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The Economic Content of National Security Policy

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In almost any debate about American foreign and defense policies, there is one element upon which both protagonists can usually agree-that economic considerations play a major role in shaping the substance of those policies. Indeed, the economics of national security policy makes strange bedfellows. The radical New Left is convinced that a conspiracy of vested interests shapes American foreign policy toward the protection of U.S. investments abroad and the economic exploitation of other peoples. But when pressed to articulate a rationale for an internationalist and interventionist approach to foreign policy, eminently conservative Establishment types also advance arguments of economic self-interest, citing the need to preserve American access to vital raw materials abroad and warning of the blow to general living standards which would occur should America become isolated from the mainstream of world commerce.[i]

On many other economic matters, as they affect national security policy, the Left and the Right find common ground. Both would agree that economic strength contributes to military power. A recent economics text with a New Left orientation argues, for example, that the Keynesian economics of the postwar period served to strengthen the military-industrial complex and the interventionist policies of the United States.[ii] And as the recent presidential campaign demonstrated, both the Republican and Communist parties agree that large military spending is needed in the United States to maintain full employment. The GOP, for example, prominently featured a campaign document listing by state and locality the employment reductions which would ensue from Senator McGovern's defense cutback proposals. In an unusual show of amity between a Defense Secretary and a Budget Director, Messrs. Laird and Weinberger both gave major speeches stressing the unemployment consequences of reduced military budgets as though defense spending created jobs in a way which other spending could not.

I shall argue that most of the popular views about the interconnections between economics and national security are either wrong or misleading. Our military strength does not depend, to any significant degree, on the size or rate of growth in our economy, at least within the range of variation which is likely to occur in the foreseeable future. Conversely, the level and the rate of growth of national income and employment are in no fundamental way dependent on the maintenance of heavy military spending. Moreover, the national security of the United States depends in no important way on securing access to raw materials, markets, or sea lanes abroad, and securing or protecting such access cannot reasonably be used as the rationale for a foreign policy, a set of commitments, or an element in defense strategy.

Yet despite all of this, I shall also argue that the national security of the United States will increasingly depend upon the way in which we conduct our economic relationships with other nations; that, in turn, the state of our domestic economy will strongly influence how those relationships are handled; and that through this chain of influence economics and national security policy are strongly linked.


Does our national security depend upon maintaining a healthy rate of growth in our economy-is it dependent on our economic strength? Surprisingly, perhaps, the answer is, "No." Obviously, it would be impossible for us to maintain a large defense budget if we had the GNP of Ecuador or Spain or Iran. But within the range of likely possibilities over the next ten years, our economic strength will not really make much difference in our capability to sustain whatever defense establishment we deem warranted. At the present time our $80 billion defense budget is approximately seven percent of GNP. In the Soviet Union the defense budget takes up perhaps ten percent of a smaller GNP. The faster the GNP grows, the smaller will be the fraction of it consumed by a given defense budget. For example, ten years from now, an $80 billion defense budget will be six percent of GNP if the economy grows by two percent per year and five percent if economic growth proceeds at a four-percent annual rate. A larger proportion of our national income would have to be taken in taxes to support the defense budget in a slowly growing economy. But these differences are modest, and surely not critical. Within those ranges we can clearly afford the appropriate defense burden at either level of GNP.

Securing national economic prosperity and healthy growth are exceedingly important objectives in their own right. But they ought to be pursued for their own sake, not because they are direct determinants of our ability to support the defense establishment.

In a more subtle way, there are connections between economic strength and national security. Rapid technological advance, a sizable population of research-oriented scientists and engineers and large numbers of technologically advanced business firms help to generate rapid economic growth and at the same time provide the research capability essential for defense in the modern world. But it is the research and technology rather than the economic growth itself which contributes to military capability.

