The Berkeley Roundtable on the International Economy (BRIE) has been in the forefront in devising the new paradigm of strategic trade and industrial policy. This set of essays by BRIE members articulates the group’s view of how the major national economies grow, innovate, and compete with one another and examines the various alternative world orders that could emerge from the struggle for wealth and the dominance of markets. The interests of national communities will continue to clash, the contributors believe. Indeed, the world, they argue, is seeing a resurgence of nationalist passion: people the world over are striving to control their particular collective destinies. We are entering “an era in which ‘security threat’ no longer refers just to tanks and missiles but also to the control of markets, investment and technology; an era that recycles old security vocabulary to fit new issues: market share, protectionism, relative gains from trade.”

That a strong economy is the ultimate basis of national power is an ancient and universal concept that has been forgotten of late in the United States, leftists having assumed that once capitalism had created the means of production, bureaucrats could simply take over the humming machinery, managing distribution and assuring universal peace. On the right, many observers have fallen prey to the classical liberal view that economics should be separated from politics, an argument adopted to counter the leftist program without due regard to its origins or broader implications: classical liberals concocted the notion of an autonomous economy simply to deny the power of industry to ambitious statesmen. As the arch-liberal Richard Cobden stated in 1842, “It would be well to engraft our free trade agitation upon the peace movement. They are one and the same.” Laissez-faire was considered to be the economic equivalent of disarmament, and it is refuted by the same logic.

At the core of both socialist and classical liberal thought is the assumption that production can take care of itself. Most economic models treat technology as an exogenous variable which appears randomly and to which the system automatically adapts. Yet production is not easy, nor rapid progress assured. Every effort, including advantageous public policy, must be made in behalf of national improvement.

BRIE sees a serious weakening of the United States within the ranks of the advanced capitalist powers: “[I]nternational markets for technology, manufacture, and finance no longer unquestioningly support U.S. industrial leadership.” They reject both the “overstretch” and “catch-up” explanations. America’s foreign commitments did not overtax the economy when they were made in the early decades of the Cold War. Rather, a sluggish economy has in recent years fallen out from under these commitments.

The fatalistic view holds that a relative decline in American power was inevitable as Europe and Japan rebuilt after World War II. Yet this thesis implies that either technology reached a plateau or markets failed to expand, allowing others to catch up as the United States was blocked from advancing further. However, the real world has demonstrated the opposite of these static conditions. The rebuilding was completed in the 1960’s, after which the struggle for supremacy began. That the United States has not stayed well in the lead in this dynamic contest must be blamed not on fate but on misguided policy.

Real economic growth averaged only 2 percent during the period 1975-1991, compared to 3.6 percent for the period 1950-1972. Even the best period since 1975, President Reagan’s second term, did not attain the 1950-1973 average. Both real wage rates at home and the value of the dollar overseas have dropped since 1973. Besides having an adverse impact on American living standards, this trend has made the projection of American power in the world more difficult. The United States used to earn trade surpluses and substantial net returns on foreign investments, paid in a strong currency. It could afford overseas troop deployments, bases, and aid to allies. Now trade deficits, a weaker dollar, and a net debtor status have made active policy a burden many feel is too heavy to bear.

Between 1965 and 1990, the United States dropped from first to eighth place in manufacturing GDP per capita among the 25 richest nations. And between 1970 and 1990 the American lead in GDP over the second and third largest economies dropped from a 4-1 ratio to mere parity.

Losses in traditional industries were once considered acceptable because they released resources for more productive fields. However, America has also been losing ground in capital goods, advanced materials, and high-tech sectors. BRIE disputes the notion of “sunset” and “sunrise” industries as well as the alleged substitutability of services for manufacturing; “High-tech sunrise sectors largely make producer goods: equipment, components, subsystems, machinery and advanced materials used to produce final products for consumers. The sunrise sector goods are applied across the economy to help transform production and products in traditional industries. The traditional industries are vital clients.” As to services, “Critical areas of the service sector are linked to manufacturing, and their capacity to support income growth will erode as manufacturing loses position.”

Steven Vogel devotes his essay to the military implications of Japan’s commercial technology. A BRIE theme is that the trade wars have already spawned new generations of militarily relevant technology: microchip devices that arc highly sophisticated, very reliable, and inexpensive. Steve Weber and John Zysman argue that “it is now the civilian sector that will frequently generate the supply base of skills, product knowledge, process know-how, components and subsystems required to produce the military products. Without the related commercial industry it will not be possible to produce the specialized military goods.” Japan’s top defense contractors are also its leading commercial combines: Mitsubishi, Kawasaki, Toshiba, Komatsu, Fuji, Hitachi.

Jay Stowsky assesses the role of such “spin-ons” in the American military. If handled correctly, the conversion of the defense industry to commercial production will actually strengthen the military-industrial base—provided that American commercial enterprises can be made strong enough to survive attacks by foreign rivals. Wayne Sandholtz and Zysman discuss Europe’s emergence as a global contender in reaction to the changing balance between the United States and Japan. Ken Conca analyzes the military-industrial revolution in the Third World.

As is common in the burgeoning literature on strategic economic policy, BRIE pays lip service to the liberal ideal of a peaceful world of free trade where national rivalries have faded and no one need worry about security or dependency. However, the logic of their argument leads back to the real world or to contending states where trade is less about mutual gain than about creating national advantages: strategic trade is not simply a matter of one-time gains or losses resulting when one government’s policy assists its firms to gain a share in global markets to the disadvantage of its trading partners. National position for particular firms is not the only issue, nor is the current position of one nation in the international economy its final reward. Future gains and losses in terms of each nation’s dynamic potential are also at stake.

Trade and industrial policies affect a nation’s “trajectory” because much of technology is the product of incremental development, proprietary knowledge, and “learning by doing.” Losing key sectors of the techno-industrial matrix may sidetrack an entire economy, making it dependent on others for critical contributions and developments. It cannot control what it cannot produce. It becomes a follower rather than a leader, a status that translates from economies into politics and becomes a threat to security as well as to prosperity.

Under the misnamed “supply-side” program, taxes were shifted from individuals to businesses, incentives for capital formation and investment in research and production were eliminated, and strategies for managed trade and industrial promotion were mocked—all in the name of liberal principles that had already failed elsewhere, including in their country of origin. Yet it is a function of competition to expose self-delusion and to punish with defeat those who refuse to learn.

In the late 1980’s, productivity was stagnant and real nonresidential investment fell; the weakness of the underlying economy slowed recovery from the 1991 recession. In order to achieve national economic recovery, both American political parties must abandon their futile posturing and learn from the work being done by BRIE and other strategic thinkers. Ideologues may be willing to lose rather than compromise their pet theories, but statesmen are remembered for discovering ways for their country to prevail.


[The Highest Stakes: The Economic Foundations of the Next Security System, by Wayne Sandholtz, Michael Borrus, John Zysman, Ken Conca, Jay Stowsky, Steven Vogel, and Steve Weber (New York: Oxford University Press) 272 pp., $29.95]