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International Economics and National Security

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The list of international economic problems that will trouble policymakers in the 1990s is long and diverse. Among the most important issues for U.S. national security are three that pertain primarily to relations among the developed countries: encouraging stability and reform in the Soviet Union, maintaining a cooperative U.S.-Japanese relationship, and avoiding vulnerabilities from the globalization of America's defense industrial base. Three more major issues facing the United States have a North-South dimension: reducing dependence on oil from the Persian Gulf, moderating the impact on the Third World of the prolonged debt crisis, and limiting the damage from the narcotics trade.

Clearly this list is not exhaustive; it could be lengthened without difficulty. Several issues that deserve emphasis in purely economic terms-from the outcome of the multilateral trade negotiations, to the competitiveness of American industry, to the future of the U.S. budget deficit-weave their way in and out of the entire list.

In the six primary areas examined here, U.S. national security policy in the 1990s faces a challenge of a different order than that confronted during the Cold War period: not clear and present dangers requiring great sacrifices, but dim and distant dangers calling for small sacrifices. The array of threats to American well-being on today's horizon is no less real than in earlier periods and in some cases may turn out to be even more troublesome. But meeting these threats will require a new kind of leadership: the management of the mundane.

Before turning to the broader theme of economic policy and the evolving strategic concerns of the United States, it is important to look closely at each issue on its own terms.

II

Does the United States have an interest in joining with other countries to provide large-scale financial support to the Soviet Union as that country struggles to transform its economy?

The deterioration of the economy in the Soviet Union has been so precipitous that it has become fashionable for experts to vie with one another in exposing new weaknesses. In April 1990 the Central Intelligence Agency calculated the Soviet gross national product to be no more than half that of the United States. Viktor Belking, a prominent economist from the Soviet Academy of Sciences, promptly pronounced the CIA figures too optimistic, asserting Soviet output was at most little more than a quarter of the American GNP. The combination of shortages, inflation and regional blockages has made it difficult to assess even the current rate of economic decline with any accuracy.

The question of whether the major capitalist powers should provide assistance has taken on fiercely partisan overtones in the United States. One side hopes such assistance might strengthen the effort to lead the Soviet Union in directions beneficial to the West. The other side fears such assistance might prop up a decaying authoritarian state and provide succor to its military establishment, which otherwise would disintegrate and disappear as a threat.

There are three economic arguments as to why external assistance would be a good idea. First, a supply of working capital, bridge financing, support for ruble convertibility, and infrastructure development is necessary before domestic markets and foreign investment can begin to work on their own. Second, outside assistance could take advantage of economies of scale in a coordinated effort to address multiple problems simultaneously. Third, it could capture a unique opportunity to provide incentives to see that reforms stay on track. The objective would be to help buffer the transition, since pain (higher prices, harder work, less job security, more unemployment) will come before any gain (greater investment, higher productivity, larger output).

The economic argument against external assistance, which so far has carried the day, is that the Soviet leadership has simply not yet made a firm decision in favor of transforming the economy to a market-based system. The Soviet Union is not like the other countries of Eastern Europe. It has a low level of foreign debt ($48 billion), large gold reserves ($30 billion) and vast resources available for development (American oil companies, for example, report a sizable inventory of already discovered fields lying idle for lack of capital and technology). In short, it is argued, the Soviet Union has the wherewithal to undertake determined action on its own.

Yet so far Soviet market reforms, at least until the 500-Day Plan, have been halting and indecisive. State ministries continue to exercise monopolistic power as buyers and sellers of goods. A plan to make the ruble convertible has yet to appear. Therefore, foreign assistance at this time might well serve the Soviets as a substitute for making tough domestic choices.

The stakes are high. A reinvigorization of the Soviet economy along market lines would add to European (and world) growth-incalculably more than would the resuscitation of Poland, for example, or Czechoslovakia, for which the industrial powers are willing to spend generous sums. Stagnation and decline in the Soviet economy, in contrast, will constitute a great drag on European prospects. Most ominous, of course, is the prospect that failure to integrate the U.S.S.R. into the Western economic order may result in chaos and disintegration in Russia and, ultimately, a return to a resentful and authoritarian Soviet regime, still in control of awesome military assets. Then, indeed, there could be serious concern that "decaying superpowers do not go quietly into the night."1

External assistance for the evolution of the Soviet Union into a stable market-based confederation of republics with growing economic links to the industrial democracies would be a feat worthy of comparison with the original Marshall Plan. Like the revival of Europe after the Second World War, it will depend primarily on courageous decisions made internally under highly uncertain circumstances. But a successful outcome will almost certainly require external assistance of Marshall Plan dimensions as well, for support and reassurance. For fundamental reform to work, there will have to be a major program of economic conversion and reconstruction lasting over an extended period of years-preferably in the form of loans under the auspices of the International Monetary Fund and the World Bank. Of course, the effort may fail, but historians, looking back at the decade of the 1990s, will be astounded if the opportunity is allowed to pass with no attempt to seize it.