To turn the question around: Does our economy need a large defense budget in order to maintain prosperity? We have been told time and again in the past three years that the high unemployment rates of those years were the price we had to pay for withdrawing from Vietnam and for turning from war to peace. This is nonsense. Full employment and prosperity do not depend upon large budget outlays for defense. There is no law of nature or of economics which says that men and women producing airplanes must produce those airplanes and nothing else; that returning Vietnam veterans can do nothing else but soldier. Of course, if defense procurement is reduced, the demand for other goods and services-public and private-must be correspondingly increased to provide civilian employment for those formerly producing weapons. People are employed only if there is a market for the goods and services they produce. But we have monetary and fiscal instruments which can stimulate demand for nondefense goods, thereby increasing the demand for labor in an amount sufficient to absorb those laid off in defense establishments. Necessarily there are transition problems. Specific reconversion programs are required for people with specialized skills and for localities which have in the past depended heavily on defense contracts. But cutbacks in defense procurement and reductions in the size of the armed forces are no excuse for an overall increase in unemployment. We can have full employment with any size defense budget, be it $10 billion or $100 billion. The Comintern was wrong-making weapons is not essential to the prosperity of a free-enterprise economy. The size of the defense budget can and should be determined on the basis of defense needs, not as a weapons-oriented WPA for putting people to work. How rapidly we change the defense budget up or down does indeed affect the size of the transition problem. But we should see the problem precisely as a transition problem which requires advance planning and not as a rationalization for perpetually maintaining an excessively large defense budget.


To what extent does our national security depend upon protecting access to overseas sources of raw materials and ensuring the safety of American investments abroad? In essence, the answer is simple, "Hardly at all." One of the most pervasive myths about national security is that the United States is critically dependent on the steady supply of a number of vital materials, and that a slowdown or cessation in their supply would be disastrous for the economy and crippling to our military capability. This is simply not true.

In the first place, unlike many other nations, we import only a relatively small proportion of our needs. In 1971 merchandise imports were approximately four percent of GNP. In the second place, any modern industrial economy, and particularly the United States, is incredibly quick to adapt to shortages of particular materials. Substitutes are rapidly discovered, synthetics developed, and ways found to minimize the use of short-supply items. A reading of the Strategic Bombing Survey, which assessed the effect of bombing in Germany during World War II, demonstrates how adaptable was the German economy-with a technology and flexibility far below what we possess today. After more than two years of heavy bombing and the reduction or elimination of many overseas materials, industrial production in Germany was 40 percent higher in 1944 than at the beginning of the war. Measures to use substitutes or to ration scarce materials were far more effective than anyone might have believed before the war.[iii] And the indigenous resources and technological capacity for devising substitutes are enormously greater in the United States of the 1970s than in the Germany of the 1940s.

There is the problem of the initial shock should the United States be suddenly cut off from access to a particular material or fuel supply. But in the long run, the economy would adapt amazingly well. If imports to the United States were cut off and our overseas investments expropriated, the U.S. economy would not collapse. Our living standards would suffer, but not by a large amount. Nor would our military capabilities be substantially impaired. This is not to suggest that we can, therefore, blithely go protectionist. Far from it. But it is important to get clear that our international interests cannot legitimately be defined, or our defense budget justified, in terms of preserving access to Malaysian rubber or Chilean copper. They are not worth the tens of billions of dollars a year we spend on conventional forces nor are they worth the risk of war.

Middle Eastern oil deserves special mention. Until recently, about 20 percent of our oil supplies were imported, almost all from Canada and Venezuela. In the last several years, however, imports have accounted for a rising percentage of our supplies, as domestic production has leveled off while demand for petroleum products has expanded rapidly. In 1972 imports accounted for almost 30 percent of supplies, and the percentage will continue to grow. Venezuelan supplies have limited capabilities of expansion, and while Canadian supplies can be increased they will fall far short of meeting growing import requirements. By 1980, from one-third to one-half of U.S. crude oil requirements will be coming from the Middle East and North Africa, depending on whose projections one believes. And this will be true even if some two to three million barrels a day are available from recent Alaskan discoveries. Europe and Japan have for years been almost completely dependent on imported oil, the bulk of which comes from the Middle East and North Africa. Recent oil and gas discoveries in the North Sea promise to be important sources of supply, but not enough to lessen fundamentally the importance of Middle Eastern and North African oil to Europe. What does the dependence on oil supplies from troubled and distant parts of the world imply for our national security policy? Only a few observations on this problem are possible within the scope of this article.

