Steven E Lobell. World Affairs. Volume 166, Issue 4, Spring 2004.
All international powers must decide how to contend with potential challengers. They must select which states to punish, where to cooperate, and how to allocate national resources between the state’s productive capacity and its military security. A state that neglects either fiscal or security interests will have insufficient economic or military means to protect its global interests. That is, allocating too much or too little for defense can be dangerous. Excessive peacetime defense expenditures to keep pace with the military spending of rapidly rising contenders will divert resources from domestic investment, limit the scope of future economic growth, and eventually weaken the productive strength of the hegemon to construct and maintain a modern military force. By allocating too little for defense, the hegemon will lack the military means to deter rising challengers and the capability to defend its extensive global interests, in the event that deterrence fails.
The United States has three blueprints from previous hegemons for how (and how not) to respond to challengers:
The Spanish I (1621-40) response of punishment everywhere. Philip IV and his deputy, Olivares, engaged in total warfare against the Dutch, the French, and the English, as well as against the Ottomans and the Swedes, on several fronts and often simultaneously. Prolonged and excessive spending eroded Spain’s fiscal strength and, ultimately, its military power, and the stress from the search for new sources of revenue contributed to revolts in Catalonia and Portugal in 1640.
The British II (1932-39) response of cooperation everywhere. Chamberlain and his supporters moderated the ascents of Germany, Japan, and Italy through economic concessions, arms limitation agreements, and territorial agreements. As a result, Britain’s military, industrial, and economic preparations for war were delayed. In addition, the challengers’ reneging on or not renewing arms control agreements meant that Britain’s military capability was insufficient to defend its global commitments.
The British I (1889-1912) response of selective engagement. Britain cooperated with the United States, France (after 1904), and Japan through devolving leadership, extending loans, reducing protectionism, and assisting in their naval ascents, and it punished imperial Germany, France (until 1904), and Russia through naval building programs, tariffs, and preferential trading arrangements. This strategy ensured that London had ample fiscal and military capability to be a leading player in the great power game.
So what are the lessons of history for perpetuating U.S. predominance? The good news is that Washington is now less likely to select the British II option of cooperation everywhere, which could endanger America’s national security. The bad news is that Washington could select the neo-imperial Spanish I path of punishment everywhere (that is, in Iran, Iraq, North Korea, Syria, China, Libya, and Saudi Arabia), which could erode America’s economic staying power.
How previous great powers have responded to challengers is driven by the classic domestic question of “who gets what, when, and how?” Foreign policy is the product of the clash between inward-oriented nationalists and outward-leaning internationalists (or what I term economic nationalists and free traders) (Solingen 1998, 64). Broad, logrolled coalitions of actors and special interest groups from government, industry, finance, and labor will converge on a common position, often for different reasons and without any formal organization (Fordham 1998, 8). Supporters and opponents know that the state’s response to challengers will create domestic winners and losers. Supporters and opponents also recognize that any changes in the state’s foreign policy can have domestic distributional consequences. By capturing the gains and avoiding the losses, the victors will expand their domestic political power to advance their preferred policies, and the vanquished will be weakened politically and economically (Rogowski 1989, 5). As Helen Milner tells us, these “domestic consequences are the ‘stuff’ of politics” (16).
Free Traders
The free trade coalition consists of internationally competitive sectors and outward-oriented allies. They have overseas investments or interests and benefit from foreign economic exposure, or they have strong international links. Free traders favor greater openness and stability and will press the government to enact policies that promote such market characteristics. Supporters of the free trade coalition include fiscal conservatives, export-oriented and capital intensive firms, large banking and financial services, central banks, smaller firms oriented to global markets, skilled labor, and finance oriented government bureaucracies such as the Treasury or the Ministry of Finance.