Some kinds of small-scale aid might be particularly effective; for example, support for infrastructure projects at the municipal or republic level designed to lend credibility to local efforts at reform, thereby avoiding the criticism that foreign aid encourages foot-dragging. Technical assistance would also help. But these will provide scant relief if the underlying economy is simply disintegrating. On the other hand, the original Marshall Plan would cost no more than $84 billion in 1990 dollars, only one-fifth of which would be borne by the United States (in proportion to its IMF-World Bank share), or approximately one-tenth the present net cost of the S&L bailout. And a major element of an economic reconstruction package, a large stabilization loan to support the convertibility of the ruble, need not involve the actual expenditure of foreign funds at all if the currency shift is successful. Once convertibility is achieved the expansion of foreign investment and trade will be much easier; without it, the expectation that foreign investment and trade will lead the process of restoring stability and growth to the Soviet economy is implausible.

For the idea of assisting the reconversion of the Soviet economy to be adopted, however, American leaders will have to persuade the public that such resources are better devoted to the Soviet Union than to competing-and worthy-causes at home. That will be no easy task.

III

How should the United States approach the U.S.-Japanese relationship? Should it be tougher or softer, more hard-line or more accommodationist in the 1990s?

The growth in Japan's economy between 1950 and 1990 represents the most rapid peacetime shift in relative economic status in the history of the world. Such explosive change on the part of a single nation could not but cause substantial dislocation to other nations. Helping to fuel resentment at the necessity to adjust, of course, is the fact that Japanese success is due in part to unfair trade practices, in particular the protection of Japan's local market from imports and the promotion of certain sectors for export-led growth.

The persistence of a large bilateral trade deficit with Japan has led to proposals that the United States shift to a tougher posture, demanding reciprocity in access between the two markets and threatening exclusion of Japanese products to the extent equal access is not achieved. The argument on behalf of this approach extends beyond mere Japan-bashing; the contention is that only a "results-oriented" approach will reduce the trade imbalance with a partner for whom the abstract exhortation to "open markets" has no meaning.

The difficulty with this approach is that all Japan's unfair trade practices, taken together, block no more than $8 billion to $15 billion in potential sales, whereas the recurrent bilateral trade deficit ranges between $35 billion and $40 billion. The fundamental cause of the imbalance lies in the disparity between savings and consumption in the two countries: the United States consumes more than it produces and does not save enough to build the additional productive capacity to make up the difference, leading to a trade deficit that supplies excess American consumption and inflows of foreign capital that make up for insufficient American savings. Thus, even the most aggressive market-opening demands on the part of the United States would leave the largest part of the problem untouched, unless there is a simultaneous change in underlying U.S. behavior toward savings and consumption, including public consumption as embodied in the federal deficit. Technically, macro-imbalances account for the entire deficit, with trade practices affecting only the composition of that deficit. The correct focus for U.S. policy, of course, is equilibrium in the country's overall trade balance, not equality in each bilateral balance. Threatening Japan with dire consequences cannot produce the desired results in the absence of a fundamental commitment to address America's own macroeconomic misalignment at the same time.

Moreover, the hard-line stance is likely to fuel resentment in Japan without producing relief. The combination of growing Japanese anti-Americanism and a changing geostrategic environment, in which the need for the U.S. nuclear umbrella is disappearing, renders it no longer implausible that the United States might push Japan too far and even fracture the U.S.-Japanese alliance. At the extreme, maverick positions taken in Japan such as those of Shintaro Ishihara and Akio Morita who argue in their book, The Japan That Can Say No, that Japan should play a more forceful role by standing up to America, or others who urge the exploration of fundamentally new political-economic relationships for Japan, could become more prevalent in Japanese politics.

