Economic Interdependence and Foreign Policy in the Seventies

Author(s): Richard N. Cooper

Source: World Politics, Vol. 24, No. 2 (Jan., 1972), pp. 159-181
Published by: Cambridge University Press
Stable URL: http://www.jstor.org/stable/2009735
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 ECONOMIC INTERDEPENDENCE AND
FOREIGN POLICY IN THE SEVENTIES

A
By RICHARD N. COOPER*

that
newsreportssuggests
CASUAL readingof contemporary
duringthepastdecade economicissueshave takenon growing
importancein the relationsof non-Communist developedcountries.
The disputesbetweentheUnitedStatesand Japanovertextiles, between
theUnitedStatesand the EuropeanEconomicCommunityoveragri-
culturaltrade,and betweenFranceand Germanyovercurrency align-
mentscome readilyto mind. It is perhapssymbolicof the enormous
successofearlypostwarforeignpolicythatissuesno graverthanthese
play sucha prominentpartin relationsamong countriesthat,earlier
in thecentury,weresporadically at each other'sthroats.But I contend
thateconomicissuesare becoming,and will continueto become,more
problematic in relationsamong advancednon-Communist countries,
and thattheirrelativeprominencetodayis not merelydue to the fact
thatother,morefundamentalissueshave been resolved.Indeed,the
trendtowardgreatereconomicinterdependence among countrieswill
requiresubstantial changesin theirapproachto foreignpolicyin the
nextdecadeor so.
To clarifythisproposition, we firstneed some delineationof the
terms"trends,""economicinterdependence," and "foreignpolicy."By
"trends,"I mean developments thatcan be confidently projectedinto
thefutureon thebasisofinformation now available,butnot,of course,
projectedwithcertainty, sincefuturedevelopments are also influenced
by futurepolicies.Indeed,a principalreasonforascertaining trendsis
to suggestwhatpolicieswill be requiredin orderto changethosethat
Moreover,trendsrepresent
are disagreeable. a projectionof observable
forces,not a descriptionof presentreality.
"Economicinterdependence" normallyrefersto the dollar value of
economictransactions among regionsor countries,eitherin absolute
terms,or relativeto theirtotaltransactions.
I shall use it in a morere-
strictedsense:to referto the sensitivityof economictransactions be-
tweentwo or morenationsto economicdevelopmentswithinthose
nations.This approachmeans thattwo countrieswith much mutual
tradewould stillexperiencea low degreeof interdependence if the
* An earlierversionof thispaper was presented
in Decemberi970 at the Council
ofForeignRelations'Conference on TrendsAffectingInternational
Relations.
160 WORLD POLITICS
valueofthattradewerenotsensitive topriceandincomedevelopments
inthetwocountries; on theotherhand,twocountries wouldbe highly
interdependent iftheirtransactions weregreatly sensitiveto economic
developments, eveniftheirmutualtradewereinitially at a low level.'
Interdependence impliestwo-way sensitivity;one-way sensitivity leads
toa dependent economy. The reasonforthisfocuson sensitivity rather
thanon levelwillbecomecleareras theargument proceeds;forthe
moment I willsimplyobserve thattheeconomy of theUnitedStates
isbecoming highly interdependent withthatofEuropeandJapan, even
thoughtotalU.S. exports to thoseareasaccountforonlyabout3 per
centoftotaloutputand (so faras we can tell) international financial
transactionsarea similarly smallproportion ofthetotalfinancial trans-
actionsin theUnitedStates.
"Foreign policy"is themostdifficult termtodefine. It maybe inter-
pretedtomeanall pointsofcontact between theresidentsofonecoun-
tryandthoseofanother, butsurely that-although important-would
be toobroad.The term"policy" wouldseem,at a minimum, toreduce
thetermto meanall pointsofcontact between nationalgovernments.
Buteventhisis broaderthanis usuallyunderstood in thepressand
in casualdiscussion; it probably refers to pointsof contactbetween
governments concerning theterritorialintegrityofthenation-state and
the security of its citizens(and possiblytheirwell-being, but that
broadens themeaningconsiderably)-in short,whathas cometo be
callednationalsecurity, broadlydefined. A thirdnotionof foreign
policyisa grandconception ofworldeconomic andpolitical orderthat
provides a consistent framework for,and guidanceto,themonth-to-
monthdecisions thatnationsmusttakein theirrelations withother
nations.
Thereis,of course,a continuous gradation betweengrandconcep-
tionsand day-to-day operating decisions, withmanyproximate ob-
jectives for
advanced guidancein specific on the(sometimes
instances,
incorrect)assumption thatthoseproximate objectiveswillserveto ad-
vancethegrander andinevitably moregeneralconceptions ofwhatis
desirable.Despitethiscontinuous gradation, I believeit is usefulto
distinguishbetween thegrandconceptions ofdesirablerelations among
1 This definitionof interdependence contrastswith thatimplicitly
used by Kenneth
Waltz, who emphasizesthe importance of foreigntradeto the welfareand security
of thecountriesunderconsideration. See his "The Mythof Interdependence" in C. P.
Kindleberger, ed., The International Corporation (Cambridge,Mass. I970), 206-2I0.
As will be made clearbelow,trademaybecomelessvaluableto countriesat the same
timethatit is becomingmoresensitive to price,income,and othereconomicvariables,
and indeedforthesamereasons.
 ECONOMIC INTERDEPENDENCE 161
thepeoplesof theworldand theusuallyall-absorbing concerns for
day-to-daydecisions
thattypically governforeignministries.
Growingeconomic interdependence has important implicationsfor
thefirstandthirdoftheseconcepts offoreign policy-for thenumber
and thecharacterofcontacts between governments and,moreimpor-
tantly,
fortheconception ofa worldeconomic andpolitical orderthat
isbothdesirable
andattainable. In particular,
itbearsontheviability of
thenation-state
as theprincipal unitofdecision-making. The implica-
tionsforthesecondconceptof foreign policy-national security-are
lessimmediatelycompellingandarelargely derived fromtheothertwo.
In theobservations
thatfollowI takeup,in turn, thefactofgrowing
economic interdependence,thechallenge thisposesfordomestic eco-
nomicpoliciesand balance-of-payments adjustment, the actualand
potentialnationalresponsesto thischallenge,and theimplications of
theresultingtensionsand pressuresforforeign policyin theseventies.
GROWING ECONOMIC INTERDEPENDENCE