The free trade bloc stands for macroeconomic stability both at home and abroad. First, this translates into limited government intervention in the economy, balanced budgets, tight monetary policy, and the deregulation of financial markets and exchange rates. Free trade supporters especially favor reforms to liberalize trade such as the abandonment of public sector trade and production monopolies, the deregulation of trade and currency regimes, and a retreat from state planning. Second, free traders favor reliance on low-cost defense arrangements such as the navy, air force, nuclear weapons, and other labor-saving technology. These arrangements are deemed essential to protect the sea-lanes of communication, trade links, and trade routes to secure imports and exports. Finally, cost-conscious free traders are open to membership in intergovernmental organizations (IGOs) and nongovernmental organizations (NGOs), as well as negotiated settlements of disputes and arms control agreements to lower the political, economic, and military costs of preparing for war. Arms races and hostility spirals are especially dangerous, because they will divert resources from productive domestic investment to military spending, undermine prosperity, disrupt trade flows, and contribute to increased protectionism.
Economic Nationalists
Pitted against the free trade coalition, the economic nationalist bloc is made up of non-internationally competitive sectors and domestic leaning groups. They have few foreign assets, sales, or ties, and they do not compete with foreign imports. The composition of the economic nationalist coalition includes unskilled labor, inefficient industry and agriculture, import-substituting manufacturing, labor intensive industry, public sector managers and workers, the military, settler pressure groups, colonial- and empire-oriented state bureaucrats and civil servants, pro-empire interest groups, small businesses that compete with imports, and trading companies.
Economic nationalists favor a military posture that calls for offensive ground force systems over defensive strategies (increasing the budget, mission, and role of the military). To protect inefficient state industry and infant industry from foreign competition, economic nationalists will lobby for tariffs, duties, and subsidies. They also view state planning as the engine for enhancing import-substituting manufacturing, and they support an active government that controls prices, licensing, purchasing, and wages. They will encourage the collaboration and amalgamation of industry into big business, as well as corporatist labor arrangements to compel labor’s cooperation with management and the government. In the past, economic nationalists regarded any colonial and overseas markets as essential for sustaining the policy of self-sufficiency and autarky, which they emphasize for strategic reasons such as the danger of economic dependence and the loss of control over destiny.
Coalitional Versus National Interest
The coalitional interest of each bloc is to bolster its own faction’s relative power over the opposition. The national interest is to maintain a rough balance between the state’s finances and security without undermining its political economy or eroding its military security.
In some states, these interests will converge, and the chosen foreign policy will advance both interests. For ruling free traders that confront liberal contenders (a state with a dominant free trade bloc), cooperation will advance the nation’s interests by lowering the cost of hegemony (safeguarding the leader’s political economy) and boost its own coalition’s power. For reigning economic nationalists that encounter imperial contenders (states with a dominant economic nationalist bloc), punishment will ensure that the state has sufficient military capability to defend its global commitments (protecting the hegemon’s national security) and will enhance their faction’s strength at the same time.
In other states, the coalitional and national interests will diverge. Ruling free traders will want to cooperate everywhere, even in the face of rogue challenges, but the national interest calls for punishment. Although punishment will insure sufficient military capability, this strategy will meet strong resistance from constituents of the free trade faction, because it will boost economic nationalists who will call for strong-fisted policy everywhere.
Where economic nationalists rule, they will push to punish everywhere, even liberal states where collaboration is possible, but the national interests call for cooperation. Although cooperation will safeguard the hegemon’s political economy, economic nationalists will oppose this strategy, because it will strengthen the free trade faction that will press for moderation everywhere. The danger in both instances is that a faction that advances its coalitional interest but harms the national interest will shorten the great power’s tenure.
Concerns about the distributional effects of compromise will impede cooperation across cleavages. Each bloc will fear that the other will gain more from collaboration, upsetting the domestic coalitional balance of power. Jockeying between the newly empowered coalition and the defenders of the old arrangement can result in an incoherent and volatile foreign policy.
