Compound Containment

Front matter

A Reigning Power's Military-Economic Countermeasures against a Challenging Power

Dong Jung Kim

A Reigning Power’s Military-Economic Countermeasures against a Challenging Power

Contents

List of Figures and Tables ix

Acknowledgments xi 1. Introduction 1 2. A Theory of Compound Containment 9 3. The Absence of Britains Compound Containment against

Germany, 1898-1914 36 4. US Compound Containment of Japan, 1939-1941 61 5. US Compound Containment of the Soviet Union, 1947-1950 79 6. Fluctuations in US Response to the Soviet Union, 1979-1985 95 7. The Absence of US Compound Containment against China,

Introduction

When is a reigning great power of the international system in a position to complement military containment of a challenging power with restrictive economic measures? It has been long argued that a reigning power is inclined to militarily confront a challenging power that has the potential to undermine international stability and threaten the reigning states privileged relative power position.’ For many scholars, policy analysts, and practitioners of the reigning power’s strategy, containment—defined as the use of internal or external military balancing measures to stop the challenging power from launching military aggression—is a particularly attractive military option in dealing with the challenging power since it is less risky and costly than other strategies such as preventive war or rollback.? Nonetheless, since economic capacity and military power are intimately linked to one another, containing a challenging state requires addressing both economic and military dimensions.’ Indeed, after the United States became the reigning power, a country identified as an adversary of the United States encountered both military and economic countermeasures organized by Washington.‘ Today, the United States is in a position to decide whether it should—or can—reinforce military containment of China with economic measures.

Scholars of great power competition, nonetheless, tend to focus on examining the reigning power’s military response alone.’ This situation is unfortunate, because these scholars do not in fact assert that military force is the only consideration in containment strategy. On the contrary, most security studies scholars recognize that military measures should be supplemented by economic policies. Moreover, they agree that the reigning power’s security concerns over the challenging power are fundamentally motivated by changing distribution of material capacities, which reflects the two states’ differential economic growth.° To put the point bluntly: scholars of great power politics agree that rapid economic growth endows the challenging power with an ability or incentive to revise the status quo, and, accordingly, responding to the challenging state requires addressing both military and economic aspects.

Despite this consensus, there have been only limited efforts to theorize the reigning power’s simultaneous employment of military and economic measures against the challenging power. The emphasis of the debate on economic instruments has been put on whether economic tools, as opposed to military force, can actually play an independent and effective role in advancing a states important strategic interests.” Moreover, while debating the effectiveness of economic sanctions in international security affairs, many security studies scholars mistakenly dismiss altogether the roles of economic measures in great power relations.* Although several scholars analyze the use of economic side payments within the context of great power competition, they often focus on the independent role of economic carrots and fall short of explaining or prescribing appropriate economic complements to diverse military strategies employed by the reigning power.’ In recent treatments of the interaction of economic relations and military outcomes, scholars offer insights to understand diverse economic aspects of great power competition.'° Yet the analytic focus of these studies has been explaining the conditions under which a great power maintains a peaceful relationship with another great power through commercial and financial linkages."

Overall, the economic aspects of containment strategy have not garnered appropriate academic attention, although scholars continue to engage with new strategies of checking a great power’s military aggression in the post-Cold War context.” To be clear, this does not mean that scholars have not debated diverse strategic options available for a reigning power or that they lack knowledge about the economic dimension of great power competition. Yet, it still remains unclear whether and how the reigning power can complement military containment with economic measures. To be more accurate, the conceptual tools and theoretical insights that have been developed by the scholars of the intersection of security and economy deserve renewed attention to more effectively address the multilayered strategies of today’s great power competition.

