Sailing between US Scylla, China Charybdis

In Greek mythology there is the cautionary tale of the two monsters, Scylla and Charybdis. The myth is based on the problems of negotiating the narrow rocky and very dangerous straits of Messina in Italy. Ships and sailors regularly sank or drowned there.

The myth is that while sailing through the strait you had to be very skilled in not getting close to shore. If you erred, either Scylla the monster on the shore would grab six sailors off your deck, or if you didn’t, Charybdis the whirlpool would suck the whole ship in.

So the choice was between saving either the ship or the six sailors. Homer, in his epic Odyssey, sacrificed the sailors to save the ship.

I tell this story because a recent research paper from the American National Bureau of Economic Research (NBER) discusses, without reference to the Greek myth, however, exactly the same problem with reference to the two economic giants, the US and China on the one hand and the rest of the world on the other.

Thus, the US controls the financial world and China controls the manufacturing world. In this situation, how do smaller economies, even if they are quite large like India’s, navigate between the two? The paper is called “A Theory of Economic Coercion and Fragmentation.” It is by Christopher Clayton, Matteo Maggiori and Jesse Schreger who say that “Hegemonic powers, like the United States and China, exert influence on other countries by threatening the suspension or alteration of financial and trade relationships.”

But, the authors say, if you try integrating with one of them, you only increase their power over you “because in equilibrium they make other relationships poor substitutes for those with a global hegemon.”

Hobson’s Choice

It’s what is called Hobson’s Choice where in reality, despite many options in theory, you actually have only one. That is, there’s no real choice.

So what constitutes a safe policy? The authors say that the smaller countries have to consider a trade off between what they gain by getting closer and their own economic security. Scylla and Charybdis. Or, as Homer asked: do you save the ship or the sailors (who are the equivalent sovereignty and your industries?)

It’s a very tough choice but the authors have a recommendation: coordinated action by the smaller economies rather than uncoordinated, each man for himself policies in order to prevent the inefficient fragmentation of the world economy.

Hegemonic intentions

They have studied financial services “as tools of coercion” that have strong strategic complementarities. They also say that power is “nonlinear” as it “increases disproportionately as the hegemon approaches controlling the entire supply of a sectoral input.” American dollars and Chinese computer chips, for example.

The paper doesn’t have anything startlingly new to suggest. It only says that smaller countries should diversify “the input sources of key sectors currently controlled by the hegemons.” Well, yes, but how do you do this without hugely annoying the bullies?

India did this by buying oil from Russia when the US embargoed Russia which invaded Ukraine. In the process, it annoyed the Biden administration so much that it’s been non-stop harassment since then.

China isn’t in that league yet but will get there, or somewhere near, in the next decade. In any case, its policies are influenced so much by domestic politics that you never know what it will do next.

In short, all economies smaller than the US and China can only keep their fingers crossed. In this increasingly uncertain world, the only certainty is that they will succumb to either the US or China. Indeed, many would say they already have.

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