Does this mean that a benign stance is appropriate for U.S. policymakers, accepting a slower pace of liberalization in Japanese markets and greater toleration for American macroeconomic disparities in the consumption/savings ratio? Those who argue in the affirmative note that changes in Japanese consumer behavior combined with the evolving demography of the Japanese population will ultimately re-equilibrate the U.S.-Japanese economic relationship without any need for radical alterations in either country's policies. In the long run, the greater proportion of Japanese retirees (who consume more) in relation to younger workers (who save more), accompanied by changes in spending habits on the part of all individuals, will move the Japanese economy naturally toward greater consumption and away from savings and investment.

The problem with this approach is that the long run is likely to take too long. The demographic shift in Japan will have its major impact after the year 2000. In the meantime the competitive position of American industry could undergo a genuinely serious weakening. The lower savings rate in the United States raises the cost of capital; long-term investment projects cost American firms two to three times what Japanese firms must provide, and demand a payback period roughly twice as quick (six years for American firms versus more than ten for the Japanese, with European companies falling in between). The higher cost of capital in fact goes a long way toward explaining the infamously short time horizons of American managers; it suggests that the relatively myopic planning calculations of U.S. corporations will not change fundamentally until the cost of capital declines, no matter what happens to capital gains taxes, Wall Street influences, leveraged buyouts and the like.

Overall the savings/consumption imbalance in the United States constitutes a drag on American competitiveness far greater than trade barriers abroad. Meanwhile the savings/investment gap is being filled with foreign investment. Should the buildup of net dollar surpluses overseas and the corresponding conversion into dollar assets in the United States continue until such time as demographic trends in Japan and elsewhere right the balance, the effect of the foreign acquisition of American business, combined with the weakening of those that remain in American hands could reach proportions that have real security consequences for the United States.

American policy, therefore, faces the task of preventing the political process from tilting too far in either direction, toward Japan-bashing at one extreme or toward toleration of economic imbalances at the other. The goal of preserving a close U.S.-Japanese political relationship requires a delicate balance of maintaining well-justified pressure against Japan's unfair trade practices while addressing-rather than avoiding-American responsibility for the fundamental economic misalignment.

IV

The third challenge to U.S. national security on the international economic agenda is the globalization of the defense industrial base. Technological prowess and production sites for goods and services vital to the U.S. economy are spread more broadly across the globe than ever before. The Department of Defense has reported that the lead in developing one-quarter of the technologies most essential to American industry is held by non-U.S. firms, and a growing proportion of the products and components needed for defense come from abroad.

On the one hand, this globalization carries great benefits. It brings superior performance, innovation and lower prices for military as well as commercial purchasers. This is the aspect that traditional economic analysis tends to emphasize, celebrating the benefits of comparative advantage and dismissing concerns about the nationality of supplier firms or the location of production sites.

On the other hand, globalization does pose real threats, threats that could become more, not less, prominent as the Cold War recedes. A survey of post-World War II experience suggests that external domination of technology, goods and services may well lead to persistent attempts at meddling, manipulation and harassment in the recipients' sovereign affairs, even in peacetime relations among allies. Such interference has ranged from denial of computer technology to inhibit De Gaulle's force de frappe, to insistence on permission to reexport products that incorporate foreign inputs to designated areas (China, Cuba, several Middle Eastern states), to retroactive cancellation of licensing agreements (the Soviet gas pipeline case). Since the United States has frequently been the manipulator, it has largely ignored the prospect of experiencing the process in reverse, until now. There is a legitimate concern about American vulnerability as local industries crucial to defense disappear, and high-tech firms are acquired by foreigners.

One response is for the United States to turn in a neomercantilistic direction itself, protecting its own industrial base (as America has already done with steel, machine tools, even textiles), devising an industrial policy to support its own national champions (the joint public/private Sematech semiconductor research venture, the 1986 American-Japanese Semiconductor Agreement, a civilian Defense Advanced Research Agency), blocking foreign takeovers (Fairchild, Perkin-Elmer), and requiring the U.S. government to "buy American" (ball bearings, machine tools).

But the neomercantilistic response saddles American users of steel or machine tools or semiconductors with high-cost inputs, and reduces their competitiveness even further vis-à-vis foreign rivals (a 25 percent cost disadvantage for steel users, a 50 percent cost disadvantage for semiconductor users who produce high-tech products.) Moreover, there is no evidence the U.S. government can pick "winners" for public support appropriately, or ensure that political forces do not divert such support to "losers" instead. How, then, can the United States cope with this dilemma?

