On his whirlwind tour of Asia, concluded on May 24th, President Joe Biden conducted himself with the awkward urgency of a man trying to correct a costly error. China may be reeling, but the ambivalent reaction, outside rich democracies, to America’s late search for solidarity reveals how Washington’s global influence has faded relative to Beijing’s. Mr Biden’s proposed Indo-Pacific Economic Framework, unveiled on May 23rd, seems an acknowledgment of why that is: for too long America had all but abandoned efforts to forge new economic ties in the region.
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Establishing a causal link between economic interdependence and the balance of geopolitical power is no simple matter, however. That economies often trade more with countries that share similar political values and interests is clear enough. Yet it could be the case that strategic concerns tend to drive economic relationships, not the other way around, or that other shared features—such as income levels or culture—bring countries closer in both economic and political terms.
Two recent papers help to pick apart what causes what. A first, by Benny Kleinman, Ernest Liu and Stephen Redding of Princeton University, considers whether economic interdependence fosters greater political alignment. To answer the question, the authors build a model in which countries sometimes take costly actions, such as providing military aid to an ally, in order to boost growth in countries with which they share political ideals and aims.
For those benevolent countries, the incentive to be generous is partly rooted in the expectation that, as the economy of the allied country grows, they will receive an economic dividend. Yet in the world the authors depict, the reward is not fixed. If a country’s economic fortunes become less entangled with some places and more with others, then the relative pay-off from making costly political investments in those places changes—and so, over time, will patterns of political friendship and enmity. Economic interdependence, in other words, causes political rapprochement.
The authors reckon that China’s early liberalisation, by driving a one-off surge in the country’s economic engagement with the world, provides evidence for this proposition. In assessing economic interdependence, they focus on one measure: how productivity growth in one country affects real incomes in others. Economic heft alone does not ensure that other places’ fortunes are bound up with your own. Instead, both rapid economic growth and extensive involvement in global supply chains can amplify a country’s economic influence on its trading partners.
Though initially modest, China’s global economic influence had, by the late 2000s, overtaken America’s: the effect of Chinese growth on the incomes of its trading partners was larger than that of Uncle Sam (indeed, nearly double it by 2010). From 1980 to 2010, the paper finds, the more economically enmeshed a country became with China, the more political alignment ensued, as captured by patterns of un voting, the forming of formal alliances and similar metrics.
The authors find further support for their model by looking at global trade shifts associated with collapsing air-freight costs. Because shipping by sea must flow around continents whereas aircraft follow great-circle routes, the falling cost of air freight in the three decades to 2010 had uneven effects on bilateral trade flows around the globe. This variation offers another way to test how growth in economic interdependence leads to political alignment—and the test, again, is conclusive.
This would seem to back oft-aired concerns that China’s rise has not just redrawn the geopolitical map, but also helped to erode democracy worldwide. Yet here the news is encouraging. New work by Giacomo Magistretti of the imf and Marco Tabellini of Harvard University also exploits falling air-transport costs to tease out the causal effect of trade on both attitudes towards democracy and the overall political orientation of a country. They find that stronger economic ties indeed facilitate the transmission of political values—but only if said values are democratic.
The effects are big. People who grew up during periods when their home economy traded comparatively more with democracies appear to be much more drawn to open regimes than those who came of age under opposite circumstances. The difference in attitudes is equivalent to that between the support reported by residents of Sweden (a bunch of hardcore democrats) and those of China (who are more tentative). Pro-democracy populations, in turn, translate into more open institutions. An 80% rise in trade with democratic countries over a five-year period raises a country’s Polity score (which measures how democratic a country’s governing institutions are on a scale from -10 to 10) by four points: the difference, roughly, between Russia and Britain. Strikingly, trade with autocracies seems to have no such effect. Excluding America or China from the analysis does not alter the results.
Bye America
Why should trade with democracies work this way? The data do not permit firm conclusions. But evidence suggests the spur to democratisation does not stem from faster economic growth or rising levels of education. Neither does it result from increased migration. Instead, the authors’ favourite theory assumes that trade with democracies boosts a country’s “democratic capital”: it fosters an appreciation for the value of democracy which helps cement a social consensus in support of democratic institutions. That seems plausible, if perhaps a little vague.
Both trade and geopolitics will look different in the years ahead than they did during the post-war era of American hegemony and globalisation. But economic ties are likely to retain their capacity to cultivate allies and shore up support for democracy. If Mr Biden wishes to bolster America’s national security, he might consider giving freer trade a chance. ?
Read more from Free Exchange, our column on economics:
How to unleash more investment in intangible assets (May 21st)
The world needs a new economic motor. Could India fit the bill? (May 14th)
Why long-term economic growth often disappoints (May 7th)
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