Spain I: Punishment Everywhere
By the late sixteenth century, Spain was the preeminent world power, and its wealthy overseas empire was the envy of the emerging European states (Williams 1966, 9). The Spanish Crown accounted for nearly all the world’s deposits of good quality marine salt, provided the bulk of Europe’s sugar, and became Europe’s leading emporium of pepper. In 1580, Madrid’s claims became even more encompassing when King Philip II of Spain secured the Crown of Portugal and its overseas empires in Brazil, Africa, and the East Indies, adding them to Spain’s global empire. Spain’s empire extended to parts of western and central Europe, the East Indies, the coasts of Africa and India, and the Americas.
Spain’s imperial wealth and its scattered empire also attracted challengers. On the Continent, Spain confronted England, France, and the United Provinces (Dutch), as well as periodic challenges from the Ottoman Sultan. In the East and West Indies (Asia and America) and in Africa, Spain’s empire was challenged by English and Dutch assaults. Attacks by marauding Barbary pirates and the Ottoman Empire harassed Spanish shipping and trade in the Mediterranean and North Africa. During the Thirty Years’ War, Spain supported the Catholics against the Protestants in Germany, the Catholic League against the Huguenots in France, and its Austrian cousins against the Turks.
Economic Nationalists versus Liberals
Economic nationalists (the Council of the Indies, the Council of Portugal, the Councils of War, the Council of State, the Council of Finances, and the governors of the main fortresses in Flanders) favored restoring Spanish predominance, which conveniently increased their power as well. They lobbied for Madrid to expand its offensive military and naval operations, to punish all great power wannabes in the core and on the periphery, and to wrestle control over finances from the Cortes of Castile (the parliament responsible for voting on taxes) and the autonomous provinces in the empire. The opposing liberals’ foreign policy called for lowering the cost of empire, which would have the internal consequence of empowering themselves instead. Enhanced liberals would push Spain to reach an accommodation with the Netherlands (extending the nearly expired Twelve Years’ Truce) and perhaps France as well to reduce international tensions and improve the investment and trade climate within Castile by lowering taxation, ending copper coinage, and halting the expropriation of the gold and silver remittances.
Through a strategy of punishing every contender everywhere, the economic nationalists weakened the opposing liberal coalition and circumvented the Cortes. Total warfare on several fronts had the intended effect of pressuring the Cortes to approve ever-newer and ever-larger sales taxes, thereby granting the Crown complete control over public revenue. Other losers from punishment included Castile’s outward looking merchants, the business community, productive sectors, bankers, and the aristocracy.
It’s the Economy, Stupid: Undermining Fiscal Strength
Although punishment everywhere was good for the economic nationalists, it negatively affected Spain’s fiscal strength and, ultimately, its military power. The stress from the search for new sources of revenue contributed to revolts in Catalonia and Portugal in 1640. The crushing weight of defense expenditures fell almost exclusively on Castile and proved fatal to its economy. In the textile industry, technical inferiority and inflation meant the loss of its market share to competition from English cloth. In one major textile city, the number of looms declined from 600 in 1580 to 300 during Philip IV’s reign and to a low of 159 in 1691 (Lynch 1992, 212). In the sixteenth century, Spain possessed a small but active metallurgical industry, which was an essential component for creating a modern arms industry. By 1619, the metallurgical industry no longer could meet domestic demands. Spain became heavily dependent on foreign-based iron production, particularly from France and England, for the supply of military parts, and by the 1650s its factories nearly had ceased production (Stradling 1981, 63). In shipbuilding, Spain failed to keep pace with the new techniques of the northern European dockyards. As John Lynch notes, Spanish shipyards produced “huge and ponderous galleons, floating castles which were years behind the vessels of northern Europe in manoeuvrability and adaptability” (1992, 218).