In all cases of external interference, the threat from foreign dependence is genuine only when there is a concentration within a very few nations of external suppliers of technology, products or inputs. When sources of supply have been well dispersed internationally there has been no ability to control, to delay or to deny, and hence no real peacetime threat. As a rule of thumb, when there are more than four foreign companies or four foreign nations supplying more than fifty percent of the world market, they will lack the ability to collude effectively even if they wish to exploit or manipulate recipients. This "four-fifty" rule provides a useful guide for designing U.S. policies.2

For American industries that are being "wiped out" by imports, those in which the sources of external supply are concentrated do represent a source of concern and should be eligible for legitimate "national security" trade protection; those in which the sources of external supply are deconcentrated do not. By this concentration test, semiconductor equipment manufactures would qualify for national security protection, textiles and footwear manufactures would not. Similarly, within an industry, subcategories of high-performance machine tools might be concentrated enough to justify protection, but measures to restrict imports of standardized cutters and grinders that have multiple suppliers would not be justified. This would provide for legitimate American security interests without incurring the costs of blanket protectionism.3

For American firms that have been targets of foreign acquisition, the degree of concentration in the world industry again provides the relevant screening measure. Even in cases in which a U.S. target firm is the only American producer of a given product, a foreign acquisition should be allowed to proceed by CFIUS (the Committee on Foreign Investment in the United States, an interagency body that advises the president, given new status by the Exon-Florio Amendment to the 1988 Ominbus Trade and Competitiveness Act) so long as there are multiple external suppliers. If the external sources are concentrated in only a few hands, the acquisition should be blocked by CFIUS and, if need be, the U.S. parent firm granted national security protection (as, for example, in the case of Perkin-Elmer's advanced lithography unit for semiconductor fabrication, sought by Nikon in an industry with very few producers).

In sum, the security objective of maximizing efficiency and innovation in vital national industries while avoiding foreign dependence requires channeling popular protectionist and neomercantilistic instincts into those narrow areas in which foreign domination actually poses a genuine threat.

V

Turning to the North-South axis, the first question is: How can the United States use the domestic shock from the confrontation with Iraq to avoid even more severe energy shortages in future?

The Iraqi invasion of Kuwait has reawakened public consciousness to the extent of American dependence on imported oil. The restoration of stability in the Persian Gulf will provide only temporary relief, however, to the looming prospect of energy crises in the 1990s. In the absence of policy changes, the United States is likely to be importing between 55 percent and 65 percent of the oil it consumes by the end of the 1990s, and more than two-thirds after the year 2000. The previous historical high for import dependence was 47 percent in 1977; the figure for 1973 when the first oil crisis struck was 35 percent.

The price projections that accompany this growing dependence on imported oil vary widely, by more than 60 percent, due to uncertainties about the cohesion and strategy of the Organization of Petroleum Exporting Countries (imprudent price rises in the 1980s nearly destroyed the cartel). What is more certain is that the production volumes demanded from OPEC will rise substantially (from 22 percent to 39 percent greater than today by the year 2000), with increasing concentration in the Persian Gulf and Libya. The expansion of output from Saudi Arabia, the United Arab Emirates and Venezuela in response to the blockade of Iraq and Kuwait in fact has revealed the narrow availability of excess capacity. By the mid-to-late 1990s the number of major OPEC exporters will have shrunk, with Gabon, Ecuador, Algeria and even Indonesia and Nigeria consuming domestically much of what they produce. Since 1985, 90 percent of the increase in world oil production has come from the Persian Gulf, a trend that will continue in the 1990s as non-OPEC countries reach a production plateau.

Adding to the energy vulnerability of the United States in the 1990s is the dilemma faced by electrical utilities as they seek to build the next generation of power facilities. In the 1970s and 1980s electrical utility capacity was in oversupply, leading to low rates of new construction. In the early 1990s electricity demand is overtaking production capacity at the very moment when there is strong opposition to the two principal sources of baseload output, coal and nuclear power. As a result utilities are returning to oil, raising usage by more than 30 percent. This supplements the demand for petroleum consumed in the transportation sector.