One must necessarily consider briefly the contingencies of nuclear or large- scale conventional war. The first-nuclear war on any scale whatever-would surely make irrelevant any issue of crude oil supply, since refinery and transportation capacity would be much more drastically affected. As for large-scale conventional war, the situation of the United States would be quite different from that of Europe or Japan. Calculations by the President's Task Force on Oil Import Control, in 1970, demonstrate that direct American military requirements would rise only to levels that could be met by augmenting supplies from the Western Hemisphere through emergency measures, and by civilian rationing.[iv] On the other hand, there is no question that in an extended conventional conflict our European and Japanese allies would be severely hurt by cessation of oil imports from areas that would probably be cut off. Even if it could be assumed, in a case of war in Europe, that supplies would still come from North Africa, Nigeria and Indonesia, the denial of Middle East oil alone would be a very severe blow to Europe.

On a cold, hard view, however, it is very difficult to imagine an extended conventional war with the Soviets during which virtually all of industrial Europe remained under NATO control. To the extent that conventional war raises oil-related security problems for our European allies, these would appear principally a matter of economic planning-oil stockpile policy, tanker availability, the standby capability of switching from oil to coal in firing power plants, and the like.

The more relevant security problems arise from the possibility of a peacetime Middle Eastern oil embargo imposed for political reasons under circumstances different in nature from those of a long-continued war. In the first place, an effective embargo would require the coöperation of virtually all major producing countries. In most Middle Eastern countries oil production can be expanded fairly quickly and at little increase in cost. The penalties for one country trying to impose its own embargo are quite high. In 1951, when Iran ceased exporting, other countries expanded their market penetration. Only recently did Iran fully recover her share of the market.[v] This is not to say that joint action is impossible. An oil embargo by the combination of Saudi Arabia, Kuwait, Libya, Iran and the oil sheikhdoms would be sufficient to cause a major impact on the European economy. But even if they acted jointly, such action would be exceedingly expensive to the producing countries themselves. By the late 1960s revenues from oil production accounted for 55 percent of the Saudi Arabian GNP, for 60 percent in Libya, and for far over 60 percent in Kuwait and the oil sheikhdoms. Oil-financed imports are a massive component of the economies of these nations and will grow in importance. The oil-exporting countries could increase their short-run staying power by accumulating large foreign- exchange reserves in advance. But foreign-exchange reserves would be useful to the Middle Eastern oil countries in such a situation precisely as a means of continuing to purchase imports from the United States, Europe and Japan during a period in which oil exports were embargoed to some of these nations as part of a political move. And in this context the increasingly heavy dependence of the Middle Eastern economies on imports is a fact which should not be ignored. If the consuming countries would develop joint policies to deal with the problem they would find themselves in possession of substantial economic weapons of their own to minimize the likelihood of a political embargo occurring. For those who worry about the possibility of the Soviet Union instigating an embargo on Middle Eastern oil exports to Europe and the United States, it should be noted that this would be an exceedingly expensive policy for the Soviets. They would have somehow to underwrite the cessation of oil revenues equal to over $10 billion a year in 1975 and at least $25 billion a year by 1980.

From a national security standpoint it is essential that the United States avoid the temptation to adopt some sort of interventionist military policy as a means of dealing with the problem. An Indian Ocean navy, taking up the British colonial role "East of Suez," and similar approaches are likely to accomplish nothing but mischief. If history is any guide, such policies cannot guarantee governments "friendly" to the United States-indeed, interventionism is likely to work in the opposite direction, as a red flag to nationalist groups. Whatever the problem of the United States and its European allies in the case of all-out conventional war with the Soviets, continuing interventionism prior to that conflict will be equally as likely to decrease as to increase the probability of maintaining wartime supplies. Against the contingency of a short-term political embargo, prior interventionist policies would be even more irrelevant.

The main problem with Middle Eastern oil is likely to be not political, but economic. A discussion of the economics of international oil policy is not the point of this article. The only relevant point, here, is that recent sharp increases in the price of oil are not a reflection of a physical shortage of petroleum reserves. Middle Eastern and North African reserves are huge. They can be extracted at a marginal production cost of ten to 15 cents per barrel. By joint action the oil-producing countries have been able to levy very large increases in taxes on oil production, so that the f.o.b. price of oil in the Persian Gulf is now about $2.00 per barrel, the bulk of which flows into the treasuries of the oil countries. Given the comparative efficiencies of oil versus other fossil fuels and nuclear power, still further large price increases would be possible, without causing a major decline in the consumption of petroleum products. For the sake of their own consumers, importing countries do have a major stake in devising policies to minimize future price increases. But, for the reasons noted above, military measures form no part of the set of possible policies which might be undertaken to deal with the economic problem.