As Madrid fell behind the emerging challengers, it was unable to recruit or finance an adequate number of troops or to supply its infantry. Financial exhaustion repeatedly forced Spain to seek a cessation in its military operations. In the Netherlands, no military campaigns were prepared between October 1628 and May 1629, because no money arrived from Madrid (Parker 1972, 256). After 1629, limited provisions were sent to the Netherlands because money was needed to fight the French in Mantua and the Dutch in the Americas. Reductions in the army’s budget meant that Madrid no longer could afford a modern military. The Spanish defeats at the battles of Rocroi, in 1643, and Lens, in 1648, were a direct result of a drastic reduction in the army’s budget (Parker 1979, 40). The absence of a cavalry contributed to Spain’s defeat at the battle of Rocroi; no longer vaunted or feared, the army of Flanders battled the French with inadequate cavalry because horses were too expensive (Lynch 1992, 165). These defeats meant the end of Spain’s military power.
Britain II: Cooperation Everywhere
In the decades after World War I, Britain was a leading world power. New regions in the Near East, namely the former Ottoman Empire, were included in Britain’s empire. Germany had been disarmed under the Versailles Treaty, and its navy was scuttled at Scapa Flow after the Great War. Other potential contenders, such as Italy and Japan, were relatively quiescent. France gave priority to its army and to the construction of the defensive Maginot Line over its navy. Russia had been greatly weakened by revolution, civil war, and Stalin’s purges of the officer corps. The United States returned to a policy of near-isolationism, concentrating its efforts in the Americas. Britain was in the enviable position of “not wanting to quarrel with anybody because we have got most of the world already, or the best parts of it, and we only want to keep what we have got and prevent others from taking it away from us” (Pratt 1975, 3).
By 1930, Britain’s global interests were under siege in disparate parts of its empire and by several contenders for regional hegemony. Britain faced Germany on the Continent, Italy in the Mediterranean, and Japan, the Soviet Union, and the United States in the Far East. Britain also encountered nationalist challenges within its empire in Egypt and India and a civil war in Palestine. The Spanish civil war in 1936 posed a threat to Britain’s passage to its Far Eastern empire through the Straits of Gibraltar and the strategic Balearic Islands. Economically, Britain’s traditional exporting industries were succumbing to foreign competition, and Britain’s growing dependence on trade with its empire meant that London needed to protect its foreign commercial interests more than ever before (Capie 1983, 17-22).
Free Traders versus Economic Nationalists
The Great War empowered Britain’s ailing economic nationalist bloc. The free traders’ postwar agenda focused on rolling back these wartime gains (Newton and Porter 1988, 55-63). Outward-oriented free traders feared that another war such as the Great War permanently would extinguish “gentlemanly” financial capitalism in Britain (Cain and Hopkins 1993, 111). They prophesized that strengthening economic nationalists would mean the “establishment of a ‘new economic order’ in which price-fixing and the control of production and competition would replace the market as the main regulatory mechanism of economic life” (Wurn 1993, 49). Even a massive rearmament program carried such risks, because it would require state intervention in industry and would divert resources and factories from exports to rearmament. As the Treasury warned, state intervention in managing the economy was turning Britain into “a different kind of nation” (Peden 1984, 24). For the sake of their coalition’s survival, free traders pressed for a self-reinforcing strategy of cooperation everywhere, even though the nation’s survival called for punishment. Free traders moderated the economic nationalists’ agenda by restraining Britain’s military buildup, imposing fiscal orthodoxy and laissez-faire economics, and lobbying for economic and territorial concessions and arms limitation agreements with Germany, Italy, and Japan. One of the central strategies of the free trader coalition was to cultivate the growth of moderates within rival imperial states, especially free trade-oriented businesses, which would pressure their respective governments for commercial and military restraint.
Commercial Concessions
Free traders lobbied for a foreign policy of economic and military concessions. First, free traders feared that punishing imperial Germany and Japan would exacerbate Britain’s and the contenders’ financial difficulties. Worse, they warned that Berlin or Tokyo might resolve a grave foreign exchange crisis by conquest (Deist 1994, 383). Free traders proposed extending foreign credits and lower tariffs to Germany so that Hitler could purchase the British goods that Germany needed, quelling the urge to expand (Newton 1995, 493-94). In the Far East, to obtain fair treatment for British trade and enterprise in China (and hopefully Manchuko), London had to keep the goodwill of China without antagonizing Japan (Trotter 1975, 10).
