Over the weekend, German Chancellor Olaf Scholz and his finance minister, Christian Lindner, announced a sea change in European foreign policy. Germany will at last liberate itself from its dependence on Russian fossil fuels and begin making serious contributions to the military defense of Europe. This was welcome if belated news—the final step in unifying the continent against imperialist Russian aggression.
The change from Berlin is also the opening of a new economic era that Western leaders must now embrace, ready or not. For the past half-century, the United States and members of the European Union have deliberately integrated their economies with those of authoritarian regimes abroad. In some cases these arrangements have been motivated by the allure of corporate profit, but more often the project has been entwined with a sincere and broad-minded approach to international politics. By linking together the economies of the world in trade, optimists in the 1980s and 1990s hoped not only to lift millions of people out of poverty but to defuse international tensions and make peace a prerequisite for economic prosperity.
As President Bill Clinton declared in 2000, welcoming China into the World Trade Organization would encourage “political reform” and be “likely to have a profound impact on human rights and political liberty.” And as Thomas Friedman opined a few years later: “No two countries that are both part of a major global supply chain … will ever fight a war against each other.”
History has not been kind to such declarations, and rarely is. Similar trade utopianism was common among European intellectuals in the years before World War I. The cultural and economic benefits from expanded trade between nations are real, but expanded trade also entails some drawbacks, and as a cure-all for authoritarian abuse, it simply does not work.
But for quite some time the dream seemed plausible, and there was no more potent symbol for the triumphant millennium to come than a unified Germany implementing the full globalization agenda. For the enthusiastic logic of international trade carried domestic implications, as well, where markets could bring innovative prosperity to a world supposedly stagnating under the meddling interests of politicians. Governments would not only bring down tariffs but eliminate costly regulations and generally do what they could to remove themselves from the flow of money and resources around the globe. This included a commitment to fiscal restraint. The EU still imposes an official cap on the size of budget deficits that its members can assume.
Germany kept tariffs low, balanced its budgets, and enjoyed a multidecade export boom. Its welfare state, by American standards, was and remains robust, for a time guaranteeing more leisure time per worker than any nation in the world.
Until very recently, economists applauded Germany’s penny-pinching as an exemplar of economic prudence. By abstaining from excessive government spending, the thinking went, Germany was keeping itself fiscally prepared to meet unexpected challenges. But both the coronavirus pandemic and the Russian invasion of Ukraine reveal how backward this reasoning was. Germany’s fiscal responsibility was in fact a reckless habit of underinvestment. Germany today spends a third less on research, education, technology, and machinery than it did in the 1980s, and until recently the number was even lower.
By failing to invest in a more effective energy system, Germany remains dependent on Russian gas, receiving 55 percent of what it burns from Russia, and was even in the process of approving a new gas pipeline to Russia when the invasion interrupted. Early critics of the economic sanctions targeting Russia pointed to the loopholes surrounding energy on many measures. The frustration is understandable, but the reality is that in Germany and several other countries, millions of homes have no other plausible heat source. Withholding Russian gas in these circumstances would amount to a Russian attack on European civilians, not an effective sanctions regime against Russia. The issue is not the sanctions, but decades of errant leadership in Berlin.
This is what makes Germany’s economic about-face on Russia so remarkable. On Saturday, Lindner, traditionally a fiscal hawk in German politics, defended his administration’s call for debt-financed spending on armaments as “investments in our freedom.” He would be wise to follow through on this reasoning with other investments that can be used to wean Europe from its economic dependency on authoritarian power.
This lesson here is not only for German leaders. American real estate, for instance, has long been entwined with Russian oligarchy, embodied cartoonishly in the persona of former President Donald Trump and his long personal friendship with Putin himself—a spectacle even more embarrassing for Americans than the sight of former German Chancellor Gerhard Schröder sitting on the board of Gazprom.
But the economic issue for the West is more serious than the corruption of a few recent leaders. It is not only Russia with whom we are entangled but its most powerful authoritarian ally, China. And the economic dependence of the U.S. on China should be at least as unsettling as Germany’s dependence on Russia. We have seen for more than a decade now that trade winds do not always blow in a liberating direction. Major scandals like Apple’s knowing reliance on child labor in China and the NBA’s efforts to silence critics of China’s crackdown in Hong Kong are only the most egregious examples of China’s authoritarian culture finding a place in American institutions. American corporations rely on China for cheaper labor and higher profits as a matter of course.
Reforming this relationship does not need to be an act of political confrontation. A new globalization with more modest aims and a clear-sighted acknowledgment of the political differences between the U.S. and its current authoritarian trading partners is possible. Unwinding our dependence on these powers does not have to be an immediate, shock therapy–style operation—indeed, the Biden administration’s largely overlooked supply chain review effort provides a very promising template for reforms—with new American manufacturing initiatives in key industries, including health care, green energy, semiconductors, rare earth minerals, and chemical development, to ensure that the U.S. will not be without options should a trading partner prove unable or unwilling to provide essential goods.
But wherever Biden’s
initiative goes, major changes are already afoot, as evidenced by BP’s decision
to abandon its $14 billion
investment in Russia’s Rosneft. However long the current sanctions regime
against Russia lasts, Western investors are rearranging themselves for a world
independent of Russia’s political instabilities. It is better to guide this
process with political leadership than to allow a series of cascading crises to
bring reform through ruin.