In the end, therefore, the problem of Middle Eastern oil dependency is not one which calls for a military or interventionist solution. Oil provides no exception to the basic propositions stated above, that U.S. national security interests and the rationale for the size and structure of U.S. military forces cannot be defined in terms of protecting access to markets or raw material sources abroad.


But while our national security interests cannot be defined in terms of protecting access to raw materials or ensuring our foreign investments, it is nevertheless true that the conduct of our economic relationships with other nations-and particularly with the major industrial nations of the world-is an essential element of national security policy. To understand the true relationship between the two requires a careful look at the nature of American national security in the world of today.

The concept of national security does not lend itself to neat and precise formulation. It deals with a wide variety of risks about whose probabilities we have little knowledge and of contingencies whose nature we can only dimly perceive. Yet, to deal with the question of how domestic and international economic relationships affect national security, it is impossible to avoid at least some discussion of what we mean by the term itself.

Clearly, to most people at least, our national security does not consist simply in providing the military forces needed to deter or to defeat a direct threat to the territorial integrity of the United States and to preserve it against physical domination by another power. A calculation of the armed forces directly needed to meet this objective would reveal the possibility of slashing our defense budget very sharply indeed. Of the $83 billion defense budget in fiscal 1973, only $19 billion goes for deterrence of strategic nuclear attack. The remaining $64 billion is devoted to conventional forces-ground, naval and tactical air. But against the unlikely contingency of a conventional attack on our own shores by currently hostile powers we do not need 16 army and marine divisions, 21 tactical air force wings, 16 carrier task forces, and a massive sea-lift, amphibious landing, and antisubmarine warfare capability. Nor would we need to maintain expensive overseas installations, provide military assistance to other nations, or put up with the costs and frustrations which inevitably plague military alliances. And should an isolationist America, at some date in the future, face the combined conventional forces of many other nations, we would have ample time in which to build up the defense of our own territory. We do not need to keep large forces in being year after year against such an eventuality. The $64 billion now spent for conventional forces could probably be cut by more than half.

Yet clearly, there is a wide consensus among the American people-whatever their differences on specifics-that in some way or the other, the United States has basic national security interests which extend beyond the guarantee of our own territorial integrity. Unfortunately, from the standpoint of precision and simplicity those interests revolve principally around intangibles, uncertainties and probabilities rather than around concrete threats readily foreseeable and easily grasped.

Several facts about the postwar world-and particularly that world as it can be projected over the next ten years-themselves suggest the nature of our broader national security concerns. First, by 1980 the ability to manufacture nuclear weapons and vehicles to deliver them across national boundaries will be well within the grasp of at least ten and possibly more major nations. Second, within ten years Western Europe will have a GNP equal to our own and a population of over 300 million, and Japan a GNP exceeding $500 billion and a population of over 100 million, while both Europe and Japan will enjoy per capita incomes equal to that in the United States today. The Soviet Union with a population of almost 300 million will be producing a three-quarter-trillion-dollar GNP, while China with a much lower national income will nevertheless possess a major industrial base and a population approaching one billion people. Third, most of history teaches that there is nothing inherently stable in the relationship among world powers. Only the most naïve can assume that the preservation of peace will arise spontaneously from the goodness of men's hearts, their fear of the consequences of war, the wisdom of individual foreign offices, or the unilateral self-restraint of national leaders. In short, the potential for awesome destruction is increasing at an accelerating pace, and without a continuing and explicit effort to help preserve world order we have no warrant for believing that this potential will remain unexercised. No one, of course, can lay out particular scenarios describing the impact on the United States of a world in which the threat of chaos was continuing and immediate-there are an infinite number of such scenarios. But none of us would wish such a world on our children or want to live in the kind of society which the existence of that world would force upon us.