Second, the City believed that trade would improve Germany’s and Japan’s political-economic climates by strengthening moderates and domestic free trade constituents. British free traders appealed to their moderate German counterparts in charge of economic affairs. The intent was that British penetration would pull Germany away from economic autarky, state subsidies, and currency control and toward a more open and orthodox economic policy (MacDonald 1972, 106, 117). Free traders countered that any attempt to block short-term loans to Germany would weaken economic moderates (and a budget crash risked contributing to external expansion for raw materials) (Kennedy 1983, 103). As Chamberlain argued, there are sections in Germany “which are anxious to restore international good relations and thereby alleviate the economic difficulties” facing their country (MacDonald 1972, 109).
In the Far East, the Treasury pushed for strengthening Japanese moderates over naval and military extremists (Trotter 1974, 71-72). Cooperation would bolster the “better elements” in Tokyo, strengthening the reformers in the Konoe government (Lee 1973, 141). To advance this agenda, in 1935, the Treasury sent Sir Frederick Leith-Ross to China and Japan with the immediate goal of providing a currency loan to China. Before departing for the Far East, Leith-Ross conducted interviews with banking and financial interests in the City and with businessmen interested in trade with China. Free traders held that joint Anglo-Japanese financial cooperation on aid to China might lead to a solution to Manchukuo, save the Washington Naval Conference system, arrive at a working arrangement regarding occupied China, and cause Japan’s return to the League of Nations.
Rearmament
In 1932, the Cabinet revoked the Ten Year Rule, warning that this did not justify immediate increases in defense spending without considering Britain’s economic crisis. The free traders’ solution to imperial Germany’s military challenge was to build up the Royal Air Force (R.A.F.) (Peden 1979, 106-50). Britain would construct as many front line bombers as possible, with few air reserves. The initial purpose was to discourage Germany from trying to compete with Britain by persuading them to accept a permanent inferiority in the air. Later, the goal was to deter Germany by demonstrating that Berlin could not win a short war with a knockout blow. In 1937, with the advent of radar that would allow fighters to find and confront an enemy’s attacking bombers, as well as with advances in fighter planes, the Treasury called for the construction of cheaper fighter planes, rather than more expensive bombers (Peden 1979, 128-34).
To curb Japan’s naval rearmament and to prevent a prohibitively expensive naval race in the Far East, free traders supported the Washington and London Naval Agreements. For free traders, naval arms limitation with Japan between 1921 and the mid-1930s constituted the most successful aspect of their efforts to reduce the military spending of a rival power. The Washington Conference called for the immediate cancellation of all existing capital shipbuilding programs, a naval holiday of ten years’ duration during which no capital ship construction would be allowed, and the scrapping of a number of new and old ships. This ratio just permitted the admiralty to send a fleet to the Far East while keeping a one-power standard against the next largest European navy (Kennedy 1976, 341).
To moderate Germany’s military buildup and prevent a repeat of the costly naval race that preceded World War I, free traders supported diplomacy in the form of the Anglo-German Naval Agreement in 1935 (Hall 1976, 478-80). The Naval Agreement permitted the maintenance of a German navy no larger than 35 percent of the size of Britain’s surface fleet in all classes of vessels and 45 percent in submarines. For financial interests anxious to limit overall spending on armaments, restricting the German fleet allowed Britain to re-arm at the moderate pace dictated by fiscal orthodoxy and to provide a sufficient force to protect against Japanese aggression in the western Pacific (Howard 1972, 101-02). There also was the belief that bilateral negotiations might move from naval matters to the urgent question of air power and a multilateral air pact directed against surprise aerial bombardment. Britain had added pressure to reach an agreement with Germany, because Japan announced in 1934 that it did not intend to renew the Washington and London Naval Treaties when the latter treaty expired in 1936.