The Argument

This book offers a structural theory that accounts for a reigning power’s decision to adopt or avoid compound containment—defined as the simul-

Introduction 3 taneous adoption of economic restrictions with ongoing military containment policies against a challenging power. It focuses on a situation where the reigning power has already adopted military containment measures against the challenging power and, therefore, has strong incentives to buttress its military measures with restrictive economic measures. By imposing restrictions on major economic exchanges with the challenging state, economic measures for compound containment try to weaken the material foundation of the challenger’s military power and impede translation of latent power into military power, thereby increasing the effectiveness of military containment policy. Different from economic sanctions that attempt to shape the targeted state's behavior in the bargaining process over a specific political or strategic issue, compound containment tries to weaken the challenging powers material capacity to launch military aggression in the middle to long term.” In line with the security studies scholarship, this book considers that economic measures play complementary, although important, roles in great power competition.'*

This book suggests that, despite the important role of economic measures in countering the challenging power, the reigning state does not simply sever existing economic ties with the challenging state and upgrade ongoing military containment into compound containment. Economic measures for compound containment aim to inflict losses on the challenging power’s material capacity. Yet restricting ongoing economic exchanges introduces losses on both the reigning and challenging powers. Therefore, economic restrictions to weaken the challenging powers material capacities—and, thus, to adopt compound containment—would be viable options when the reigning power can inflict relative economic losses on the challenging state.

I posit that this ability to impose relative losses on the challenging power is deeply affected by the availability of alternative economic partners for the two competing states.'° Building on mainstream international economics, a state's alternative economic partners are defined as a state or group of states that can replace the majority of roles or “functions” performed by a current economic partner when ongoing bilateral economic exchanges are disrupted due to strategic competition. This book suggests that, depending on the configuration of the availability of alternative economic partners for the reigning and challenging powers, the reigning state would or would not possess an ability to inflict more losses on the challenging state through economic measures. The presence or absence of this ability, in turn, shapes the decision to employ compound containment.

In circumstances where alternative economic partners are largely available for the challenging power but not for the reigning power, the reigning state cannot impose greater harm on the challenging state, and, thus, it avoids restrictions on bilateral economic exchanges and eschews compound containment. In contrast, when alternative partners are largely available for the reigning power but not for the challenging power, the reigning state is in a position to inflict relative losses on the challenging state through economic restrictions, and, accordingly, it adopts compound containment measures.

In order to reinforce the credibility of this argument, I pit my argument against two alternative explanations. First, the reigning state—which is not a unitary actor—might avoid compound containment because of the influence of domestic interest groups that have stakes in continuing economic exchanges with the challenging state.!° If these groups prove to be more influential than other societal groups that want to restrict economic relations with the challenging state, their preferences would be translated into the avoidance of compound containment against the challenging power. Second, for some scholars, the reigning state’s important decisions reflect the convictions held by key decision-makers. In this perspective, when leaders of the reigning power have a strong belief in the peace-creating effect of international economic ties, the reigning state would avoid compound containment measures based on the conviction that continuing economic exchanges will pacify the challenging power.'”

It needs to be noted that this book presents a theory of the reigning power’s grand strategy, rather than a theory that explains outcomes of interactions between states. This theory builds on seminal works on the intersection of international security and economy that have not garnered the attention they deserve in public discourse about a reigning power’s response to a challenging power. For instance, the concepts and theoretical mechanisms I advance were introduced in the works of scholars such as David Baldwin, Albert Hirschman, Jonathan Kirshner, and Michael Mastanduno.'® Moreover, the literature on the relationship between trade and great power competition by scholars including (but certainly not limited to) Joanne Gowa, Edward Mansfield, and more recently, Dale Copeland, offers elaborate insights to understand the economic aspects of competition between reigning and challenging powers.’’ This book knits together and reinstates the conceptual and theoretical tools laid out in these works in a theory that explains a reigning powers strategy toward a challenging power.

Introduction 5 Case Studies

This book substantiates its argument and the two alternative explanations through case studies. The empirical body of this book consists of two parts. First, it presents an exploration of major historical incidences since the late nineteenth century of a reigning power’s response to a challenging power. I focus on the reigning power’s decision about ongoing trade with the challenging power against which it has adopted or strengthened military containment measures. The historical cases include Britain’s response to Wilhelmine Germany between 1898 and 1914 (Chapter 3), the US response to Imperial Japan between 1939 and 1941 (Chapter 4), the US response to the Soviet Union between 1947 and 1950 (Chapter 5), and two consecutive US administrations —Carter’s and Reagan’s—reactions to the USSR between 1979 and 1985 (Chapter 6). In each of these relations, Britain or the United States strengthened military containment measures against the challenging powers while significant commercial ties existed between them. Accordingly, the reigning power found good strategic reason to reconsider extant trade with the challenger. Nonetheless, compound containment was not present in all the cases. While the United States countered Japan during the 1939-1941 period, the Soviet Union between 1947 and 1950, and the resurgent Soviet threat during the last year of the Carter administration with compound containment measures, compound containment was largely absent in Britain’s response to Germany before World War I and the United States’ countermeasures against the Soviet Union during the Reagan administration.