The extraordinaryandunprecedented growth in internationaltrade

has frequentlybeenmentioned. The increasein international travel
has beenevenfaster, and is equallyunprecedented. It is not clear
whether internationaltradehas grownin relationto totaleconomic
output(GNP); therelative growth of"services"wouldargueagainst
this.But,in anycase,thatis lessimportant thanthesensitivity of in-
ternationaltransactionsto domestic economicdevelopments suchas
taxation, and interest
inflation, rates.Thereis no questionthatthis
hasincreased
sensitivity in certain
dimensions. Although merchandise
importsaccount foronly4 percentoftotalU.S. expenditure, forexam-
ple,imports accountfora muchlargershareoftheincrement during
periodsofrapidlyrisingexpenditure (I7 percentin i968, inrealterms).
Whendemandrunsaheadof output, therestof theworldfillsthe
gap.Thisprocess haslongbeenmoreoperative in othercountries than
intheUnitedStates,buteventheretheresponse hasbecomemorerapid
andmorecomplete.
It is less clearwhetherthepricesensitivity
of international
demand
has increased. and communications,
Improvedtransportation wider
offoreign
acceptability and narrowed
styling, costand qualitydiffer-
encesamongnationssuggestthatit has; but growingproductdif-
witheachmajorfirmtrying
ferentiation, to establish
itssecureniche
cutstheotherway.So doesthegrowing
in themarket, importance of
themultinationalfirmwherever conventions
market-sharing prevail
amongitsvariouscomponents.Butthesefirmshavealsocontributedto
162 WORLD POLITICS
theconvergenceof costand designand to thewideracceptability
of
"foreign" On balance,pricesensitivity
products. forinternational
trade
hasprobablyincreased
as well.
Thisincreased hasextended
sensitivity eventolabor,an areainwhich
theintegrative
forcesofpolicyandtechnologyareundoubtedly weaker
thanin anyother.In i967, when Germanyslumpedintoits firstpost-
warrecession, one-third oftheunemployed workers wholostjobswere
foreignerson short-term contracts.On returning to theirhomelands
theyraisedunemployment thereand reducedit in Germany, literally
representing an exportation of unemployment. The reverse occurred
onceGermany expandedagain.Whenreductions in federalfunding,
thestockmarket slump,and risingpricescombined to bringabouta
sharpreduction in new hiringof university teachers in the United
States,graduatestudents in Britain-whose highereducational estab-
lishment continues to growat a rapidpace-nonetheless also feltthe
pinch:Britons and Commonwealth studentsstudying in theUnited
Statesstarted tolookforjobsin Britain toreplacethosetheycouldnot
findin theUnitedStates.
Finally,thegreatest growth ininterdependence hasundoubtedly been
in investment, bothreal and financial. The greatgrowthin direct
foreign business investment in thesixtiestestifies to the new search
forearning opportunities everywhere, notmerely in thenationalmar-
ket.Barriers oflanguageand law havegradually beenbrokendown
or surmounted by largeand evennot-so-large Americanfirms, who
haveflocked to Europeto exploitnewor newlyperceived market op-
portunitiesandtaxadvantages. Financialcapitalhasalsobecomemuch
moresensitive toyielddifferentialsamongmajorfinancial markets,and
an increasing number ofbothborrowers andlenders scana worldhori-
zonforsources offundsandinvestment opportunities; indoingso,they
tienationalmarkets morecloselytogether. Germanfirmscan borrow
fromArabiansheiksandIowafarmers inLondon'sEurodollar market.
Evennationalstockmarkets, although theyare subjectto diversein-
fluences,haveshownincreasing parallelism
of movement duringthe
pastdecade.2 As in otherareasofeconomics, it is themarginal trans-
actionthatcountsin linkingmarkets together.
This growinginterdependence maybe confidently projected into
thefuture, in theabsenceof stronggovernment actionto retardthe
2For a more systematic reviewof the evidenceof increasedinterdependence, see
Cooper,The Economics of Interdependence(New York i9t68), chaps.3-5; and Cooper,
"Towardsan International CapitalMarket?"in C. P. Kindlebergerand A. Shonfield,
eds.,North American and Western European Economic Policies (New York I971),
i92-208.
 ECONOMIC INTERDEPENDENCE 163

process,becauseitisbasedon thetechnological advances in transporta-

tionand communication whichincreaseboththespeedand there-
ofmoving
liability goods,funds, persons, information, andideasacross
national boundaries-in short, thesameforcesthatareproducing the
much-touted shrinking world,in termsofbotheconomic and psycho-
logicaldistance.
Although thisprocessis world-wide, it is muchfurther advanced
amongtheindustrial countries of thenon-Communist world-West-
ernEurope,NorthAmerica, and,increasingly, Japan-countries that,
in thelastfewdecades, haveconverged remarkably in theirobjectives
ofsocialandeconomic policyandin theirpolitical processes forrecon-
cilingdifferences andforexecuting policies.Although thesecountries
willcontinue tobe concerned aboutthesecondand thirdworlds, their
concerns willderivelargelyfromconsiderations otherthangrowing
economic interdependence. (Economicinterdependence must,in this
context,be distinguished fromthegrowing psychological interdepend-
encebrought aboutby increasing directexposure throughtelevision
andothermedia.)The remarks thatfollowwilllargelyconcern rela-
tionsamongtheWestern industrial countries.
A secondkindof growingeconomicinterdependence, institutional
ratherthanstructural, canbe discerned amongindustrial nations. This
institutional
interdependence occurswhenthesecountries must,by
prioragreement, confer, and evenreachjointdecisions, on matters of
economicpolicy.The two outstanding examplesof this,neitherof
thempresent a decadeago,are theperiodicdecisions leadingto the
creationofSpecialDrawingRights(papergold) at theInternational
Monetary Fund,and thedecisions concerning theformation of com-
mercialandagricultural policieswithintheEuropeanEconomicCom-
munity. Bothinvolve truly supranational decision-making, although of
courseonlyafterpriornegotiations amongnations. Less dramatic in-
stancesaretheattempts bydonorstocoordinate foreign aid to particu-
lar countries
in "consortia" underthegeneraldirection of theWorld
Bank,andtheattempts, so farlargely unsuccessful,
to coordinate trade
policiesofthedeveloped countries withrespect to theproducts of the
lessdeveloped countries.Thiskindofinstitutional interdependence is
insomemeasure a response to thegrowing structuralinterdependence,
butit oftenalso has a quitedifferent, morestrictly politicalorigin,
and thusis a separately identifiable factorin the economicarea.3It
3This secondformof integrationcorrespondsto whatKarl Kaiserhas called "inter-
governmental regionalsubsystems,"to be distinguishedfrom "transnationalsociety
subsystems,"of whicheconomicintegration throughjoined marketswould represent
one possibleexample.But joined marketsalso createpressuresfor intergovernmental
164 WORLD POLITICS
in myargument,
be ignored
willtherefore to
accession
as will British
theEEC.
THE CHALLENGE OF GROWING INTERDEPENDENCE TO
NATIONAL ECONOMIC POLICIES

Domestic Mostnationaleconomic
policies. policiesrelyfortheiref-
fectivenesson the separation of markets. This is trueof monetary
policy,ofincometaxation, ofregulatory and ofredistributive
policies,
policies(whether thelastbe through taxation
differential or through
directtransfers).Increasedeconomic interdependence, by joiningna-
tionalmarkets, erodesthe effectivenessof thesepoliciesand hence
threatensnationalautonomy in thedetermination and pursuit ofeco-
nomicobjectives. The term"threaten" is used nonpejoratively; there
arealsoeconomic advantagestothejoiningofmarkets, andin some-
butnotall-casestheseoutweigh theresultantlossofeconomic auton-
omy; indeed, thatis whatcreatesthepredicament. It is aggravatedby
thefactthatduringthepastfewdecadesthepeoplesofall industrial
countries havesubstantiallyraisedtheirexpectations of governmental
activityin managing theeconomy withrespect to employment, infla-
tion,growth, incomedistribution,anda hostofotherobjectives, leading
to theemergence ofwhatis sometimes calledthewelfare state.
The lossof autonomy has beenmostprominently discussed in the
policy.4As nationalmoneyand capitalmarketsare
area of monetary
joinedbyinternational flowsoffunds, ratesin variousmarkets
interest
aredrawntogether. Subsequently,if an individual country wishesto
pursuea contractionary monetary policyin orderto discourage a do-
mesticboom,it willfind,in thecourseoftrying to tighten monetary
thatit is merely
conditions, drawing fundsfromabroad;themoreits
centralbanktightens, themoreitswould-be domestic borrowerswill
theirneedsby borrowing
satisfy abroadratherthanat home.Under
thesecircumstances, monetary policybecomesan effective toolforin-
fluencingthe short-term balance-of-payments position of a country,
sinceitcanattract orrepelshort-term funds;butithasbecomean in-
toolforitscustomary
effective objective of influencingthecourseof
domesticeconomicactivity.
The international of firmsand fundsalso erodesthetax
mobility
action. See his "The Interactionof Regional Subsystems,"World Politics, xxi (October
i968), 84-Io7.
4The term "autonomy" is preferredhere to the more usual "economic sovereignty."
In fact,nations retain actual as well as legal control over their instrumentsof policy
(sovereignty); the problem arises because these instrumentsof policy lose their ef-
fectiveness,so that countries find themselvesable to pursue their objectives, but un-
able to achieve them.
 ECONOMIC INTERDEPENDENCE 165

