Commerce & weaponized interdependence
How state conflicts short of war are remaking commerce
Weaponized interdependence will remake the commercial environment over the next decade.
States are back, baby! Ok, they never went away. But the state’s role in making, shaping, managing, directing, guiding, contracting, and expanding markets is becoming more central and more directly interventionist.1
Over the last 40+ years, globalization has driven tighter commercial integration and greater geographic specificity. The structure of these networks has, as all networks do, created a host of asymmetric relations ripe for political exploitation.
The combination yields weaponized interdependence. Chokepoints in key commercial ties that may be activated by states for strategic advantage. Or, to paraphrase Clausewitz: commerce becomes politics by other means.
Flows of finance, information, and physical goods across borders create both new risks for states and new tools to alternatively exploit or mitigate those risks. The result, as Thomas Wright describes it, is a world where unprecedented levels of interdependence are combined with continued jockeying for power, so that states that are unwilling to engage in direct conflict may still employ all measures short of war.2
Two articles this morning signally two ends of the spectrum of these changes.
The New York Times cover the Biden administration’s latest on reshoring chip manufacturing. Biden has accelerated and expanded earlier policies from the Trump administration to cut China out of advanced technologies. Reshoring, friendshoring, and nearshoring have marked key efforts to rewire geographically specific manufacturing hubs and use commerce to constrict political ambitious – i.e. stopping the flow of advanced chip, presently only manufactured in the US, Taiwan, The Netherlands, and Japan from making their way to China where they may find use in advanced weaponry.
Hot on the heels of massive state aid via the Inflation Reduction Act, with its whopping $369bn subsidies for green tech, comes direct aid in the form of investment in domestic chip manufacturing. Unlike the last 40 years where the state just funded the science and let private companies reap the profit, this new policy represents a shift where the state will tie aid to specific corporate behaviors. We saw similar in the bank bailouts of 2008, but they lacked teeth and were broadly circumvented. Given Biden’s legislative acumen, money says this be different.
If the US model offers the possibility of local abundance via a global loss, then the Russian experience of weaponized interdependence is degrowth. And with it a more extreme bifurcation of the market as the market spirals into decline.
This from Vogue Business on luxury in Russia illustrates how weaponized interdependence reshapes markets in the other direction.
Following Russia’s invasion of Ukraine, Russia was swiftly cut out of the global system (the speed with which the SWIFT payment system isolated Russia is my current fav example of weaponized interdependence).
The government’s response has reshaped luxury commerce in the market. The Russian have legalized parallel trade (allowing import without trademark owners consent), turned a blind eye to grey and black market imports, and, inadvertently, opened the market to new domestic brands.
To paraphrase Jeff Goldblum in Jurassic Park, “commerce, it, uh, finds a way.” Its just not always particularly efficient in its distribution. While there are winners – new local brands given light, air, and soil to take root –existing global players face increased costs in managing brand assets, securing supply chains, and managing positioning.
As this process continues to play out, we can expect to see all sorts of weirdness as globalization reorganizes. With the US shifting away from the global commercial system it pioneered and new powers emerge with wildly different views on the world - looking at you China - the transition from “the trade must flow” into “maybe the trade will flow and only through this set of locks” will be bumpy.3
I’m not a guy for big “this will change everything” claims, but this’ll come close.
Weaponized interdependence will rework organizational underpinnings of global, region, and local commercial ecologies. And now’s the time to get prepared.
States and markets have been tied together via a complex web of co-evolutionary dynamics forever. (I mean, the earlier known writing was states accounting for productive capacity and taxes.) But after 40 years of concerted efforts to present markets as somehow distinct - and sacrosanct - its interesting to see states so squarely centered again, particularly in the US. Doubly interesting that it shares so many similarities to a pre-1980 dynamic.
Shout out to John Padgett for introducing me to these ideas via his 1998 Santa Fe Institute proposal on “The Co-evolution and States and Markets” - https://uchicago.app.box.com/s/8ohb7sz1jfr97wum7bsmq0ql090d23o5. His work across the last two decades has taken this idea in some truly wonderful directions.
Farrell, Henry, and Abraham L. Newman. “Weaponized Interdependence: How Global Economic Networks Shape State Coercion.” International Security 44, no. 1 (2019): 42–79. https://doi.org/10.1162/isec_a_00351.
Baschuk, Bryce. “Supply Chain Latest: US Snub of WTO Called a Step Back for Trade.” Bloomberg.com. Bloomberg, December 12, 2022. https://www.bloomberg.com/news/newsletters/2022-12-12/supply-chain-latest-us-snub-of-wto-called-a-step-back-for-trade.