Second, in addition to the historical case studies, this book applies the theory to a critical contemporary great power competition: the US response to a rising China from 2009 to 2016 (Chapter 7). The Obama administration famously declared a “pivot to Asia” and strengthened the United States’ military presence in the western Pacific. Nonetheless, the United States in this period did not target China’s heavy dependence on foreign trade as a means to counter Beijing’s growing aggressiveness. Focusing on the Obama era—and, to some extent, the Trump administration as well in the concluding chapter—this book examines whether the theory developed in this book can account for the US response to a rising China. In each of the case study chapters, I examine how well my theory and the two alternative explanations account for the reigning power’s decision on compound containment against the challenging power.

In conducting the case studies, I utilize both primary and secondary sources. Secondary works, when read with care, provide good resources to verify a proposed causal relationship and mechanisms. Moreover, secondary sources are invaluable for understanding the overall context of relations between the competing states, as well as identifying key actors, ideas, and decisions. Nevertheless, many questions remain unanswered when one exclusively utilizes secondary works. Historians study a certain topic, event, or individual in a great power’s foreign relations and choose not to extrapolate their observations. Scholars, moreover, might have different interpretations of the same event. Thus, there is often no substitute for examining primary records of the historical issue. I use web-based published primary sources, including the Foreign Relations of the United States series and British Cabinet Records. Based on original archival research, I also make extensive use of unpublished primary records that are publicly available at the British Library, the British National Archives, and the US National Archives. I collect and examine primary records including policy directives, government reports, communications between government agencies, minutes of cabinet meetings, and personal exchanges between leaders. Beyond these, I examine media coverage during the time periods on which I concentrate, as well as articles, speeches, memoirs, and correspondences written by key decision-makers themselves and their advisers.

Contribution of the Book

The analysis presented in this book has several theoretical implications. Contrary to realist arguments, this book suggests that relative power considerations can constrain a great power to maintain economic ties with a major security competitor.” The main causal mechanism is derived from the structure of international trade that is embedded within the broader international political structure. I also demonstrate that the approach taken in this book yields a more convincing explanation for a reigning power’s decisions about ongoing economic exchanges with a challenging power than theories that have shown strength in explaining foreign economic policies.”!

Moreover, this book provides a building block for a more sophisticated theorization of great power balancing behavior and grand strategy. In particular, it calls scholars’ attention to the linkages between international

Introduction 7 security and economy in analyzing a reigning great power’s grand strategy. In current discourse on US grand strategy, for instance, scholars have concentrated on debating appropriate use of military force in dealing with a strategic challenger.” Nonetheless, considering the historical developments of great power competitions, as well as the trajectory of today’s most important great power relations, one cannot easily separate high politics from low politics and focus on military confrontations alone. Most scholars, in fact, would agree that an explicit focus on the military dimension of great power competition is problematic. By reinstating theoretical and conceptual tools that have been developed by prominent scholars of international politics, this book motivates more active scholarly engagement with the multifaceted aspect of great power competition and strategy. To be clear, this book does not suggest opening up an entirely new research area for the students of grand strategy and balancing behavior. Nonetheless, it does claim that the nexus of international security and economy has remained a strangely understudied research agenda.

This book also contributes to the ongoing debate in the United States on the future of its strategy toward China by shedding light on the question of what constitutes a sound economic complement to US military grand strategy. Extensive economic ties between the two countries have created a dilemma in US strategy against China, especially since Washington has strengthened its military presence in Asia and its security alignment with the countries that surround China.” It still remains unclear which strategic rationale Washington should adhere to in determining a multifaceted response to Beijing.

