The Grand Strategy: Fixed Spheres of Influence or Variable Shares?

The rise of the populist-nationalism over the
past year or so is partly predicated on a
realist view of international relations.
  In the realist school of
thought, the nation-state is the main actor, and international relations is characterized by competition between states.  

Many take away from this that competition is
competition: it takes place on different fronts simultaneously,
and that strategy is more or less than same, increase one’s powers and minimize the
adversaries’ power and opportunities. 
Drilling
down from that generalization
, two broad expansion strategies
emerge.  

The first is the traditional export-oriented strategy.  We are all
familiar with it.  To service foreign
demand
, business ships their domestically produced output across the
border.  There are certain policies that facilitate such a strategy, such
as a weak currency, a free-trade international regime that reduces trade barriers and domestic demand often needs to be
repressed to ensure. 

Some see this strategy to be a developmental
strategy in the sense that emerging market economies may pursue such a strategy
to provide the critical scale and investment for industrialization and
modernization.
  However, as advanced industrial countries like
Germany, Switzerland, Finland and Sweden for example, demonstrate,
export-oriented strategies are not limited to emerging market economies or is
moving past them some kind of natural
evolution.  

 Th export-oriented model fit well into
the traditional approach to international relations.
  Countries sought
spheres of influence.  These were non-domestic areas where a country
dominated.  Wars were often fought
as one wanted to increase their sphere, which meant encroaching on another
sphere.  Since at least the start of the 20th century, when the US was an
emerging revisionist power, it objected to the sphere of influence
approach.  

Specifically, as several European countries
(Britain, France, Germany, and Portugal) and Japan were carving up China into
spheres of influence that the US defended
China’s territorial integrity and offered a non-imperialist expansion strategy
and the basis of a different world order. 
Rather than fixed spheres
of influence, the US vision was based on
variable shares of the world economy.  The variability depended on one’s
economic prowess not political concessions from a country’s emperor or
officials.    It was the basis of what was called the Open Door.  

After WWII, with European countries and Japan
using tariffs to facilitate the rebuilding of domestic industries, and the
over-valued dollar, US companies,
developed an alternative to the export-oriented strategies. 
This
strategy was based on direct investment,
the building of production facilities.  Service foreign demand through
local production.   Since US records have been kept (more than 50
years), the sales by majority-owned affiliates have outstripped US
exports.  In 2014, local sales outstripped exports by a factor of nearly 5
to 1.  

As a consequence, the value-added by the
affiliates of US companies contributes to local GDP is a palatable way, unlike
exports
.  For example, in 2014, the value-added by US affiliates
accounted for nearly 32% of Ireland’s GDP, 15% of Singapore’s GDP and 4% of
Australia’s GDP.  

The era of floating exchange rates began with
the collapse of Bretton Woods in  1971.  Floating exchange rates mean
volatile exchange rates. 
The US direct investment strategy helps insulate
companies for the vagaries of the foreign exchange market. 
Export-oriented strategies have traditionally been more sensitive to currency
appreciation, but recent experience and research suggest that for many goods
exports are somewhat less sensitive to currency swings than in the past.  

In addition,
the latest academic findings suggest that the impact of the direct investment
strategy on domestic employment is more nuanced than might be suspected.
 
Unskilled labor hired by the foreign-based affiliate of US companies competes
with unskilled labor in the US.  However, skilled labor hired abroad
appears to lead to more skilled domestic workers.   If barriers are erected to deter hiring
unskilled workers abroad, it does not mean more unskilled or low-skilled domestic workers would be hired.  Rather, businesses would be
incentivized to replace workers with machines, of which robots are just the
newest form. 









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