The core of U.S. internationalist policy, accepted even by many of those who have been the most vigorous critics of our intervention in Vietnam, rests on the concept of the United States as a guarantor of the security of Western Europe and Japan. In turn, the two chief rationales for that policy are: (1) domination of either by a hostile power would threaten U.S. security; and (2) without the U.S. guarantee, nuclear weapons would proliferate, competitive arms races could be set off, and the world would become a much more dangerous place, with the risk of major wars potentially involving the United States substantially increased. It is the central theme of this paper that acceptance of these two propositions implies some important consequences about how the United States, in the interests of national security, must conduct its international economic policies. But before proceeding to spell out those consequences, it is necessary to deal, albeit briefly, with some recent attacks on the validity of the basic propositions themselves.

The thesis that nuclear proliferation would result in a far more dangerous world, and more specifically pose a major threat to U.S. national security interests, has been forcefully challenged by Robert Tucker.[vi] While on many points Professor Tucker's analysis is very close to the positions advanced in this article-particularly his rejection of the view that economic interests require the projection of U.S. power overseas-on the consequences of nuclear proliferation his arguments are not, I believe, persuasive.

The essential point that Tucker makes is that a nuclear weapons capability can, for the first time in history, provide a nation with a relatively assured capability of deterring attack. In the balance-of-power systems of a bygone era, alliances were needed to achieve national security because the preponderance of power that any one nation needed to possess assured deterrence was unachievable with conventional weapons. According to Tucker, however:

For the state that can now destroy any other state or combination of states, [nuclear] weapons have in truth conferred what has heretofore proven unachievable-a surfeit of deterrent power. ... In other than the extreme situation, nuclear weapons confer a degree of security on their principal possessors that great powers seldom, if ever, enjoyed in the past.[vii]

Because of this surfeit of deterrent power, the loss of allies does not threaten the physical security of any nation possessing nuclear weapons. On Tucker's analysis, domination of Western Europe by the Soviet Union would not pose a physical security problem for the United States. Moreover, nuclear proliferation would, in effect, increase the probability of world peace and order by putting more nations into the position of having an unassailable deterrent against an attack on their territory.

This view is, I think, fundamentally wrong, particularly with respect to the consequences of nuclear proliferation. In the first place, the possession of strategic nuclear weapons by two major powers, such that each can destroy the other's homeland, may effectively cancel out the possibility of such weapons being used, but need not eliminate the possibility of the use of conventional weapons against each other. The risk of an outbreak of conventional war between two nuclear powers might indeed be reduced, but certainly not eliminated. The very nature of nuclear deterrence-power A cannot use nuclear weapons against B because B can retaliate devastatingly-may lead to a major war being fought without the use of strategic nuclear weapons. While the possession of nuclear weapons may reduce the likelihood of conventional war among nuclear powers, and limit the extent to which total victory can be pursued in such a war, we have as yet no warrant for believing it would lower the possibility of conventional war to zero.

Not only is it a dubious proposition that a surfeit of nuclear power would eliminate the likelihood of conventional war, it is quite probable that the proliferation of nuclear weapons would increase the danger of nuclear war. In the first place, a nation which has the capability of deploying only a modest number of strategic nuclear weapons opens itself up to the possibility of a first strike. If, in a crisis, a potential adversary thinks it has a very high probability of eliminating all of its enemy's delivery vehicles by a carefully planned attack, it may be tempted to do so.

Even more relevant is the problem of tactical, as opposed to strategic, nuclear weapons. Nuclear proliferation would involve not merely the spread of strategic "city-busting" nuclear weapons delivered over long distances, but also the widespread deployment of smaller tactical nuclear arms. The very large resource costs and technological requirements of strategic nuclear weaponry center on delivery vehicles-missiles capable of reaching an adversary's homeland. But delivery of tactical nuclear weapons can be had "on the cheap"-tactical aircraft and artillery tubes can deliver such weapons.

A complete U.S. withdrawal from Europe and Japan raises the possibility, although not the certainty, of a rapid nuclear proliferation, including the spread of tactical nuclear weaponry. Since an exchange of tactical nuclear weapons could quite easily accelerate into all-out nuclear war, one might argue that such weapons would never be used, and would simply be a part of Tucker's "surfeit of power" deterrent. But as a deterrent they offer nothing that strategic weapons do not offer except cheapness. A nation which sought to buy deterrence on the cheap, acquiring tactical nuclear weapons and neglecting conventional firepower, might be tempted-indeed forced-to use a few of those weapons to gain an advantage should war break out. Moreover, tactical nuclear aircraft that are caught on the ground are vulnerable to a surprise attack and are a tempting target for a first strike, particularly by a power which has come to rely on nuclear weapons for its deterrence.[viii]