This book suggests that the United States has not been in a position to impose significant relative losses on China through compound containment measures, considering the potential availability of alternative economic partners for China and the United States. Thus, complementing military containment with extensive commercial restrictions is unlikely to be a viable option for the United States in a visible future. This book also suggests that the Trump administration's protectionist trade policies against China are far from compound containment, in which economic restrictions are employed to weaken the challenger’s material capacities to launch military aggression. Indeed, it still remains unclear whether the United States would be able to effectively deny alternative economic partners to China and replace the majority of China's roles in its economy, and thereby employ compound containment against China. As long as the United States cannot assure its ability to inflict more losses on China through extensive economic restrictions, Washington might need to eschew adopting a compound containment strategy even if it decides to reinforce military containment of China.

Road Map

The rest of this book proceeds as follows. Chapter 2 lays out my theory, the alternative explanations, and research strategy. In Chapters 3, 4, 5, and 6, I test the theories against the historical record, utilizing both primary and secondary sources. Chapter 7 extends my analysis to a contemporary context, the US response to the Chinese challenge during the Obama administration. Chapter 8 summarizes my findings, discusses theoretical and policy implications, and concludes.

Chapter 2

This chapter explains a reigning power’s decision to upgrade its military containment of a challenging power into compound containment with the adoption of restrictive economic measures. It begins by discussing the definition and key attributes of compound containment as a strategy of great power competition. Then I explain how a structural consideration—the availability of alternative economic partners for the two competing powers—constrains the reigning power’s decision to adopt compound containment. Next I lay out alternative explanations so that I can pit my theory against them in the following chapters. Finally, I describe and explain the research methods that I use in this book.

What Is Compound Containment?

Compound containment refers to a states decision to reinforce ongoing military containment efforts against a security challenger with restrictive economic policies that are designed to weaken the challenger’s material capacity. It is distinguished from other strategic uses of economic measures in several ways.

From Military to Compound Containment

In this book, a reigning power refers to the state that commands the largest material capacity among the leading members of the international system and exercises leadership in the governance of major issue areas of interstate relations. A reigning power, nonetheless, is not a “global hegemon,” which is altogether immune to a challenge from other states. Rather, it is a state that relentlessly tries to maintain its relative power position in the anarchic international realm.! A challenging power implies a potential regional hegemon in a great power region—Europe, North America, or Northeast Asia—that has grown particularly powerful compared with its immediate neighbors and is militarily contending with the reigning state. It also has the potential to achieve further material growth and displace the reigning power’s position.”

Scholars of great power politics agree that a reigning power harbors profound strategic concerns vis-a-vis a challenging power.’ If the two states are geographically close to each other, the challenging power’s ascendance inadvertently threatens the reigning power’s security. Even if the reigning power is located at a distance from the challenging power’s territory, the challenging state can nonetheless become a serious military threat once it becomes capable enough to achieve regional hegemony. This is because, utilizing large resources in a major region of the world, a regional hegemon can develop a military that can be projected to distant areas and threaten the reigning state’s safety or vital interests.‘

In this theoretical formulation, the reigning power is better off checking the challenging power early on. Yet, depending on external or domestic circumstances, as well as decision-makers’ worldviews, the reigning state's initial response to the challenging state take different forms.” The reigning power can try to shape the behavior of the challenging power through the use of economic engagement, social interactions, or international institutions. When the reigning state recognizes that the challenging state still needs to achieve significant material ascendance or does not want to predetermine the nature of the challenging power, it will be particularly inclined to take a more nuanced approach in dealing with the challenging state.® Nonetheless, when the challenging state continues to grow and tries to address its strategic interests in an aggressive manner, the reigning state will eventually recognize that nonaggressive strategies have been unsuccessful in pacifying the challenging power and consider containment as an effective strategy in countering the challenging power. This book focuses on a situation where the reigning power finds itself in a situation in which it determines to adopt or reinforce serious containment policy against the challenging power.