policiesofnations.It is no secretthatthenascentinternational bond

market hasthrivedonfundsthatengagein taxevasion.Hostcountries
suchas Luxembourg havea disincentive topolicecarefullythetaxation
ofinterest
earningsonforeign funds:theythereby attract busi-
financial
ness.Withoutthefullcooperation wheretheearnings
ofcountries take
place,thedifficultyofenforcing taxlawson residents holdingfunds
abroadwillenablethewealthy andastute ofallnations
residents tomain-
taina tax-free
sourceofinterest income;as morepeoplebecomeaware
ofthepossibilities
opento them,thiswill,in turn,increasingly erode
boththerevenue and theredistributive of manycountries.
objectives
Foroperating business firms it is moredifficult
to avoidan accurate
ofearnings.
declaration Butbyadjusting thepricesatwhichtransactions
takeplaceamongbranches in differentcountries,
theymaysharply re-
ducetheirtotaltaxliabilitiesandthereby thwart thefiscalobjectives
of
countrieswithhightaxrates.
In bothofthesecases-taxevasionandtransfer pricingfortaxavoid-
ance-national authorities arenotwithout countervailingcourses
ofac-
tion.But,as will be made clear,in somerespectsthesecoursesof action
eitherinfringeon the sovereignty of othernationsor place theirown
internationalfirmsin a difficult
competitiveposition.So a dilemmare-
mains.
The same is trueof regulatory policiesof business,such as antitrust
regulations,capitalizationrequirements, disclosurerequirements, trad-
and thelike.In each case theinternational
ing regulations, mobilityof
fundsand firmserodesthe nationalcapacityto impose and enforce
limitationson businessbehavior.A Swisscorporation, facedwithlocal
requirements togiveinitialrightstonew equityto existingstockholders,
foundit convenient to establisha subsidiaryin Curacaoinstead,and to
raiseitsnewequityfromthatbase,drawingon international (including
Swiss) sourcesoffunds.Ifitwerenotforlawsextending thejurisdiction
of theUnitedStatesto its citizenseverywhere-apowerfulirritant to
some countries-American firmscould escape U.S. proscriptions on
tradewith Cuba simplyby locatingin countriesmore sympathetic
to suchtrade.
Althoughlabor is stillfarless mobilethan capital,the mobilityof
certaingroupsof people is sufficientlyhigh to limitpoliciesdesigned
towardredistribution,whetherthroughtaxationor,as in thecase ofthe
BritishHealthService,throughimposedconditionsofwork.This force
can be seen mostclearlywithinthe United States,where statesand
withgenerouswelfareprogramshavebeen swampedby
municipalities
166 WORLD POLITICS
immigrants fromelsewherein thecountry;
in theendthisrequiresa
fiscalbale-out
bythefederalgovernment.
Mobility unitespreviously
fragmented
markets,and in so doing
threatens policiesthat,fortheirfeasibility,dependedon thefragmenta-
tion of markets.As nationsbecome increasingly interdependent, as
capitaland skilledlaborbecomelessexclusively nationalin theirorienta-
tions,countries desiringto pursuetaxor regulatory policiesthatdeviate
widelyfromthosepoliciesin othercountries will findthemselves stimu-
latinglargeinflowsor outflowsof funds,firms,or persons;thesein-
ducedmovements will in turnweakentheintendedeffects of thepoli-
cies,or make themmorecostly.Economicpoliciesthathave hitherto
been regardedas exclusively domesticwill come underincreasingin-
fluencefromtheinternational environment.
Balance-of-payments policy.In additionto affecting domesticeco-
nomic policies,increasedinterdependence will also, and more im-
portantly in theimmediatefuture, affectour methodsfordealingwith
imbalancesin international payments.Under the presentrulesof the
game,laid downin theBretton WoodsAgreement in I944, countries are
requiredto fixtheirexchangeratesand to financeoutofreserves, or by
borrowingat the International MonetaryFund, any temporaryim-
balancesin payments. "Fundamental"imbalancesare tobe corrected by
movinga country's fixedexchangerateparityto a new level.This sys-
temrequiresa governmental judgmentconcerningwhen a givenim-
balanceis fundamental ratherthanmerelytemporary; whilethisjudg-
mentis being made,the publicat large can speculateon whetheror
notthevalue ofthecurrency is goingto be changed.In theeventof a
change,thisspeculationresultsbothin a redistribution (fromgovern-
mentto successful domesticspeculators)and in a loss (fromgovern-
mentto successful foreignspeculators)of nationalwealth.
This systempresupposes fragmentation of the marketsforfinancial
assets.Such fragmentation was implicitin the BrettonWoods Agree-
ment,to be achieved,if necessary, by the impositionof controlson
movements of capital.(ArticleVIII, Sec. 2(b) requiresall membersof
theIMF tohelppolicethecapitalcontrolsof anymember.)For various
reasons,restrictionson capitalmovementshave seemedboth less de-
sirableand lessfeasiblethantheyappearedtwenty-five yearsago; there-
fore,as thebarriersof ignoranceand costin undertaking international
transactionshave fallen,the potentialspeculativemovementof funds
has increasedenormously. Justas thereductionin barriers has increased
of fundsto transnational
the sensitivity interestratedifferentials, and
 ECONOMIC INTERDEPENDENCE 167
therebyerodedtheeffectiveness
ofnationalmonetary it has in-
policy,
creasedthesensitivity
offundsto prospects gain,and
forspeculative
thereby renderedmoredifficult (becausemorecostly)the use of
changesintheexchange ratetocorrect
imbalances A crude
inpayments.
quantitative
indicator
ofthesedevelopmentsis provided
bycontrasting
the maximumdaily speculationof under $ioo million against the
pound sterling, in the "massiverun" of August I947, with the maxi-
mumdailyspeculation ofover$i.5 billionin favoroftheGermanmark
in May i969, and themovement ofover$i billionintoGermanyin less
thanan hourin May 1971. Moreover,as thebarriersof ignorancefall
further, thereis no reasonwhy $i.5 billionshouldnot riseto $i5 bil-
lion,or evento $50 billion,in a day.A io per centgain overtheweek-
end is a tidyrateofreturn:ifthespeculatorguesseswrong,he has lost,
under the BrettonWoods arrangements, only the relativelymodest
transactions costs.Such huge speculativemovementsimpose propor-
tionatelosseson countriesthatdo changetheirexchangeparities.
Reluctanceto makean adjustmentin the exchangeratewill induce
a searchforalternative devicesforcorrecting paymentspositions,and
these,in turn,will impinge-as,indeed,theyalreadyhave-on bothdo-
mesticpoliticsand foreignpolicy.One can makea plausiblecase in con-
jecturalhistory thatthegovernments of France,Germany,and Britain
were turnedout in i969-i970, as was that of Canada in i963, on
groundsthat fundamentally reflectthis growingeconomicinterde-
pendenceamongnationsand the resultinginfluenceon the abilityof
countriesto cope satisfactorily with balance-of-payments difficulties.
The exchangeratefiguredexplicitly in theGermanelection.De Gaulle
was ostensibly rejectedon the basis of his proposalsforregionalgov-
ernment in France,butone mayarguethatthemorefundamental rea-
son forhis rejectioncan be foundin the economicfactorsthatled to
the disruptionsof May-Junei968, namely,France's restrictive eco-
nomicpolicyafteri965. This policyrepresented an attemptto halt
the deterioration in France'sbalance-of-payments position,and, inter
alia, it involved sharp cutsin the plannededucationalbudgetand pro-
duced the highestlevel of unemployment in France sincethe 1930's.
Harold Wilson'spromisethatthe devaluationof the pound in i967
wouldnotdevaluethepoundin thepocketoftheaverageBriton,which
was followedby themostrapidpriceincreasesin two decades-linked
in turnto the devaluationand to Britain'sdependenceon the world
market,where priceswere also rising-despitegrowingunemploy-
ment,playeda keyrole in his electoraldefeatin i970.
168 WORLD POLITICS