Free traders, and especially the Treasury, opposed expenditures for a continental-size army in peacetime and during the initial stages of war (Peden 1979, 113-50). A continental army was expensive and would cause economic dislocation by diverting manpower from production. Instead, British labor (kept at home) would build the equipment to support the armies of its continental allies.
Finally, Chamberlain argued that a strong British economy would deter emerging contenders from challenging its regional hegemony (Coghlan 1972, 215). The Treasury’s position was that Britain had a financial advantage over its enemies in a long war because of its strong economy and its large war chest. Britain’s superior war potential would deter a rising challenger because any conflict would become a costly and protracted war that Britain would win (Peden 1979, 65).
It’s Not the Economy, Stupid: Eroding National Security
Free trader restraint shortchanged Britain’s national security interests. At best, Britain’s military, industrial, and economic preparation for war (including infrastructure, administrative apparatus, and spare military capacity) was delayed. At worst, in the case of the defense of Singapore, it really had not begun.
In the Far East, the Washington and London Naval Conferences granted Japan local naval hegemony. To gain Japan’s consent to the naval tonnage limitations set at the London and Washington Naval Agreements, Britain and the United States agreed not to fortify any of their island possessions in the Pacific and to neither upgrade nor build any new naval bases in the region (Kennedy 1976, 324-25, 335). The United States could not improve existing naval facilities in the Philippines (there were no limitations on Hawaii). Britain could build up Singapore, but not Hong Kong, into a first-class naval base. However, Singapore was far from complete because of free trade opposition. Thus, neither Britain nor the United States had a base within striking distance of Japan.
In 1934, unwilling to accept permanent naval inferiority, Japan denounced the Washington and London Naval Agreements. As expected, at the Second London Naval Conference, in 1936, Japan demanded a common upper limit, seeking parity with the fleet strengths of Britain and the United States. In response to Japan’s invasion of China in 1937, London rejected a naval show of force to punish Japan, instead choosing to provide a loan to China for its defense and military supplies via Hong Kong and the new Burma Road. As war approached, the combination of Britain’s one-power standard, the Anglo-German Naval Agreement, and the growing conflict with Italy in the Mediterranean meant that Britain could spare few ships and would not dispatch the main fleet to Singapore to defend the Dominions or British interests in the Far East.
In Europe, like the Washington and London Naval Agreements, the Anglo-German Naval Agreement allowed Berlin to construct the Imperial Navy without the fear of a British preventive strike (Hall 1976, 483). Chamberlain’s cost-saving strategy meant that Britain only could moderate Germany’s and Italy’s expansions through territorial concessions. The Munich Agreement, intended to defuse the immediate danger of war, strengthened Germany’s immediate war-making capacity by granting Berlin foreign exchange, strategic raw materials, industrial power (especially the Skoda armament works), and military equipment for war (Barnett 1972, 556). In March 1939, with little fear of retribution, the German army invaded the rump of Czechoslovakia. In April, unwilling to accept an everlasting position of naval inferiority, Hitler rejected the 1935 Anglo-German naval agreement, calling for a massive naval construction program (Z-Plan). Similarly, in 1938, Britain recognized Rome’s position in Abyssinia, only to have Italy violate this understanding by invading Albania in 1939. The settlement gave Italy large segments of Abyssinian territory currently occupied by Italian troops, and it made frontier adjustments between Abyssinia and Italian Somaliland in favor of Italy.
Britain I: Selective Engagement
In the sixty years or so after the Napoleonic wars, Britain came to dominate many regions of the globe. These spheres of influence comprised the Far East, especially China; central Asia, including the “Jewel in the Crown,” India, and the buffer territories of Persia and the Gulf, Afghanistan, and Tibet; the Mediterranean; southern and eastern Africa; and Central and Latin America. Although London did not dominate Europe, Britain was the historic balancer on the Continent.
By the last decade of the nineteenth century, Britain faced intense industrial competition and naval construction challenges. These competitors included Germany, the United States, Russia, France, and Japan in the Far East; France and Germany in the Middle East and Africa; France and Russia in the Mediterranean; Germany on the Continent; Russia in central Asia; and the United States in Central and Latin America.
