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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
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