RESPONSES TO THE CHALLENGE TO NATIONAL AUTONOMY

IN ECONOMIC POLICY

Domesticpolicies.The intrusions of growinginterdependence into

domestic economic policy,whichare alreadyvisiblebutare likelyto
becomemuchmoreintense in thenextdecade,haveelicited fivequite
different,butnot mutually exclusive, typesof responseby national
governments: passive, exploitative, defensive, aggressive, and construc-
tive.Thesedesignations are meantto be descriptive, not normative.
A passiveresponse involves acceptance of thelossof domestic eco-
nomicautonomy and virtualabandonment of anyattempt to pursue
courses independent ofthosedetermined bythecountries towhichthe
passivecountry is closelylinkedwithtiesof tradeand finance. It is
largelya resortof smallcountries who havebecomeawareof their
dependence on othersand forwhomthecostsof independent action
(i.e.,offoregoing thebenefits oflinkedmarkets) arelikelytobe high.
Someofthesecountries alsopursuean exploitative course, whichat-
temptsto takeadvantageof the growinginterdependence in ways
whichare successful if pursuedby onlya fewcountries, butwhich
cannotbe generalized fortheworldeconomy. Thus,we observe coun-
triesoffering of
flags convenience on ocean shipping, lightregistration
anddisclosure requirements forsecurities, nominaltaxation on certain
forms ofbusiness activity (taxhavens),and generous subsidies to for-
eigninvestment.5 So longas onlya fewcountries createespecially fa-
vorableconditions for certain forms of economic activity, theywill
succeedin attracting thatkindof activity fromelsewhere; if many
countries beginto compete forthesameactivities in similarways,in-
ternational location willbelittleinfluenced, andnetbenefits willaccrue
to thefavored activitiesat thegeneralexpenseof governments, con-
sumers, orlabor.Thiskindofpolicycompetition is alreadynoticeable
in thetaxconcessions, and evendirectsubsidies, givenby manyless
developed countries toforeign investors; as thepractice spreads, revenue
baseswillbeerodedwhiletheeffect inattractinginvestment willdimin-
ish.Competition canalsobe observed in theexportcredittermsgiven
bytheindustrialized countries, in subsidies to hotel-building and other
aspects oftourism in Europe, and in the use,bymunicipalities within
theUnitedStates, of tax-free industrial development bondsto attract
industry. (Thisdevelopment hasrecently beenrestrained byCongres-
sionalaction.)Successin exploiting thenewmobility is therefore lim-
5For a generaldiscussion see Charles
foreigninvestment,
of theseissuesas theyaffect
American Business Abroad (New Haven i969).
P. Kindleberger,
 ECONOMIC INTERDEPENDENCE 169
itedtothosecountries whobegintheprocess, andcontinues onlysolong
as othercountriesdo notfollowor retaliate.
A defensive response involves attempts to reduceeconomic interde-
pendence bypreserving or restoring thefragmentation of markets in
orderto retainsomeeconomic autonomy. An earlyexamplewas the
imposition ofrestrictionson immigration intotheUnitedStates.This
wasdone,amongotherreasons, in orderto protect thedistribution of
incomethenprevailing and to reducetheflowofnewimmigrants to
a levelwhichmightreasonably be assimilated. Morerecently, Britain,
Denmark, and Switzerland haveall imposedlimitson thenumberof
foreign workers. The reasonsare bothpolitical(on the assumption
thatcertain minimum requirements ofhomogeneity in thepopulation
mustbe metin a functioning democracy) and economic(concerning
in particularthedistribution of incomebetweenrelatively unskilled
laborand otherfactors of production). The UnitedStateshas long
maintained anescapeclauseonitscommitments tolowertariffs thatcan
be invoked ifforeign competition createsinsuperable adjustment prob-
lemsfordomestic firms and labor.Somecountries haveforyearsim-
posedimpediments to themovement of financialcapitalacrosstheir
boundaries. Othershavestarted to do so morerecently. The United
Stateshas itsinterestequalization taxon purchases of foreign stocks
andbonds,and itsmandatory restrictions on foreign lendingbyU.S.
firmsandbanks.Britain andFrancehaveevenmorestringent controls.
Theserestrictionsareoftenimposedundertheheadingofbalance-of-
payments measures, buttheyaremorecorrectly viewed,I think, as de-
vicestoinsulatenational capitaland moneymarkets fromoneanother
in orderto preserve somedegreeof nationalmonetary control.This
viewis supported by thefactthatcountries suchas Germanyand
Switzerland, withstrong or neutralpayments positions, havealso re-
sortedtosuchmeasures.
Somecountries haveengagedin aggressive as well as defensive ac-
tionstopreserve national autonomy. Ratherthanreducemobility, these
actionsattempt toextendnationalcontrol to themobilefactors where-
evertheybe. Thus,theUnitedStates(whichbecauseof itssize and
relativeimportance is in thebestposition to engagein extraterritorial
extensionofitslawsandregulations) hasfromtimeto timeextended
itsantitrustlawsto theforeign subsidiaries ofU.S. firms and evento
theforeign of
parents foreign subsidiaries operating in the United
States.For example,it has demandedthedisclosure of financial in-
formation byforeign firms whosesecurities are tradedinformally in
theUnitedStates, prevented foreign subsidiariesof U.S. corporations
170 WORLD POLITICS
fromsellingto certainCommunistcountries, imposedminimumlimits
on repatriation of earningsby Americanfirmsoperatingabroad,and
attempted(unsuccessfully) to compel submissionof certainbusiness
information by foreignsea and air carriers.These variousactionsin-
variablyprovokecriesofoutragefromothercountries,' fortheyattempt
to extendU.S. regulatory to economicagentsthatare the
jurisdiction
legal entitiesof othercountriesand henceundertheirjurisdiction, de-
spite their American ownership.On the other hand, failure to
subjecttheseforeignentitiesto U.S. regulations or theirequivalentin-
vitescircumvention oftheregulatory intentthroughmovementabroad.
If therecordsof American-owned firmsoutsidethe UnitedStatesare
notsubjectto subpoena,forexample,firmswhichare prevented bylaw
fromconspiring to fixpricesor sharemarketswithintheUnitedStates
maydo so abroad,withimpunity. Or, if UnitedStatesfirmsoperating
fromforeignbasesare not affected by theU.S. proscription on exports
to Cuba,therestrictive policycan be vitiatedsimplybylocatingabroad.
(This observation is notmeantto implyapprovalof thisproscription-
onlythata nationalpolicycan be undercutby international mobility
ofitsfirms.)In otherwords,whiletheresponseoftheUnitedStatesin
thesecaseshasbeenaggressive, ithas notbeencapricious;it is addressed
to a real problemin whichthe decision-making domain of businesses
coversa widergeographicarea thaa the jurisdictionof government.7
A fifthtypeofresponseinvolvestheconstructive attemptby govern-
mentsto frametheirpoliciesjointly,so thatmobilityamong the co-
operatingcountries ceasesto offeran escapefromgovernmental juris-
diction.Examplesof truecoordination of policiesare rare,althoughin
thearea of monetary managementtherehave been severalfaintsigns
of coordinated action,notablyin the generalloweringof interest rates
in i967. Therehave also beenattempts, to limitex-
partiallysuccessful,
portcreditconcessions by government-sponsored exportcreditinstitu-
tions.Bilateraltaxtreaties have,ofcourse,foryearsbeenused to recon-
cile theconflicting claimsof tax jurisdictionoverbusinessincome.But
thisapproachthroughcoordinationcould go much further, and en-
compassa wide rangeofpoliciesconcerning taxation,theregulationof
businessstructure and activity, the framingof monetarypolicy,and
"Or worse.In i963 Britainthreatened to seize Pan Americanand TWA planesif
the CAB did not back down fromits insistence on regulatingtrans-Atlantic
fares.
7 The actionsbyBritain,Denmark,and theNetherlands to halt"pirate"radiostations
operatingofftheircoastsin international watersalso represent extraterritorial
claims
as does theunilateralextension,
to jurisdiction, by Ecuador,Peru,Chile,and Iceland,
claims far into international
of territorial waters,in order to controlrich fishing
grounds.
 ECONOMIC INTERDEPENDENCE 171
other"domestic" It is an approachthatrequires
policies. considerable
patience, forjointregulation
however, can proceedonlyas rapidlyas
themostlaggardparticipant; sincesomepotential have
participants
successfully thenewmobility,
exploited theywillbe reluctant
to give
up theirgains.
policies.The samefivetypesofresponsecan oc-
Balance-of-payments
curintheareaofbalance-of-payments adjustment. Thepassive response,
whichrepresents a return tothefeature ofthenineteenth-century gold
standard thatrequired domestic economies to be keyedto balance-of-
payments conditions, hasprovenacceptable to fewcountries. Thereis
a widerdanger, alreadyobservable, that,in theirattempt to avoidex-
changerateadjustment, somecountries willengagein exploitative re-
sponses.Byaltering thedomestic taxsystem totakeadvantage ofa fea-
tureoftheinternational tradingrules(embodied intheGeneralAgree-
menton Tariffs and Trade) thatpermits certaintypesof bordertax
adjustments butnot others, thesecountries will attempt to improve
theirtradepositions; bysubsidizing thetourist industry,theywilltry
to increaseforeign exchange receipts.
A defensive response involves imposing restrictions on variouspay-
mentsto foreigners in orderto improvethebalanceof payments-
restrictionsthatcouldin thepastbe observed withrespect to virtually
all internationaltransactions: trade,tourist expenditures, foreign aid,
privatecapitalmovements. Canada in 1970, and Germanyand the
Netherlands in 1971, adoptedquitea different defensive response in
allowingtheirexchange ratesto floatfreely,tobe determined bymar-
ketforces. Thisexpedient, longurgedby manyacademiceconomists
butprohibited bytheBretton WoodsAgreement, insulates
thoseecon-
omiesfrominflows of interest-sensitive
and speculative funds.
TheUnitedStatesis in theuniqueposition ofbeingabletoadoptan
aggressive response in thisarea.It hasbeensuggested bysomethatthe
UnitedStatesshouldceaseto pay gold fordollarsoffered by other
centralbanks,in ordertoforcetheworldontoa dollarstandard or to
induceothercountries toallowtheircurrencies tofloatagainstthedol-
lar-in theexpectation thatmostcountries wouldrejectthelatter option
andprovewillingto acceptand holdlarge(unlimited?)numbers of
dollars,thereby relieving theUnitedStatesofconcern overitsbalance-
of-payments condition.8 Othershave claimedthatfor all practical
purposes we havealreadyreachedthisstate.But in termsof foreign
8 See C. Fred Bergsten,"Taking the MonetaryInitiative,"Foreign
Afgairs, XLVI
(July i968), 7I3-32, who discusses the proposal but rejects it. It was, however, put
intoforceby PresidentNixon while this essaywas going to press.
172 WORLD POLITICS
policy,thereis a vastdifferencebetween an explicit
arrangement that
mostgovernments wouldfinddeeplyoffensive, and an implicitar-
rangement withmanyof thesamefeatures in practice.The former
wouldcreateconsiderable publicas wellas official
resentment,which
mightleadto actionson grounds ofnationalpridethatareneither in
theeconomic interestsof thecountriesundertaking themnorof the
worldeconomy; thelatterwouldhaveenoughambiguity topermit both
the UnitedStatesand otherlike-minded governments to maintain
withsemi-truth thatnothing haschangedandthateachcountry retains
itsfreedom of actionwhilestillenjoying thebenefitsof international
intercourse.
Finally,itis possibletoimaginetruly cooperative
forms ofpayments
adjustment, in whichrulesorconventions areestablishedtodetermine
whichcountries shouldmakewhatadjustments, withderogationssub-
jecttointernational The rulesofBretton
consultation. Woodsmadean
attempt inthisdirection,butthepossibilities
forprivatespeculative
gain
surrounding discrete in exchange
alterations ratesthatarethesystem's
keystone havein practice rendered theIMF consultative procedurea
deadletter.Nevertheless, inrecentyearstenseandsometimes acrimoni-
ousconsultation on exchange ratechangeshastakenplaceoutsidethe
IMF amongthemajorcountries.
ECONOMIC INTERDEPENDENCE: IMPLICATIONS FOR FOREIGN POLICY