The fact that tactical nuclear weapons are unlikely to be used without leading to escalation has not so far been a bar to their manufacture and deployment by NATO or Warsaw Pact forces. Nor can we be sure that rational calculation would be a bar to their use in a major crisis in a world of many independent nuclear powers, particularly since they offer an alluring (even if illusory) means of securing an advantage without directly invoking the immediately awesome consequences of strategic exchange. Rational calculation has been as much noted for its absence as its presence in moments of great international crisis. In the decade before World War I, countless books were written demonstrating how the terrors of modern war would inevitably bar its future occurrence-deterrence by machine-gun and conventional bombs. And the leaders of Europe had read those books. It was not unawareness of terror that let the conflict occur. After the various ultimata had ticked inexorably to their deadlines in midsummer 1914, Chancellor Bethmann-Hollweg replied to the question, "How did this all occur?" with the answer against which even the horrors of nuclear weapons are not yet proof-"Ah, if we only knew."

At best, with a proliferation of nuclear weapons, the large number of competitive military establishments would cancel each other out, still leaving the possibility of major conventional war. At worst, the spread of tactical nuclear weaponry would create a highly unstable military balance, threatening the early use and ultimate escalation of nuclear conflict in a crisis. In such a world, the danger of a major conflict involving the United States would be very much present, and the national security would be very much at risk.

Viewed from this standpoint, one of the central aims of our national policy is to participate with other major industrial nations in creating a fabric of world order that provides for the security of those nations in a way which eliminates the need for the acquisition of independent nuclear arsenals and reduces the growth of competitive military establishments.


In the postwar world to date, Western Europe and Japan have looked to the United States to provide the nuclear shield and the basic source of defensive strength against attack. The major potential adversaries against whom the defensive shield was erected have been the Soviet Union and to a lesser extent China. That aspect of our national security policies has, to date, been largely successful. Most of the major problems of the recent past have not stemmed from these arrangements but from the three major powers probing at each other in peripheral areas, and from our own misconceived attempts to apply the U.S. security guarantee to areas in the Third World where neither our security nor that of Western Europe or Japan is fundamentally at risk.

We have been so conditioned in the past 25 years to define our national security objectives solely in terms of adversary relations with the Soviet Union and China that we tend to forget the more fundamental and far wider objectives which define our role in helping to create and maintain a fabric of order among the industrial nations of the West. Now, as there is progress toward negotiations and at least some degree of détente with the two adversaries, and as we hopefully reduce excessive military commitments in Southeast Asia, there is some danger that we will pay too little attention to the long-run national security implications of our relations with Western Europe and Japan.

The arrangements with our allies and friends whereby the United States is militarily first among equals will endure only so long as they trust us to use power wisely and not to abuse it for short-term tactical gains. At the same time, rapid economic growth among the major industrial nations has made them strictly our equals in the area of world trade and monetary affairs. In the normal course of events, disputes and tensions about economic matters arise, many of which have major domestic political implications in the nations involved-agricultural prices, tariffs quotas and the like. How these disputes are handled, and particularly how the United States deals with them, inevitably has an impact on the underlying trust and confidence which others have in our behavior. If we periodically use our economic power on a unilateral basis to extract short-term economic gains, why should other nations not begin to believe that we will also do so in the political and military arena?

A set of defense arrangements under which a number of powerful nations forgo independence of action and, for many, the possession of their own nuclear capability, in return for a U.S. security guarantee, necessarily rests upon their willingness to trust in the responsible use of U.S. power. A major nation can, if it wishes, throw its weight around through unilateral actions and often gain some immediate trading advantages. For any nation this is a dangerous game, since its success depends on the good sense and restraint of its trading partners. Should they decide to retaliate, the whole world-trading system could be placed in jeopardy. But for the United States it is a doubly dangerous game, since it risks damage to the trust which others place in our role in the political and military arena, which is critical to national security arrangements.

