Tech innovation collapses interdependence

Globalization therefore creates powerful pressures on governments not to close off their economies through protectionism or military aggression. Interdependence can also tamp down conflicts that would otherwise be likely to break out during a great power transition. Of the 15 times a rising power has emerged to challenge a ruling power between 1500 and 2000, war broke out 11 times.109 Despite these odds, China’s recent rise to great power status has elevated tensions without leading to anything approaching war. It could be argued that the Sino-American economic relationship is so deep that it has tamped down the great power conflict that would otherwise have been in full bloom over the past two decades. Instead, both China and the United States have taken pains to talk about the need for a new kind of great power relationship. Interdependence can help to reduce the likelihood of an extreme event—such as a great power war—from taking place.

Will this be true for the next generation economy as well? The two other legs of the Kantian triad—democratization and multilateralism—are facing their own problems in the wake of the 2008 financial crisis.110 Economic openness survived the negative shock of the 2008 financial crisis, which suggests that the logic of commercial liberalism will continue to hold with equal force going forward. But some international relations scholars doubt the power of globalization’s pacifying effects, arguing that interdependence is not a powerful constraint.111 Other analysts go further, arguing that globalization exacerbates financial volatility—which in turn can lead to political instability and violence.112

A different counterargument is that the continued growth of interdependence will stall out. Since 2008, for example, the growth in global trade flows has been muted, and global capital flows are still considerably smaller than they were in the pre-crisis era. In trade, this reflects a pre-crisis trend. Between 1950 and 2000, trade grew, on average, more than twice as fast as global economic output. In the 2000s, however, trade only grew about 30 percent more than output.113 In 2012 and 2013, trade grew less than economic output. The McKinsey Global Institute estimates that global flows as a percentage of output have fallen from 53 percent in 2007 to 39 percent in 2014.114 While the stock of interdependence remains high, the flow has slowed to a trickle. The Financial Times has suggested that the global economy has hit “peak trade.”115

If economic growth continues to outstrip trade, then the level of interdependence will slowly decline, thereby weakening the liberal constraint on great power conflicts. And there are several reasons to posit why interdependence might stall out. One possibility is due to innovations reducing the need for traded goods. For example, in the last decade, higher energy prices in the United States triggered investments into conservation, alternative forms of energy, and unconventional sources of hydrocarbons. All of these steps reduced the U.S. demand for imported energy. A future in which compact fusion engines are developed would further reduce the need for imported energy even more.116

A more radical possibility is the development of technologies that reduce the need for physical trade across borders. Digital manufacturing will cause the relocation of production facilities closer to end-user markets, shortening the global supply chain.117 An even more radical discontinuity would come from the wholesale diffusion of 3-D printing. The ability of a single printer to produce multiple component parts of a larger manufactured good eliminates the need for a global supply chain. As Richard Baldwin notes, “Supply chain unbundling is driven by a fundamental trade-off between the gains from specialization and the costs of dispersal. This would be seriously undermined by radical advances in the direction of mass customization and 3D printing by sophisticated machines…To put it sharply, transmission of data would substitute for transportation of goods.”118 As 3-D printing technology improves, the need for large economies to import anything other than raw materials concomitantly declines.119

Geopolitical ambitions could reduce economic interdependence even further.120 Russia and China have territorial and quasi-territorial ambitions beyond their recognized borders, and the United States has attempted to counter what it sees as revisionist behavior by both countries. In a low-growth world, it is possible that leaders of either country would choose to prioritize their nationalist ambitions over economic growth. More generally, it could be that the expectation of future gains from interdependence—rather than existing levels of interdependence—constrains great power bellicosity.121 If great powers expect that the future benefits of international trade and investment will wane, then commercial constraints on revisionist behavior will lessen. All else equal, this increases the likelihood of great power conflict going forward.