The foregoing excursion intothechallengethatincreased interde-

pendenceconstitutes to domestic economicpolicies,and thepossible
national setsthestageforan examination
responses, oftheimplications
forforeign policy.
Obviously, theimpacton domestic is oneroutewhereby
politics eco-
nomicinterdependence can influence a nation'sforeignpolicy,hence
theproblems facingtheforeign policyoftheUnitedStates.The shift
fromDe GaulletoPompidouandfromLabourtoTorymaynotbasi-
callyaltertheshapeofworldaffairs, butitcanaffectthemin important
details.For example,France'swillingness to considerBritain's
entry
intothe EuropeanEconomicCommunity bluntedBritain'sgeneral
foreign policyroleas longas negotiations werein process, and will
divertBritish and Europeanofficial attentionand energyfromother
matters forsometime.Another exampleis therestoration
ofBritain's
militarycommitment eastofSuezbefore thewithdrawal hadproceeded
so faras to becomeirreversible. The important influence
of domestic
onforeign
politics policyis alsodemonstrated bytheelection
ofa Com-
munistas President of Chile.It has beenallegedthattheveryrapid
 ECONOMIC INTERDEPENDENCE 173
growthof foreign ownership in Chileanmanufacturing in the late
muchofit in theformof takeovers,
sixties, playeda significant role
in thepublicappealof Sr. Allende,who duringhis campaignraised
the spectreof foreigndomination of Chile'sinfantmanufacturing
sector.
The impacton politicalleadership maypossibly lead to the most
important effectof interdependence on foreign policy,but it is too
subtleand toouncertain in direction to be analyzedwithanyconfi-
dence.Moredirectand clearlyidentifiable effectsarisefromthechal-
lengesto nationalautonomy in therealmsof economic policy.These
challenges takeforeign policyrightintothethicket of domestic poli-
tics.On thewhole,foreign policy,in thenarrower senseof national
securityandmilitary-strategic considerations,hasin all countriesbeen
elitist-theinterestandprovince ofa relativelysmallgroupofpersons.
Strategic considerationsdo becomepoliticalissues,butgenerally in a
rather abstractfashion,as broadissuesand postures. Eventheforeign
policybudget-largely military-has untilrecently beenrelatively im-
munefromdomestic politicalconsiderations.(This is equallytrueof
foreign aid,whereonesmallgroupis pittedagainstanother, and the
publicremains passiveanduninterested.)
Withtheadventof increased economicinterdependence, however,
foreign developments willintrude on a wholerangeofpoliciesthatare
traditionallydomestic, and thesebread-and-butter domesticpolitical
issueswillin turninfluence and greatly complicate themanagement
offoreign It followsthatforeign
policy.9 policyin thesenseofall offi-
cial relationsbetweencountries will becomemoreintricate bothin
therangeofissuesandthefrequency withwhichtheyarise.National
reaction in theseventies will undoubtedly blendall fivetypesof re-
sponse. Manyoftheseresponses willcreatefrictionsbetween countries,
anddiplomats willbe keptbusyat theirtraditional taskofsmoothing
ruffledfeathers.Ifforeign policyis tobe regarded as successful,
itwill
have theadditional taskof and
channeling controlling thereactionsto
9This has longbeentrueof tradepolicy,of course,and thisfacthas set tradepolicy
apartfromotheraspectsofforeignpolicy-a muchwiderrangeof politicalinterests and
personshad to be broughtinto the picture.Indeed,in the early ig3o's, tariffs
were
considered a matterof domesticconcern.Such successas tradepolicyhas
exclusively
had as foreignpolicyhas hingedon the brilliantidea of reciprocity,
whichin effect
pitsone setof domesticeconomicinterests
againstanotherand thereby restoresto the
executivesomeof thefreedomof actionthathe has in otherareas of foreignpolicy.
On the generalrelationshipbetweendomesticpoliticsand foreignpolicyin Britain
and the United States, see Kenneth N. Waltz, Foreign Policy and Democratic Politics
Waltz does not discusstradepolicyat all; if he had, he
(Boston i967). Curiously,
mighthave qualifiedhis judgmentthatthe Americanexecutivehas more scope for
pursuing foreignpolicy than does the British Prime Minister.
174 WORLD POLITICS
greaterinterdependence in orderto prevent thedominance of those
exploitative,
defensive, and aggressive responses that,if generalized,
are detrimental to international orderand henceto all participants.
This means,in particular, confining theexploitative responses to de
minimus casesandintroducing somekindoforderintothedefensive
andaggressive responses so thattheywillnotprovoke retaliation that
is damaging toall parties.
To saythis,however, istosaylittlemorethanthatintimesoftension
and conflictingobjectives it is in theinterest of all to avoidoutcomes
thataredetrimental to all.It is farmore difficult
todefinethemaximal
taskforforeign policy(evenin an arealimited toeconomics), forthat
depends,amongotherthings, on ourbasicobjectives and in particular
onthevaluewe attach tothepreservation ofnational autonomy as such.
We mustsoonerorlaterfacein a globalcontext theissueofcentraliza-
tion-decentralizationthatis so prominent withintheUnitedStates.In
thinking abouttheseissues, I findit helpful to consider threeextreme
cases-Weberian "idealtypes." None ofthemwillbe realizedduring
thenexttenyears, buteachmayserveas a model,orgeneralguideline,
towardwhichwe mightmove;all ofthemacceptas giventhefactof
extensivegovernment influence on theoperation ofmarket forces.
isa regime
Thefirst ofnation-states, eachsuccessfullypursuing itsown
thathavebeendetermined
objectives in itsownway,democratically or
otherwise.As notedabove,successful pursuitofeconomic objectives at
thenationallevelrequires markets thatarefragmented at leastto the
nationallevel,and thisin turnimpliesthateachnationis sufficiently
insulatedfrom other nations topursueitsindependent course(although
groupings oflike-minded nations neednotbe excluded).Thisdoesnot
ruleouttradeandcapitalmovements, butit doespresuppose somein-
strument of policy(tariffs, quotas,taxeson international transactions,
flexibleexchangerates,or otherdefensivemeasures)thatwill permit
the countryto preventemaciationof its domesticpoliciesby interna-
tionaltransactionsthatare highlysensitiveto them.It is thesensitivity
of internationaltransactions thatmustbe reduced,and thatobjective
doesnotrequireautarky.
The secondregimeinvolvesa supranational statethatwill take over
manyof thefunctions thatare now performed by the nation-an ex-
tremeformof "constructive" response.In the area of economicpolicy
thiswouldmeaneconomicstabilization, taxationofmobilefactors, regu-
latorypoliciesconcerning businessesand unions,and even,up to a point,
policies.In otherwords,thespanofgovernment
redistributional control
would be broughtinto correspondence with the decision-making do-
 ECONOMIC INTERDEPENDENCE 175
mainofmobilebusinesses and individuals.