In short, the national security objectives of the United States involve far more than our relationships with the Soviet Union and China. They have to do with our role in helping to maintain orderly and peaceful relationships among nations, each of which has the potential capability of destroying the other. And given this definition, all of our relationships with other major powers have a bearing on our national security. In particular, the economic and monetary arrangements through which we deal with them are an integral part of the complex set of relationships which make up our basic national security. From this standpoint there are several aspects of current international trade and monetary arrangements which are especially critical:

First, while foreign trade is a relatively small part of the American economy, it is much more critical to the economies of our European and Japanese allies. U.S. exports and imports are about four percent of GNP; but they amount to ten to 12 percent in France and Japan and 16 to 17 per cent in Germany and Great Britain. Living standards in Europe and Japan do depend critically on foreign trade. How we conduct our economic relations with these countries is therefore a matter of major concern to them.

The unilateral action taken by the United States in August 1971, suspending convertibility of the dollar, may well have been the only means of securing a vitally needed realignment of currency parities and of opening up the whole question of exchange rate flexibility. As a nonrecurring one-time shock to the system, such a unilateral action was probably healthy. But the simultaneous and unneeded imposition of the ten-percent surcharge, the nationalistic rhetoric in which the action was announced, and the subsequent attempts to picture the United States as a long-suffering, put- upon patsy now prepared to slash about with its economic power in order to gain trading concessions, should not become a guide as to how we should act in the future. We can and should negotiate hard about trade restrictions. But tough negotiations are not the same thing as unilateral actions. And we must-I repeat, must-be prepared to avoid seeking short-term tactical gains by unilaterally exercising the economic power which we admittedly possess by virtue of the size of the American market and the dollar's current role in the world. Over the long run, such a display of power is a sure road to unraveling the painfully built network of political and military arrangements which are the world's protection against a multiplicity of competitive and nuclear-armed military establishments.

Second, many of the truly divisive problems which threaten the international trading structure are really traceable to shortcomings of the international monetary system. In the absence of methods to make easy adjustments in exchange rates, balance-of-payments difficulties have too often been handled in various countries by trade restrictions or curtailment of domestic growth, both of which devices can threaten longer- run international political relationships. It is not just for economic reasons, therefore, that we must bend every effort to devise a world monetary system which can handle balance-of-payments difficulties. Some combination of short-term financing arrangements and methods for making small but frequent adjustments in currency parities will be vital to this end.

During the decade of the 1960s the inability to deal with persistent U.S. balance-of-payments deficits through exchange-rate adjustments led to some absurd and dangerous measures. Because of balance-of-payments problems, we put extreme pressure on our allies from time to time for offset arrangements to cover our overseas defense expenditures. Some parts of these overseas expenditures do represent outlays for the common defense. They are a real budget cost which should indeed be subject to negotiations about burden-sharing. But the foreign-exchange costs of our defense program are no different from the foreign-exchange costs of our commercial imports. If total dollar outflows persistently cannot be covered by total dollar inflows, this is a problem to be handled by exchange-rate adjustments, not by exerting pressure on our allies for defense offset arrangements. Yet, our pressure for offset agreements was so sharp it was a major factor in the downfall of the Erhard government. We have also gone to extreme lengths in trying to tie our foreign aid to American procurement. We have paid premiums of 50 percent or more on defense procurement to avoid buying from foreign sources. In all of these cases we threatened in a major or minor way the fabric of important military and political arrangements in order to cover a balance-of-payments problem. But if we can work out more suitable means for payments adjustment, many of these basically silly and dangerous games can stop.

In a very real sense, therefore, securing a workable set of monetary arrangements which makes possible relatively smooth adjustments in payment imbalances would be a major contribution to our national security. It would remove the need for all sorts of unproductive frictions which wear away the framework of our political and military relationships.

It is in this connection that economic growth in the United States is important for national security. Stable prosperity in America does tend to help preserve prosperity for our trading partners (although our prosperity is by no means the only factor affecting their economies). Equally if not more important, protectionist policies are less likely to gain widespread political support in a fully employed and prosperous economy. It is hard to preach the advantages of international specialization and free trade to the shoe worker or electronics worker whose job has been displaced by imports, when there are no other jobs to be found. In fact, the employment adjustment from imports is, in the aggregate, far smaller than the continuing adjustments created by technological change or shifting consumer tastes. For all sorts of reasons, millions of workers in the United States are laid off each year. In 1970, for example, layoffs amounted to 20 percent of the manufacturing work force. Competition from imports was responsible for only a small fraction of the layoffs. The general economic recession, the shifting fortunes of particular business firms, and the introduction of labor-saving machinery, along with many other factors were responsible. But it is far easier to identify and legislatively restrict competition from "low-paid foreign textile workers" than it is to stop computers from replacing clerical help, to prohibit Mrs. Jones from switching from wool to nylon carpeting, or to preserve the sales of inefficient business firms.