The United States and other industrial democracies are better off than they were during the oil crises of 1973 or 1979 since they have petroleum reserves to draw upon in a crisis. In general, however, the prospects for energy vulnerability are growing ever more worrisome, especially given growing military capabilities for long-range destruction among the countries in the Persian Gulf. Upheavals there could come to have a genuinely devastating impact on the international economy.

In the not-too-distant future, the unimpeded spread of dual-use technologies could lead to a new delivery-system "package," in some ways even more worrisome than ballistic missiles. The package consists of two parts: first, relatively inexpensive drone airplanes, constructed with low-observable simple composite materials (e.g., fiberglass) built around increasingly efficient turbofan engines, which are currently available from American, European, Indian and Brazilian sources; second, increasingly available in-flight navigational updating from multiple commercial sources (U.S., Soviet, French, Chinese, Japanese, Brazilian and Israeli satellites with Sony, Motorola or Hughes communication downlinks).

Such a package creates a "poor man's cruise missile." By the mid-to-late 1990s this system will compete with ballistic missiles as a delivery vehicle. It will provide a burgeoning number of Third World countries with an ability for quasi-precise theater bombardment, without the considerable cost of maintaining a fleet of high-performance airplanes and pilots. Deployable in large numbers, with semi-stealthy flight characteristics, these vehicles will be capable of carrying chemical or other high-explosive warheads (although they will not, of course, have the terrain-hugging flight patterns of advanced cruise missiles).

The presence of these delivery vehicles will exacerbate the problem of supplier competition, making control over ballistic-missile technology even more difficult. Altogether, the evolution of technological capabilities will magnify the destructiveness of regional military conflicts, raise the probability of conflicts during periods of crisis-given the destabilizing advantages to each side of preempting the other-and make intervention by major powers much more costly and risky.

Policy recommendations for reducing vulnerability to oil imports from the Persian Gulf would have to combine conservation with the promotion of domestic sources of supply (especially for electricity). For conservation, the most efficient approach is to continue to raise energy taxes, which will still be lower in the United States than elsewhere (taxes reach $1.20 to $3.00 per gallon of gasoline in Europe and Japan).4 Energy taxes are appealing in revenue terms; each 10¢ increase in gasoline taxes, for example, generates approximately $6 billion in government receipts (allowing for the drag on the economy). For environmental reasons (global warming, acid rain), some analysts recommend a more general carbon tax and a turn away from coal.

For promotion of domestic sources of supply, solar energy has long-term appeal, but nuclear power offers the only realistic alternative to coal for the next generation of utilities.

Both options have strong domestic opposition. But difficult choices about substantially higher energy taxes and the resumption of nuclear plant construction are unavoidable if the United States is to decelerate the rate of growth of imported oil to a more moderate pace from the current headlong rush.

VI

The security implications of relations with the Third World are not limited to the energy supply from the Persian Gulf. What are broader U.S. concerns in regard to the less developed countries (LDCs) as Cold War anxieties diminish?

With the exception of East Asia, the Third World is just ending a "lost decade" in which the attempt to pay off foreign loans with a net capital outflow of $20 billion per year from South to North has reduced per capita living standards by more than ten percent in real terms, producing a social setback greater than the Great Depression of the 1930s.

Any analysis of the causes of the debt crisis bestows an abundance of blame on all parties. Public and private borrowers sought, and commercial banks provided, funding for many dubious projects in the late 1970s. Then, the dramatic rise in U.S. interest rates from 9 percent to 19 percent in the period 1978-81, followed by recession in the developed countries and the consequent collapse of commodity prices, left both LDC borrowers and bank creditors unexpectedly overextended. The interest expense to Argentina, Brazil and Mexico, for example, tripled, while the terms of trade dropped by almost ten percent.

Initially, the United States, in its "Baker Plan," gave priority to maintaining the viability of the international financial system by seeking to ensure the health of the commercial banks. The succeeding "Brady Plan" has for the first time permitted discussion of the concept of debt relief for the LDC borrowers. The Brady Plan combines a U.S. Treasury bond guarantee for the principal of new, discounted bonds plus IMF-World Bank guarantees for interest payments, in return for domestic policy reforms in the debtor countries. It has been expanded in 1990 to include the possibility of relief on debt owed to governments as well as commercial banks.