Economic Nationalists versus Free Traders
Within Britain, the ruling free trade faction pressed for cooperating with the liberal United States, Japan, and France (after 1904) through devolving leadership, extending loans, reducing protectionism, and assisting in their naval ascents. Opposing economic nationalists pressed for a three- or even four-powered naval standard (for example, as many battleships as the next three or four largest naval powers), industrial protection and imperial preferences, and maintenance or expansion of imperial garrisons. Free traders blocked calls to punish liberal contenders, because such a policy would hurt the free traders and their constituents the most by provoking an unnecessary and costly hostility spiral, resulting in commercial retaliation, trade wars, and even militarized conflict between trading partners. Many free traders joined the economic nationalists in favor of punishing imperial Germany, France, and Russia, even though this resulted in increased defense spending and preferential trading, strengthening the latter coalition. When accommodating imperial states, free traders risked losing commercial and financial access to the locale and strengthening the war-making capacity of a rival.
The domestic consequence of cooperation reinforced the strength of many members of the free trade faction while weakening the constituents of the economic nationalists. Cooperation bolstered efficient industry, the city of London, the Liberal Party, and fiscal conservatives by diverting resources from defense spending and enhancing trade and capital flows. Free traders moderated the scale and the nature of the economic nationalists’ program for punishing imperial contenders because of a fear that it would augment the power of the members of the economic nationalist coalition such as the military, inefficient industry, agriculture, the Conservative Party, and pro-Empire organizations and colonial bureaucrats who would push London to adopt a more belligerent grand strategy.
Safeguarding Fiscal Strength and National Security
Fortunately for Britain, the free traders’ interests and the nation’s interests converged. A strategy of selective engagement advanced London’s productive strength and its military security, thereby extending Britain’s great power tenure. Devolution of naval leadership over the Americas to the United States in 1901, over the Pacific to Japan in 1902, and over the Mediterranean to France in 1912 drastically reduced the political, economic, and military costs of hegemony. Free traders were eager to see Britain’s allies receive financial support. London played a central role in the formation of the Anglo-Japanese alliance because of the complementarity between Tokyo’s industrialization and the City’s export trade of capital goods and services (Nish 1966, 11-13). The City championed the Anglo-Russian Entente in 1907 because it would facilitate financial investments in Russia and would protect Britain’s commercial and financial interests in Persia. Stable Anglo-American relations were vital for English capital because British investors held about $2.5 billion in American stocks and bonds, or 75 percent of the American securities in foreign hands (Rock 1989, 45).
Many free traders retreated from their earlier calls for cooperation with Germany, instead siding with moderate economic nationalists in their support for increased naval estimates. As a result of the naval reforms, Britain matched Germany’s military buildup and reduced its naval estimates every year from 1904-10 (Sumida 1989, table 3). In 1904-05, the army cost 31.6 million [pounds sterling], and by 1905-06 this amount had been reduced to 29.1 million [pounds sterling], and it continued to decline until 1913-14 (Sumida 1989, table 15). The cost of the army declined because of the withdrawal of a number of colonial garrisons between 1904 and 1906 (West Indies, Bermuda, and Canada), a reduction of British forces in Canada, and a cap on Britain’s defense spending in India (Marder 1961, 28-45). Furthermore, thrifty free traders directly and indirectly accelerated the naval ascents of the United States and Japan, ensuring that each could assume the responsibilities associated with regional hegemony. By allocating these freed-up military resources to Britain’s remaining commitments, London strengthened its immediate fleet capability in its home waters, the Atlantic and the Mediterranean.
