the advanced countries are now so intimately intertwined that it would be distorting reality to think of many of their transactions as representing arm's-length exchanges.

When international transactions are effected between parties whose relationships are long-term and organic in character, the regulatory capabilities of an intervening state inevitably decline. As a result, any state which senses an inadequacy in its capacity to impose effective restrictions at the border has ample reason for harboring that feeling. For brief periods of time, perhaps, regulatory controls may have a real impact; for longer periods, the illusion of such impact may persist simply because the specific channel that had been blocked by a particular set of controls was responding in line with governmental expectations. But given the complexity of multinational institutions and the presence of so many alternative channels for the legitimate international movement of funds and other resources, the regulating sovereign seems increasingly at a disadvantage.


The advanced world, carried ebulliently on the crest of a technological revolution in transportation and communication, has absentmindedly set up a virile system of international institutions and relationships that sit alongside the system of nation-states. The system of nation-states has its built-in machinery of political process and public accountability, while the international system wields its power and garners its support by less well-defined means.

In part, the two systems are complementary; in part they are at odds. The international system, when operating benignly, stands for all the good things that can be achieved by open boundaries: more trade, more capital flows, more movement of ideas and people, more growth. The system of nation- states, at its best, stands for all the good things that national policy can hope to provide: more economic security, more social equality, more identification and a sense of belonging. An economic determinist, if asked to project the outcome of the clash between the systems, would probably lean toward the assumption that the international order will prevail. The shrinkage of international distances will continue; the flow of international ideas will accelerate; the opportunities and the requirements of large-scale human endeavor will increase.

But such a prediction, if it were made, would be far too facile, especially for the three or four decades ahead that represent the planning horizon of most of us. There is a stubborn life and purpose in the system of nation- states, and there is a tenacious capacity on the part of mankind indefinitely to disregard the seemingly inevitable. It is perfectly possible, therefore, to picture a sequence of events in which the increasing openness of national boundaries leads to a reaction of disconcerting force. Restrictions on the flow of capital, goods and people could conceivably be the first response to the difficulties and uncertainties that have been generated by the relatively open boundaries of the past decade or two. In classic Hegelian fashion the world may experience a period of revulsion from the international order before it is prepared to move on to a new international synthesis.

Some kinds of problems are less likely to touch off a spasm of revulsion and withdrawal than are others. I would worry only a little, for instance, about the problems that arise over the conflicting jurisdictional reach of nation-states, such as the efforts of one nation to influence the actions of the nationals of another. Conflicts of this sort, which appear from time to time in fields such as antitrust or trading with the enemy or securities regulation, can be handled reasonably well as nations grow more sensitive to the problem. A tolerable state of affairs can be created partly by the nation-states' application of self-imposed constraints and partly by their negotiation of common standards.

There are some problems, however, whose solution is not amenable to modest measures of that sort. Some demand consciously coördinated action among sovereigns on issues that are fairly sensitive in terms of domestic politics. The balance-of-payments issue, for instance, when it involves agreements among governments to create Special Drawing Rights (SDRs) or "paper gold," begins to move into sensitive territory. The existence of agreements of this sort may go unnoticed by the politicians for a period of time, provided they are sufficiently technical and obscure. But when they begin to demand coördinated economic action tending to restrict the freedom of states to frame independent domestic policies, one can expect to see the beginnings of major difficulty. When this interrelation becomes widely apparent, coördinated action may be resisted by all the principal actors involved: by the governments which would have to share their power with others; and by the enterprises whose transactions would be the subject of the coördinated governmental control.

If governments were obliged to coördinate their monetary, fiscal and other economic policies on any intimate and continuous basis, the consequences would presumably affect all business, whether oriented to the domestic market or to the international market. But multinational enterprises would have an especially heavy stake in such a trend. In some respects, the trend could increase the freedom of multinational enterprises; but the opposite may also be true. Intergovernmental coördination might, for instance, reduce the number of situations in which the rights afforded by some governments were thwarted by the regulations imposed by others. On the other hand, since there are some things that governments can do together which they cannot do separately, intergovernmental coördination could have the effect of increasing the effectiveness of regulations by the public sector in many fields, including taxation and monetary regulation.

In general, multinational enterprises as a group have exhibited no great enthusiasm for a coördinated approach by sovereign states to the problems that the states addressed individually in the past. Such a reserved reaction is readily understandable. The largest and most seasoned of such enterprises can point with justifiable pride to the fact that, despite the pitfalls and dangers that uncoördinated sovereign action may theoretically offer to multinational enterprises, few of them have fallen victim to the dangers of six or seven decades of war, depression and tension. As far as such enterprises are concerned, a heavy presumption exists that they would continue to survive even in an uncoördinated world.

Instead of subjecting themselves to the uncertain consequences of multinational coördination, most such enterprises are quite ready to commit themselves to a "code of good behavior" toward the economies in which their affiliates are established. These enterprises are aware that their "conduct" has generally been quite reasonable and acceptable when viewed by any normal standards. Accordingly, most of them have been willing to commit themselves on paper to the continuation of such conduct. They are usually prepared to agree to train local nationals, observe local customs, obey local laws and perform all the other acts expected of decent local citizens. But "conduct"-at least "conduct" defined in these terms-is not very relevant to the underlying issue. With varying degrees of intensity, nation-states have a sense that the locus of their power is challenged by an open international system in general and by multinational enterprises in particular. What some are searching for is the means of checking their sense of ebbing control and of retaining a tolerable amount of that power.

It may be that, in the end, sovereign states will learn to live with a decline in their perceived economic power. But one marvels at the tenacity with which man seeks to retain a sense of differentiation and identity, a feeling of control, even when the apparent cost of the identity and the control seems out of all proportion to its value. One cannot disregard the possibility that one of the advanced countries, imperiled by a sense of ebbing control and declining identity, may strike out blindly against the others.

The role of statesmen in a situation of this kind is to find the means for accommodating the tension before it grows intolerable. In this case the accommodation will be painful and complex. On the part of governments, it will involve agreements that demand the conscious sharing of prerogatives that once were independently exercised. On the part of business, it may demand a tolerance for more coördinated and more effective measures of public control. Whether the advanced world has the resiliency and farsightedness to take the needed steps remains an open question.

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