Killing in the Crib: Investment Relations between Great and Rising Powers

• In Event: Military and Economic Interdependence

Abstract

In recent years, scholars have critically examined America’s post-Cold War economic engagement with China, highlighting America’s role in China’s meteoric rise. Supporters of engagement argue that such actions have helped strengthen and preserve a world order that not only serves American interests but also promotes peaceful cooperation among great powers, old and new. Critics label it a strategic blunder which has hastened the decline of US hegemony, calling China a “rival of America’s making.” This debate highlights a major dilemma in modern international relations. Since the onset of the industrial age, economic relations between great (and rising) powers are essential but generate major benefits for one’s geopolitical competitor(s). So how do states navigate these decisions? When and with whom do they economically engage and when and why do they stop? My paper examines part of this puzzle, focusing on investment flows between great powers through a structural, historical lens. In doing so, it provides a new theory on the manner in which security competition affects these flows.

I argue that great powers limit investment flows between themselves and great powers they view as threats. Instead, they invest in less threatening great powers and smaller countries. In addition to the obvious extractive benefits, investments in smaller countries often give the investing great power(s) both political influence and economic leverage. In time however, some smaller countries benefit enough from international investment and become rising great powers themselves. In these cases, threatened great powers are faced with two choices, either pull their investments or use the influence and leverage provided by their investments to try to preclude the rise of a new great power. Killing the baby in the crib is the preferable option in most cases. The rising power is cut down and investment relations (and their benefits) are maintained if not increased.

To demonstrate the operation of the theory, I examine multiple historical cases where the great powers involved achieved varying levels of success. Doing so allows me to maximize variation in the outcome and provide more comprehensive empirical support for my theory. Germany pulled its investments from Russia as the latter’s industrialization, paired with its already massive population, threatened to engulf German power. America coerced Japan into accepting the Plaza Accords, leading to an asset price bubble that crippled the rising power’s economy for over a decade. The British attempted both courses of action regarding America’s rise to power but were ultimately hamstrung by their increasingly constrictive security environment.

My theory has implications for how scholars think about inter-great power economic relations. In the modern era, great powers can rarely afford autarkic relations with their fellow great powers, but the possibility of rivals benefitting at their expense is sometimes equally unwelcome. In such cases, states prioritize according to their own individual threat environments, cutting ties with threats while pursuing them with those deemed less threatening. With rising powers, great powers have an additional option: using their existing ties to try halting its growth before it’s too late. This explains America’s past and predicts its likely future investment relations with China. Far from unwittingly creating its own rival, America’s engagement with China was a failed attempt to kill the baby in the crib. Thinking it could replicate its success in Japan, America welcomed investment to China. It believed that the influence and leverage provided by such a relationship would enable it to prevent China from growing into a fully realized great power. This is evidenced by constant American calls for China to accept liberalizing reforms, especially appreciation of its currency. Such endeavors are not limited to the economic realm either. Calls for political reforms or increases of regional or ethnic autonomy are often thinly veiled attempts to politically weaken China from within. However, it is unlikely these efforts, nor investment relations between the two countries, will continue indefinitely. As China remains defiant in the face of American advances, the American economy will steadily decouple from the Chinese economy, especially in the realm of investment capital.

Author

• Alec Hahus, University of Notre Dame