Why the United States Will Pursue Britain I
For the United States, parochial and national interests likely will align as well. Free traders historically have aided in the ascent of liberal competitors and thereby have expedited the hegemon’s retreat from the locale. According to Richard Rosecrance and Jennifer Taw,
Dutch capital largely financed British commercial and industrial growth at the end of the seventeenth and the beginning of the eighteenth century. Similarly, British investment provided an essential stimulus to the growth of the United States both before and after the Civil War. (1989, 190)
With the final victory of the free trade bloc over the protectionist and isolationist forces, postwar American foreign policies such as the Marshall Plan, the Dodge Plan, and the Bretton-Woods system contributed to the ascents of liberal Japan and Germany.
Self-serving ruling free traders will block calls to punish liberal states. They know that a hostility spiral only will undermine macroeconomic prosperity by disrupting trade flows, diverting resources from domestic investment to military spending, and contributing to increased protectionism. The long-term effect may be a decline in America’s international competitiveness. Given their near-preponderance, free traders likely will join with economic nationalists to punish imperial and rogue regimes, forgoing any immediate distributional gains from cooperating with such states. Free traders understand the commercial and military danger of weak and dissatisfied states becoming powerful and dissatisfied.
The implication is that the United States will assist liberal Germany (or the European Union) and Japan, accelerating their rates of ascent. As Germany and Japan assume greater political, economic, and military roles in their respective spheres, the United States can retrench, retaining access to its traditional interests without bearing the costs associated with regional hegemony. Devolving leadership to different liberal contenders also reduces many realists’ concerns that a single power will dominate the Eurasian landmass, commanding greater industrial capacity than the United States and thus tipping the balance of global power against America. Where there are no liberal successors, the United States should stand firm and hasten emerging liberal followers, even in the Third World. The United States can invest this “peace dividend” and can concentrate the newly available military resources in its remaining commitments, safeguarding its fiscal strength without eroding its national security interests.
Why the United States Could Pursue a British II or Spanish I Strategy
Britain II
One real danger for the United States is that it could pursue a British II strategy of cooperation everywhere, even where it should punish. For ruling free traders, cooperation everywhere will have the domestic outcome of boosting their own faction. Concern for the economy, which reflects its constituents’ interests, especially peacetime military spending and opposition to protectionism, means that free traders are very tempted to offer military, economic, or territorial concessions to temper a contender’s ascent and demands. The most acceptable concessions impede further increases in the military and economic power of the contender and provide open access to the contender’s markets. If the hegemon can convince the rising contender to moderate its military buildup and prevent a costly arms race, then it can lessen the unbearable burden of preparing for war against multiple challengers; the leader can husband its economic power in the event of a protracted conflict without diverting resources away from industry toward the military. An arms limitation agreement also can prevent a costly arms race.
The danger of cooperation everywhere is that it risks undermining America’s military security. As imperial contenders or rogue states encroach, they likely will reject cooperative economic, political, and military agreements. E. H. Carr notes that weaker states will renounce treaties concluded by them with stronger states so soon as the power position alters and the weaker state feels itself strong enough to reject or modify the obligation. (1964, 190)
The allocation by the United States of too few resources for defense and the failure of arms reduction agreements, in addition to illegal rearmament by the challenger, means that Washington will have insufficient capabilities to defend its global commitments.
Spanish I
Another danger for the United States is that international events (worsening global economy) or domestic ones (terrorist attacks) might strengthen the forces of the economic nationalist bloc. For economic nationalists, punishing everywhere through unabashed unilateralism (abandoning the North Atlantic Treaty Organization or the United Nations), military buildup to prepare to fight several preventive and pre-emptive wars (simultaneously if necessary), and trade protectionism will have the domestic consequence of empowering their constituents.
The danger of a neo-imperial strategy of punishing everywhere, especially in liberal states where cooperation is possible (the 1992 Defense Planning Guidance discouraged all industrialized countries, including U.S. allies, from aspiring to a larger regional or global role), is that it risks undermining America’s political economy. As Robert Gilpin (1981) and Paul Kennedy (1987) warn, excessive and sustained peacetime military expenditures will divert resources from domestic investment, limit future economic growth, and erode the financial basis for Washington to construct and maintain a modern military force.