When overall economic prosperity exists, most employers are looking for workers. Jobs are plentiful. Import competition is, both really and psychologically, far less of a threat to individual workers. Those who are laid off have a much better chance of finding a new job quickly at decent pay. Moreover, during periods of low unemployment and vigorous prosperity, import competition can more easily be seen in its positive role of limiting inflation, rather than its negative role of "destroying" jobs. It is during economic recessions that imports take the blame for a host of other problems. And it is then that protectionist measures are most loudly demanded. While it is impossible to be very dogmatic about how important prosperity among advanced industrial nations is for the maintenance of peace and order, it surely plays some role in minimizing the beggar-my- neighbor policies which have so often led to political and military confrontations.


In the final analysis, the harsh fact of nuclear weapons dominates our long- run national security interests. We want to avoid a world in which a large number of competitive military powers possess the capability not only of destroying each other but of pulling down civilization, and us along with it. For the first time in history, a number of nations which could, economically and technologically, equip themselves with vast numbers of terribly destructive weapons, must voluntarily forgo those weapons even though a few other nations have them in superabundance. Leaving aside the modest nuclear arsenals of England and France, the stability of this arrangement fundamentally implies for Europe and Japan a major act of faith in the political and military leadership of the United States, not merely vis-à-vis the Soviet Union and China but with respect to themselves. Special responsibilities are thereby imposed upon us. One of these responsibilities is the obligation to conduct our international economic relationships in a way which gives other nations confidence that the United States can be trusted not to abuse the power it possesses. And another is the obligation to pursue vigorously the creation of means to adjust balance- of-payments difficulties, so that what are essentially financial and currency-value problems do not turn into political disputes threatening world order.

Unevenly, and with occasional setbacks, the institutions of an orderly world are being strengthened. In Western Europe, unity is growing and the fears of Soviet domination are receding. The painstaking efforts to create a world different from that which existed between 1870 and 1939, despite the massive residue of hostility and the emergence of the cold war, are beginning to pay off. But Sedan, Verdun, Dunkirk and Stalingrad still loom large in national memories, and Soviet intervention in Hungary and Czechoslovakia happened yesterday by history's clock.

In Asia, Japan and China, and North and South Korea, have begun the process of establishing normal relationships-but they have only taken the first steps and the journey will be a long one. It is still too early to conclude that the special role of the United States in guaranteeing the security of Western Europe and Japan is obsolete and would be replaced by mutual trust and confidence rather than by hostile armed camps. So long as that special role is needed, the conduct of international economic relations-always important in determining how well nations live with one another-will retain a special significance for the national security objectives of the United States.

[i] Indeed, the "conservative" arguments are rendered more in the true spirit of Lenin's analysis of imperialism than are those of the New Left. It was Lenin who argued that the working class of rich Western nations, as well as the capitalists, shared in the gains of imperialism.

[ii] Daniel R. Fusfeld, Economics, Lexington (Mass.): Lexington Books, 1972, p. 6.

[iii] Edward S. Mason, "American Security and Access to Raw Materials," World Politics, January 1949, p. 153 (cited in Mancur Olson, Jr., "American Materials Policy and the 'Physiocratic Fallacy,'" Orbis, January 1963, p. 678).

[iv] The Oil Import Question, U.S. Cabinet Task Force on Oil Import Control, Washington: G.P.O., February 1970, p. 36.

[v] Ibid., footnote 28, p. 34.

[vi] See Robert W. Tucker, A New Isolationism: Threat or Promise?, New York: Universe Books, 1972, especially Chapter III.

[vii] Ibid., p. 47.

[viii] Indeed, such a dangerous situation now exists between NATO and the Warsaw Pact. Both sides have very large numbers of tactical nuclear weapons whose delivery systems are highly vulnerable to a first strike. Tactical nuclear forces in Europe rank high as a subject for arms-limitation negotiations.

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