Sucha superstate
neednot
funds,and laborare notfreeto move
be globalin scope.Businesses,
andtheywillnotbe forsometime.The Communist
globally, countries
and manylessdeveloped countriesare effectively fromthe
insulated
maineconomic centers oftheindustrialworld,eitherbypolicyor by
uncertainty
inherent in theabsenceofpolicyunderpolitically
unsettled
circumstances.
Thereis a naturalhistorical analogyhere.It is thegradualpassage
of responsibility
forincreasing areasof economicmanagement from
theAmerican statesto thefederal government. As American business
becametrulynationalratherthanregionalor local in character, the
statesfoundit increasingly in a country
difficult, withinwhichfree
tradeprevailed andcontracts madein onestatehad to be honoredin
others,to regulatebusinessactivity effectively.
Businesses simplyleft
thestatesthatimposed onerous restrictions oratleast
on theiractivities;
theheadoffices migrated. Consequently, thefederal government gradu-
allytookoverregulatory responsibilities.
The thirdregime involves American hegemony, an extreme formof
"aggressive"response. Ratherthanturnresponsibility overto a super-
state,
theUnitedStateswouldgradually extenditsregulations tocover
U.S. citizensabroadand foreigners residing in, or dealingwith,the
UnitedStates.Bya combination ofpersuasionand(nonmilitary) threat,
itwouldeither bringothercountries intolineor drivethemintothe
firstregime,thereby insulating themfromsuch contactwith the
UnitedStatesas theyfindoffensive to theirsovereignty. The world
wouldbe on a dollarstandard, andmanynations wouldadoptsystems
ofregulationandtaxation similar tothoseoftheUnitedStatesin order
toavertpunitive reactionsfromit,andtoavoidinternal embarrassments
arisingfromdifferential treatment favoring Americanoverdomestic
Thisstateofaffairs
enterprises. couldnotbe brought about,ofcourse,
without overcoming a certainamountof domestic Americanopposi-
tion,concerning, forinstance, thetaxationof incomefromforeign
sources evenwhenit is notrepatriated.
Noneoftheseregimes is immediately foreseeable,fornoneis politi-
callyfeasible.
Butthemodelregime whichwe implicitly useat present
-autonomousand purposeful in
nation-statesharmonious and unre-
strictedeconomic intercourse, through thecompetitive marketplace,at
fixedexchange rates,governed byoccasional and conventions
treaties
toassuregoodconduct andtoironoutmodest problems ofoverlapping
jurisdiction,
leavingvirtually all economicdecisionsto nationalgov-
ernments-is simply notviablein thelongrun,forthereasonsalready
176 WORLD POLITICS
given.Unlesswe developsomenewconception ofworldeconomic or-
der,thesearchforspecific solutions to specificproblems will runa
substantial
riskofslipping intopractices thataredetrimental toall.We
willenjoyneither thefullbenefits ofeconomic integration on a "global"
scalenorthefullbenefits of nationalautonomy in theestablishment
andpursuit ofeconomic and socialobjectives. In short, it is thethird
notionofforeign policy,thegrandconception of a worldeconomic
order,whichwillbe profoundly affectedby theimpactof increased
economic interdependence, forgreater interdependence willinevitably
compela basicre-examination ofthekindofworldwe ultimately want.
Variousviablecompromises amongthesethreeregimes areofcourse
possible,
andwe shouldnodoubtworktowardoneofthemin thenear
futurerather thantoward theidealtypes. Threecometomind.The first
leanstoward preservationofnational autonomy byreducing thedegree
ofinterdependence through actionbyindividual governments; suchac-
tionswouldbe governed by international conventions to assurethat
theyweremutually consistent andthattheywentnofurther thanneces-
sarytoachievetheirpurposes. Thus,agreement mightbe reached, and
controlsinstituted, to limitmovements of financial capitalbetween
countries.The blockagewouldnothave to be completeto preserve
somedegreeof nationalautonomy in monetary policy,butit would
havetocoverthemajorsources offlows.Similarly, taxescouldbe im-
posedon theoutflow of business capitalto prevent modestnational
differencesin taxationand regulation of businessfrominfluencing
thelocationofindustry. Tariffquotasmight beusedtoinhibit anyrapid
growth ofimports thatwouldgreatly disturbdomestic industries; the
quotascouldbe allowedto growautomatically so thatloss of com-
wouldbe reflected
petitiveness in a relativebutcontrolled declinein
thedomestic industry.
A second, preferable approach accomplishes muchthesameobjective
by introducing somewhat greaterflexibility in exchangerates,with
international rulesgoverning thechangesin ratesand surveillance of
adherence totherules.10 Thisapproach would,I believe, helpenormous-
ly withrespect to balance-of-payments adjustment, and considerably
withrespect tothemovement ofyield-sensitive fundsandprice-sensitive
goodsfromcountry tocountry, butitwouldstillleavethewholearea
ofbusiness regulation untouched. It mighttherefore be combined with
10A proposalalongtheselinescan be foundin Cooper,"SlidingParities:A Proposal
for PresumptiveRules," in George N. Halm, ed., Approaches to Greater Flexibility of
Exchange Rates (PrincetonI970), 25i-59. This volumecontainsextensivediscussion
of a numberof similarproposals.
 ECONOMIC INTERDEPENDENCE 177
a thirdapproach, involving intensive efforts todiscover areasofpoten-
tiallyoverlapping jurisdiction witha viewto reachingcommontax
andregulatory policiesamongcountries-preferably whiletheprocess
of extensive foreign investment is stillat a relatively earlystage,so
thata reasonably firmframework ofexpectations regarding corporate
practices is available.(Recentinconclusive discussions betweenthe
UnitedStatesand Swissauthorities, regarding theprosecution of tax
evaders, indicate justhow difficult agreement will be in someareas,
andwithsomecountries.)
The newrequirements of theinternational scenewill undoubtedly
revive thedebatebetween thosewitha dirigiste philosophy ofeconomic
policyandthosewholeantoward laissezfaire.The former havelargely
carried thedaydomestically," withgovernments committed tostabilize
theeconomy, assuregrowth, and establish an equitable distributionof
income. The latter willtherefore welcomea chancetoreopentheissue
in a new context;theywill resistattempts to restrictinternational
transactions andtoregulate international firmsandfinancial transactions
through intergovernmental cooperation. International mobility offersa
welcome escapefromdomestic regulation. The newcircumstances will
alsoresult insomemajorrealignments onbroadissuesathome.Ameri-
can laborhas generally beeninternationalist in outlookand position,
butit correctly seesthemobility of American firms as a threatto its
welfare. Itsopposition to "tarifffactories" has begunto spreadto all
foreign investment andevento liberaltradepolicy, justas,in a some-
