Our National Security Relies on a Healthy Economy

Economic Tradecraft

The most important determinant of a country’s national security is the health of its economy and its society. That is a strong statement, but it is true. I saw it when I studied economic history in college, years ago. I saw it as a young economic analyst at the Central Intelligence Agency, watching Japan, Taiwan, Singapore, South Korea, and China come of age economically and strengthen their national security in the process. 

And, I saw it, as I nodded in agreement, as I read Paul Kennedy’s 1987 masterpiece, The Rise and Fall of Great Powers – the main thesis of which is great power ascendancy and durability relies on economic success and its sustainability. Kennedy wrote “The relative strengths of the leading nations in world affairs never remain constant, principally because of the uneven rate of growth among different societies and of the technological and organizational breakthroughs which bring a greater advantage to one society than to another.”

As such, it is appropriate, and even necessary, that The Cipher Brief take on some of the key economic issues, and even perhaps the key social issues, of the day – because they do not just affect our economic and domestic well being, they affect our national security as well. 

One of the key policy issues on the table today is international trade. President Donald Trump ran on a populist platform that blamed our trading partners for our economic problems, specifically the loss of middle-class manufacturing jobs, and he promised to fix it all by negotiating better trade deals. It is one of the few issues on which his post-election rhetoric has stayed constant. He continues to threaten our trading partners that a new day is coming.

How to think about this? It has been my strongly held view, since my earliest days studying economics, that international trade has significantly boosted the U.S. economy. But, how do we quantify that in a way that is both accurate and that captures people’s attention? And how do we translate that into national security?

For the first question, luckily, we have the ongoing work of the Petersen Institute for International Economics (PIIE).  The Institute is a private, nonprofit organization focused on the in-depth study of international economic policy. PIIE has a reputation for both non-partisanship and rigorous inquiry. And it just published a briefing paper that gets at the question of what effect has international trade, over a long period of time, had on our economy.

In the paper, Gary Hufbauer and Zhiyao Lui provide an update to a 2005 PIIE study on the economic benefits of international trade. Hufbauer and Lui estimate the payoff to the GDP of the United States from the expansion in trade from 1950 to 2016 – due both to policy liberalization and to improved transportation and communication technologies – at $2.1 trillion. That translates into $7,014 per person. That means that the average American’s income today is 12 percent higher than it would be in the absence of the expansion of trade. In economics, that is a huge number.     

What about the second question regarding the link between economics and national security? How to measure that? That is even harder because a strong and growing economy advances a nation’s security interests in a variety of ways. It gives it the resources – tax revenues to spend on defense, intelligence, and diplomacy – necessary to play a significant role in the world.  It gives it the technology to do so. It gives it the confidence to do so. And it creates interdependencies among it and its trading partners that, while not guaranteeing stability, certainly enhance it. 

Let’s just take defense spending. We can actually estimate the effect of trade on that. As the United States spends roughly 3.5 percent of its GDP on defense, the expansion in trade from 1950-2016 has added almost $75 billion to our defense budget today. That is comparable to roughly three times what the Department of Defense lost in spending due to sequestration. Again, it is a big number.

Hufbauer and Lui also estimate that the payoff to U.S. economy from additional trade liberalization could be as high as $540 billion by 2025. They estimate that the majority of that – some $311 billion – could come from trade liberalization from a free-trade agreement among Asia-Pacific nations. That would be a 3 percent gain for the overall U.S. economy (almost .4 percentage points of additional growth a year) and a nearly $20 billion gain for defense spending.       

The policy implications here are obvious. For example, the hope for a free-trade agreement with our Asia-Pacific Economic Corporation (APEC) partners looks grim in the aftermath of the Trump Administration walking away from the Transpacific Partnership Agreement (TPP). Given the above numbers, this will cost the U.S. economy and our national security dearly – not just from the economics of the issue but also from the fact that TPP would have played a significant role in containing Chinese influence in East Asia.

Likewise, any retreat of trade liberalization put in place in earlier years – a rollback in the North American Free Trade Agreement (NAFTA), for example – would put at risk the $2.1 trillion in economic gains made to date and the resulting national security gains as well. The potential consequences are huge and should be highly concerning to both economists and national security experts.   

What about the job losses that so dominated politics in the 2016 election? Between 2001 and 2016, the U.S. manufacturing sector shed nearly 5 million jobs, an almost 30 percent decline over the period. The important point here is that trade is not the biggest factor in these job losses; automation is. This can be clearly seen by the fact that manufacturing output in the United States today is higher than it has ever been – despite the drop  in employment. Machines are replacing people.

In addition, Hufbauer and Lui, in the same policy brief, estimate that increased trade in manufacturing has resulted in net loss of only 156,250 per year from 2001 to 2016. While obviously significant to those who lost their jobs, Hufbauer and Lui point out that the figure represents less than 1 percent of the total number of people involuntary separated from their jobs each year. The authors argue that a more robust unemployment insurance and expanded tax credits could help these displaced manufacturing workers adjust.  Trying to save these jobs through restricting trade would be counterproductive. I could not agree more.

I look forward to many more economics pieces in the Cipher Brief in the months ahead. Our understanding of national security depends on it.

Economic Tradecraft

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