The concept of containment was first introduced by George Kennan’s famous article on Soviet aggressiveness in 1947.’ Although scholars and practitioners never fully agreed on the precise meaning of containment, it was widely understood as efforts utilizing military means to prevent territorial and political expansion of another great power. One can suggest that containment strategy is implemented when the reigning state has reinforced or deployed its most capable military units against the challenging state, and it is in the process of mobilizing more domestic resources in order to increase its military ability to stop that state’s military aggression. Containment is also in place when the reigning state has strengthened formal and informal military alignments with the countries that are located near the challenging state.

Moreover, the strategy of containment is closely associated with the concept of balancing. In practice, diverse military balancing measures— defined as acts of mobilizing one’s own military force or pooling resources with other states against a common adversary—can be equated with containment policy against a security challenger.’ Put simply, when internal or external balancing is translated into a grand strategy, then we have the strategy of containment. Considering that every grand strategy attempts to advance the mid- to long-term strategic interests of a great power, containment also tries to check the challenging power in the middle to long term.!°

Given the historical and theoretical uses of the term “containment, there is no doubt that military force plays a central role in any containment strategy. Nonetheless, as long as military force rests on wealth, and amendments in relative wealth imply changes in the distribution of military power, the reigning state has incentives to adopt economic measures to make its military containment of the challenging state “compound,” rather than implementing military countermeasures alone. According to Robert Art, compound containment is a strategy that “involves both military stalemate and economic denial to weaken the aggressor state?!! It means pursuing a two-tier strategy: adopting military containment for “defense” (aiming to prevent the challenging power from launching military aggression) and, at the same time, employing economic measures for “offense” (trying to weaken the material foundation of military threat from the challenging state).

More specifically, compound containment occurs when the reigning power employs restrictive economic measures in order to weaken the challenging power’s material capacity, and thereby reinforce ongoing internal or external military balancing efforts against that state. Economic restrictions for compound containment aim to block the challenging power’s access to the reigning states market, goods, services, raw materials, financial resources, technology, factors of production, firms, entrepreneurs, or production network. Specific examples of these policies include (but are not limited to) embargo, boycott, tariffs, nontariff barriers, blacklists, quotas, license denial, dumping, preclusive buying, asset freezing, expropriation, and unfavorable taxation.” When successful, these economic restrictions diminish the challenging power’s material capacity by undermining that state's economic performance and impeding the translation of latent power into military force, in turn decreasing the challenging state's ability to start military aggression. Through economic measures, the reigning state can attain the objective of military containment more effectively and at a lesser cost. Since containment has a relatively long temporal scope, aiming to advance mid- to long-term strategic objectives vis-a-vis the challenging power, economic measures for compound containment also try to affect the challenging state’s material capacity in the middle to long term.

This book explains the variations in the reigning power’s employment of compound containment measures against the challenging power. As the dependent variable of my argument, whether or not the reigning power’s response to the challenging power constitutes compound containment hinges on the implementation of policies designed to diminish major economic exchanges with the challenging power, since military containment measures are assumed to be already in place against the challenging power that has been clearly identified as an adversary. When the reigning power adopts restrictive economic policies that would deeply undermine major economic exchanges with the challenging power—against which it has already implemented internal and external military balancing measures—in order to weaken that states material capacity, then compound containment is in place. In contrast, avoiding compound containment refers to complying with the current policy arrangements that regulate major economic exchanges with the challenging power, as well as sustaining the trajectory of extant policies, despite ongoing military containment efforts. More simply, the reigning state that avoids compound containment does not make any serious efforts to alter existing policy arrangements that govern major economic exchanges with the challenging power. In this case, the challenging state continues to obtain economic gains through bilateral exchanges with the reigning state, and the reigning power’s internal and external military balancing measures are not reinforced by economic policies.