whatdifferent context, British Socialists regarded in-
a restriction-free
ternational economy as a threat totheir plansfordomestic socialreform
in thelate1940's. Laissez fairemightlogically be regarded as a fourth
extreme regime, reflecting a universal passiveresponse, butitsmanifest
conflict withaccepted domestic objectives warrants itsexclusion.
In summary, increased economic interdependence willresultin more
variedandmorefrequent official
and semi-official contact between na-
tions-far morethanforeign ministries canhandleinvolume, scope,or
technical detail.As a result, therelative importance offoreign ministries
in relations amongtheWesternindustrial countries will decline.In-
11Some yearsago GunnarMyrdalidentified and lamentedthe tensionbetweenna-
tionalpursuitof domesticobjectives thatare desirablein themselves,
and the preserva-
tionof an integrated internationaleconomy.He arguedthatthe growthof the wel-
farestatehad led to disintegrationof theworldeconomy.I believethatthisjudgment
undulyidealizesthe"integration" of theworldeconomybeforetheriseof the welfare
stateand that,in any case,it is premature;but the tensionbetweennationalpursuit
of nationaleconomicaimsand theattainment of harmonious and unrestricted
interna-
tionaltransactions
is certainly
present, and indeedwill becomemoreacute.See Myrdal,
Beyond the WelfareState (London i960), especiallychap. io.
178 WORLD POLITICS
creasedeconomic interdependence will alsocompela reassessment of
theprevailing modelofworldeconomic order.
The impacton foreign policyin thesenseofnationalsecurity is not
likely,in themediumrun,to be anygreater thanit was in thefifties
or sixties.*
Suchinfluence as thereis willcomethrough twochannels:
thetoneofpublicattitudes towardforeign nations, and theprocessof
adjustment toimbalances in internationalpayments. Publicfeelings of
benevolence or malevolence towardparticular foreign nationsareeasy
to underrate becauseof theirintangible quality;although theyrarely
provedecisive, theycaninfluence theflexibilitywithwhichtheexecu-
tivecan pursueforeign policy.In theabsenceof an adequateadjust-
mentmechanism, balance-of-payments pressures can of coursehave
verytangible on a nation's
effects as Britain
flexibility, andFrancehave
bothlearnedduringthepast fifteen years.These limitshave been
brought hometotheUnitedStatesin a variety ofwaysthatrangefrom
theperceived needto tie foreign aid to procurement in theUnited
States(themostimportant irritantin ourrelations withsomecoun-
tries),to thepersistent pleasforreduction of forcelevelsin Europe
and elsewhere on balance-of-payments grounds. Suchpressures erode
theconfidence ofothernationsin ourabilityto carryout our stated
commitments andobjectives. Whatis clearly neededis theintroduction
of someinstrument of controlthatwouldachievea balance-of-pay-
mentsadjustment amongmajorcountries, butwouldalsofurther the
causeofinternational cooperation.
It is important to recallthatmostof thetensions betweeninterna-
tionaltransactions and theautonomous pursuit of domesticeconomic
policyarisefromthesensitivity
of movements
of goods,services,
funds,
firms,
andpersons toeconomic developments at homeandabroad,and
notfromtheabsolute magnitude oftheflows. The valueoftradeto a
in termsofitscontribution
country, to nationalwelfare,
maydepend
neither
onthesensitivitynoronthemagnitude oftheflows,althoughit
is morelikelyto be relatedto themagnitude thanto thesensitivity.
Indeed,valueand sensitivityare inversely
relatedin one important
respect:
highsensitivity
results fromthecapacity
precisely ofa country
tosubstitute
domestic forforeignproductionorinvestment,in response
* This statement did not anticipatethe extraordinarily
aggressiveresponseof the
UnitedStatesin PresidentNixon'sNew EconomicPolicyof AugustI97I. Imposition
of the ten per cent surchargeon importsand declarationthatthe dollar would no
longerbe convertible intogold,withoutany priorconsultationeven with our closest
allies,are bound to induceothersto re-examinetheirdependenceon, and trustin, the
UnitedStatesin matters of nationalsecurity,
and mayeven acceleratetheproliferation
of nuclearweapons.
 ECONOMIC INTERDEPENDENCE 179
to relativelysmallmargins of advantage; yetwhensuchsubstitution
is easilypossible lowcost,thevalueperdollaroftradeor
at relatively
investment to the countryis correspondinglydiminished. (It is of
coursepossible thatthetotalgainsfromtraderemainhighevenwhen
thegainsclosetothemargin aresmall,so thatsensitivity
is highup to
a point, butnotbeyondthatpoint.)Wherethetotalgainsfromtrade
arehigh,preservation oftradebecomesa matter ofhighforeign policy,
as itissometimescalled,orevenofnational security.
Thus,a highvalue
placed on trademay lead countriesto war over it, as it led Japanin
I94I to attackthePhilippines and theUnitedStatesfleetat PearlHarbor
to removethreatsto itsoil tradewiththe East Indies.Increasedinter-
dependencein the senseused here will greatlyreducethatrisk,but
it also greatlyincreasesthe intrusionof internationaltransactions into
domesticaffairs, therebyaugmentingand aggravatinga verydifferent
rangeof problemsin foreignpolicy.
Growingeconomicinterdependence thusnegatesthe sharpdistinc-
tionbetweeninternaland externalpoliciesthatunderliesthe present
politicalorganizationof the world into sovereign,territorially-based
nation-states-sometimes calledtheWestphalianSystem, aftertheTrea-
tythatmarkedan end to the universalism of the Middle Ages-that
areinviolablein theirdomesticactionsand subjectto voluntarily agreed
rulesand conventions in theirforeignpolicies(includingwar).12 The
growinginterdependence of the world economycreatespressuresfor
commonpolicies,and henceforprocedureswherebycountriesdiscuss
and coordinate actionsthathitherto wereregardedas beingof domestic
concernexclusively. These pressuresarise because marketforcesin-
creasingly circumscribe the abilityof nation-states
to achievetheirde-
siredaims,regardlessof theirformalretentionof sovereignty. Where
autonomyimpliessuccessin achievingobjectives, and not merelythe
freedomto makefutileattempts to achieveobjectives,
some autonomy
in policycan actuallybe restoredby yieldingsovereignty in certain
areas.
The WestphalianSystemformallytreatsall nationsas equals, and
diplomaticformspreservethatfiction.But thereare manyimportant
asymmetries in the world, so that "interdependence" is not always
even-handedin its circumscribing impact.The asymmetries do not,
however,alwaysfavorthe largercountries.It is truethatthe United
States,by virtuebothof its relativeeconomicsize and of the interna-
12See RichardA. Falk, "The Interplay of Westphaliaand CharterConceptionsof
InternationalLegal Order,"in RichardA. Falk and CyrilE. Black,eds., The Future
of the InternationalLegal Order, I, Trends and Patterns (Princetoni969), 43-48.
180 WORLD POLITICS