The case of Mexico has perhaps greatest salience. The United States welcomed the inauguration of Mexican President Carlos Salinas de Gortari, whose administration had more coherence and ideological commitment to market forces than any other in the past quarter century. Mexico, consequently, became the showcase for the Brady Plan. But at the end of long negotiations relying on voluntary participation by the banks, the magnitude of the relief in fact turned out to be quite small (approximately 35 percent in comparison to discounts on Mexican loans in the secondary market of between 50 percent and 70 percent prior to the Brady Plan). The outcome raises doubts about the utility of allocating scarce public resources to a program that fails to reduce the debt burden sufficiently to "jump start" an economy.

One alternative might be to press for greater debt relief under IMF auspices in return for sensible domestic policies without permitting commercial bank cooperation to be merely voluntary. To a certain extent, this option has been overtaken by the guarantee features of the Brady Plan, at least in the Mexican case. The new U.S. Treasury-backed bonds embodying the 35 percent reduction are designed explicitly for broad resale by the commercial banks, rendering impractical subsequent renegotiation with widely dispersed creditors. Likewise, the stream of interest payments supported with IMF set-asides cannot be reduced without simply transferring the burden of payment onto the IMF and the World Bank. The modest outcome of the Brady Plan in the Mexican case may thus be permanently locked in.

Looking to the future, for Mexico to regain its economic momentum will require that it reach and sustain throughout the 1990s more favorable economic conditions than have yet been achieved. For Latin America as a whole to "grow out" of the debt crisis, economic expansion must average five to six percent per year through the late 1990s, replacing the current rate of less than two percent. Adding to the growing pessimism that this can happen is evidence that the potential boost that could come with further repatriation of "flight capital" is not likely to occur simply with the introduction of favorable LDC policy changes (since many are by now already in place), but only with the appearance of growth-induced profits themselves, creating a catch-22 for the prospects of sustained economic growth.

For other countries, such as Brazil and Argentina (there are 36 remaining countries eligible for assistance by the Brady Plan), postponement of debt repayment is taking place de facto, if only because their dire straits do not permit a Brady Plan negotiation of Mexican dimensions. The outcome is turning out to be the worst of all worlds, however, a slow-motion slide toward bankruptcy without the "new start" that actual bankruptcy proceedings afford.

The very "success" of the Brady Plan, which provides strong guarantees but only small debt relief, shifts the burden for turning around the LDC economies to the other side of the equation, trying to solve the debt problem via the expansion of trade. Here the outcome rides to a great extent on the results of the Uruguay Round of multilateral trade negotiations. The key market-opening initiatives for the Third World (with special importance for Mexico, Central America and the Caribbean as well as the rest of Latin America, involving textiles and apparel, leather goods, footware, ceramics, sugar, fruits and vegetables and other agricultural products) are highly sensitive. Concessions may be politically palatable to the developed countries only in a context that simultaneously includes breakthroughs on the issues of most benefit to them, such as services, intellectual property and unfair trade practices. In short, the Uruguay Round will have to be a major triumph to touch those areas of most importance to the Third World.

An alternative might be a free trade agreement with Mexico. But since a bilateral pact would offer Mexico many fewer compensating gains than would a global agreement, the price paid by the United States in politically sensitive labor-intensive industries would have to be significantly greater. Over the medium term, while higher oil prices may boost Mexico's growth prospects, the corresponding slower economic expansion (or recession) in the United States will stiffen resistance to trade liberalization. Extending the free trade idea to all of Latin America, as the Bush Administration has proposed, would attenuate the benefit for Mexico, and still be more costly to the United States and less beneficial to the recipients than a global approach.

Over the course of the 1990s, as Cold War preoccupations fade, American policymakers will not be able to relax their geopolitical concern about the economic and political fate of the Third World, especially Latin America. They will have to develop new visions of mutually beneficial economic engagement persuasive enough to overcome short-sighted opposition to concessions on trade and debt.

VII

Finally, there is the pernicious problem of narcotics. To deal with the growing dimensions of narcotics trade, George Shultz and Milton Friedman have articulated the starting point of most economists when faced with a powerful cartel, namely, decriminalization as a means to eliminate the basis by which the cartel controls the market. This approach, Shultz and Friedman argue, would undermine the ability of producers and traffickers to reap such high profits and eliminate the incentive for drug pushers to get young people addicted.

The consequences, however, are more complicated than the proponents of decriminalization first envisioned. The outcome might be an expanded underclass of addicts, prone, in the case of crack cocaine, to particularly destructive, paranoid behavior.