I consider that the complementary economic measures for compound containment address all major economic interactions with the challenging power and are not confined to military-related exchanges such as trade of dual-use goods. In distinction from Michael Mastanduno, who distinguishes strategies of economic containment into economic warfare, strategic embargo, and tactical linkage based on the content, target, and timing of economic measures, this book suggests that diverse economic measures are not clearly distinguishable in modern economic contexts.!* I take this approach because, as long as the competition between the reigning and challenging powers is fundamentally motivated by the changing balance of material capacities, any economic exchanges that contribute to the challenging power’s material capacity need to be reconsidered. For instance, exchanges such as the trade of ordinary goods facilitate resource allocation and rationalize the economy, and in turn help a state to generate more latent power that can be translated into military might. While any economic exchange can help the challenging state to advance its material capacity, there is no good reason to confine economic measures based on the type and size of exchanged items.'* From the neoclassical economic perspective, all goods and services in international economic interactions that have significant implications for military competition can be considered “strategic?!

For theoretical simplicity and following the insights of mainstream economics, which suggest all goods should be considered to have strategic implications in balance-of-power competition, I consider that the dependent variable of my theory takes the value of either “adopt compound containment” or “avoid compound containment.” Yet this does not mean that the policy decision to employ compound containment is completely dichotomous or that variations in the dependent variable are clear-cut. To be clear, this book recognizes that modern international economic relations are very complex, and there can be gray areas between the adoption and avoidance of compound containment. Thus, I consider the reigning power to have adopted compound containment when it implements policies that are designed to diminish major economic exchanges with the challenger— which refers to economic interactions that have the largest ramifications for the performance of the challenger’s economy—while implementing military containment, even when those policies do not seamlessly cover all economic exchanges with the challenging state. Accordingly, even when I consider compound containment to have been adopted by the reigning power, there still can be ongoing, minor economic exchanges between the two powers. Similarly, even when the reigning power avoids compound containment, it can nonetheless impose restrictions on some economic exchanges with the challenging power. The book tries to explain the overall trajectory of the reigning power’s decisions about ongoing major economic exchanges with the rising power, rather than account for every specific measure.

Compound Containment as a Distinct Strategy of Great Power Competition

Compound containment can be distinguished from other strategies for checking great power aggression that take economic measures seriously, as summarized in Table 2.1. To be clear, there are significant overlaps between strategic employments of economic measures in international politics. Yet these measures can be analytically distinguished from one another.'®

Most notably, economic measures for compound containment are not identical with economic sanctions, which refer to a state’s use of economic punishment to affect another state’s behavior in the bargaining process over a specific political or strategic issue.!” For compound containment, weakening the targeted state’s material capacity to launch military aggression is the utmost objective. In other words, economic measures in compound containment should not be considered a component of coercive diplomacy." They do not necessarily occur in the bargaining process with the targeted state over a specific issue. Instead, economic measures in compound containment aim to make the challenger less capable of launching military aggression, and they are considered complements to, rather than substitutes for, military instruments. Michael Mastanduno conceptualized these

Table 2.1. Strategies against a Challenging Power

Strategy Attributes

Military containment Employment of internal and external balancing measures to prevent the targeted state's territorial expansion

Compound containment Simultaneous employment of economic restrictions with ongoing military containment to weaken the targeted state’s material capacity Economic sanctions Use of economic punishment to shape the targeted state’s behavior in the bargaining process over a specific strategic or political issue Economic engagement Use of positive economic inducements to shape the targeted state's short-term behavior or to alter mid- to long-term preference Hedging Employment of a mix of low-intensity military and economic policy measures to manage risks and assure flexibility Soft balancing Use of nonmilitary means to discourage the targeted state’s military aggression types of economic measures as economic containment.’? Nonetheless, after his work in the 1990s, there has been scant theoretical and empirical attention given to the concept of economic containment, whereas economic sanctions have won extensive academic and public attention.

When the reigning power’s decision-makers choose to employ compound containment, they expect to attain changes in the targeted state's material capacity for aggression, rather than seek to achieve immediate changes in the ongoing wrong behavior of the targeted state. Economic measures for compound containment might not contain clear demands addressed to the targeted state—or entail requirements that the targeted state cannot accept—because they are designed to weaken the targeted state, which is already clearly identified as an adversary. Since economic measures for compound containment aim to diminish the challenging state’s material capacity, they are difficult to remove, whereas economic sanctions convey the provision of their removal in case of modifications in the targeted state's policy.