tionaluseofitscurrency (whichin turnis partlyrelatedto size) retains

muchmoreautonomyin theuse of monetary policyfordomesticpur-
poses than do othercountries, for its own actionsstronglyinfluence
worldmonetary conditions.Tight moneyin the UnitedStatesmeans
tightmoneyin theworld (as in i969), withcapitalinflowserodingthe
tightmoneypositiononly modestly.Similarly,the importanceof
Americaninvestment abroadmeansthatAmericancorporatetax prac-
tices(and in particulartheprovisions forcrediting foreigntaxesagainst
U.S. corporatetax liabilities)have a stronginfluenceon corporatetax
treatment in othercountries, therebypreserving someautonomyto the
UnitedStates.
On theotherhand,smallcountries aresometimes in a morefavorable
positionto exploitthe international rules and the increasedmobility
offirmsand fundsthanlargeones.Like an oligopolistic firm,thelarge
countrymustbe alertto the reactionsof othersto its own actions;it
mustconcernitselfwiththe viabilityand stability of the systemas a
whole.The smallcountry, in contrast,can, withinlimits,considerthe
systemas being beyondits influenceand can therefore act freelyin
ways that,if generalized,would alterthe system,oftenforworse.It
can act withimpunity so long as theresultingmovements of fundsor
firmsremainrelatively small-that is, so long as theydo not threaten
the systemas a whole. Thus we see the emergenceof "flagsof con-
venience"and theiranaloguesin mattersof corporatestructure, dis-
closureofinformation, and taxation.
Throughoutthisdiscussionthe less developedcountrieshave been
largelyexcludedfromconsideration. This is notbecausetheirproblems
are unimportant, but because economicinterdependence among the
developedcountries is movingso rapidlythatitcreatesa commonrange
of problemsamong countrieswithbroadlysimilarobjectivesand in-
stitutionalsetups,and therefore callsforcommonand oftencollectively
agreedsolutions.The EuropeanEconomicCommunityas a centerfor
economicdecision-taking is rapidlybecomingobsoletein the face of
growingeconomicinterdependence; theUnitedNations,on the other
hand,is much too largeand reflects much too diversea rangeof eco-
nomicconcernsamongitsmembersto be a usefulinstrument forinter-
nationalcollectiveactionin thisarea. An unhappyby-product of re-
lyingon a smallgroupof largelyindustrialnations,a richman's club,
is the accentuation of the perceiveddifferences betweenthe rich and
thepoor.As timegoes on, problemsfacingthe initialgroupwill un-
doubtedlyspread; therefore the club shouldhave a flexibleapproach
to membership, as requiredby theproblemsat hand. A muchbroader
 ECONOMIC INTERDEPENDENCE 181
groupwillbe appropriate forexamplein defining
forsomeissues, the
between
relationship firms,
foreign-controlled hostgovernments,and
homegovernments. Butevenheretheconcerns of less
and anxieties
developed fornational
stillgroping
countries, mayhavequite
identity,
a different fromthoseof morematureand moreself-confi-
character
solutions.
and thisin turnwillrequiredifferent
dentcountries,