On the other hand, the profitability of the current system is so great that even dramatically improved success in supply-side enforcement (interdiction of production and distribution) will only marginally offset the incentive for generating new sources. The prospect of providing alternative economic opportunities to woo Peruvian, Colombian and Bolivian peasants away from coca production appears dim when one considers that marijuana has come to be the largest cash crop of California's rich, fertile and irrigated agricultural regions, where alternative opportunities are abundant. It is not implausible, therefore, that narcotics traffic could proceed in its growth to nation-state-threatening dimensions, unless the current system of oligopoly pricing is eliminated. More generally, the drug trade may become the successor to the Cold War in providing resources to sustain worldwide terrorist activity.

To prevent this from happening, political leaders may have to let national security considerations tilt the highly sensitive domestic debate in the direction of decriminalization.

VIII

This survey of the international economic issues that will gain increasing prominence on the national security agenda as the Cold War recedes suggests an array of policy alternatives and preferred outcomes. Certain economic themes appear and reappear.

Continued improvement in the budget deficit, for example, is desirable in economic terms to help restore the balance between savings and consumption, to lower the cost of capital in the United States, to improve the competitive position of American companies and strengthen the defense industrial base in a period of globalization, and to re-equilibrate U.S.-Japanese relations and maintain trans-Pacific as well as trans-Atlantic political ties with post-1992 Europe as international economic competition intensifies.

The success of the Uruguay Round of trade negotiations would be favorable to diverse issues. A successful outcome would not only improve trade efficiency and expand the range of comparative advantage, as economists are wont to argue, but play a central role in bolstering political stability for countries still struggling with the debt crisis. Success in multilateral trade agreements will likewise ease the pressure for more insulated neomercantilistic blocs in Europe, Asia and North America and help build the economic "substructure" to support the "superstructure" of ongoing political coordination among the industrial democracies.

Better macroeconomic performance on the part of the United States is not only an economic objective but also a growing strategic concern if the nation is to maintain a position of leadership in national security affairs worldwide. New resources are needed to pursue the option of offering assistance to Eastern Europe and the Soviet Union, as well as providing economic and military aid to allies in the Third World beleaguered by nearby enemies (the Middle East and Persian Gulf) or within their own borders (the narcotics-producing countries of Latin America). The analysis of the relationship between the cost of capital and the competitiveness of American business suggests that future attempts to seek resources by raising the corporate tax rate would be counterproductive. The requirement to balance savings and consumption carries a public policy preference to reward the former and penalize the latter. The need to hold down the growth in energy usage in particular points to further boosts in the gasoline tax. (There may be other candidates for new revenue as well, like a value-added or general consumption tax.)

Overall, the economics agenda gives national security strategists much to think about in considering relations with the major powers, the Soviet Union, Europe and Japan. It also suggests, however, that the Third World will be the source of renewed preoccupation for the national security community for reasons that have nothing to do with U.S.-Soviet competition. International economic policies that ignore the importance of restoring Third World growth and stability would bode ill for the longer term security environment.

Searching for solutions across all the topics from the economics agenda, there is a final conclusion that is greater than the sum of the parts: the distinction between high politics (vital interests affecting national security) and low politics (petty questions of economic dispute and rivalry among states) may be disappearing. In the post-Cold War world, low politics is becoming high politics.

The traditional difference is that high politics involves clear threats to the nation, and therefore lends itself to the formation of domestic consensus, whereas low politics involves issues that are much more likely to be mired in domestic struggles for short-term partisan advantage. In the security environment of the future, dangers are likely to be more diffuse, the connections between them and the policies needed to respond to them more murky, and the need for sacrifice in order to advance national interests more opaque than in the period of bipolar antagonism.

The ultimate question for the United States in the post-Cold War era, therefore, may be one of governance: how to achieve the consensus and the continuity of domestic policy in the realm of low politics that are now required for America to continue as a great power into the 21st century.

1 Z, "To the Stalin Mausoleum," Daedalus, Winter 1990, p. 297.

4 For those who stress reliance on market signals, the argument for an energy tax is that the play of supply and demand among private parties creates a price that does not adequately reflect the potential social costs associated with concentrated dependence on a particularly volatile supplier; to the market price, consequently, should be added a "national security premium." For those concerned about a "level playing field" for U.S. competitiveness, an energy tax of up to $2-$3 per gallon of gasoline would simply match the burden borne by Asian and European firms.

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