Capital Conflict

JD Johannes

1 year ago

December 20, 2017

In 1954 President Eisenhower discussed creating a directorate in the National Security Council for “unconventional or non-military warfare.”1 One of the NSC’s recommendations was to set up a council to “find ways effectively to utilize U.S. private organizations” to coordinate “economic, psychological, political warfare, and foreign information activities so as to further international cooperation.”2

Fifty years later, as multidomain warfare moves deeper into what strategists call the gray zone,3 the U.S. must return to this vision. We need a council that will effectively coordinate private U.S. organizations with an American economic, political, and psychological warfare. Only in this way can we effectively compete against the economic warfare policies of states like China and Russia, which integrate not only their native corporations but their native criminal organizations into their national strategies.

Failure to compete could result in the U.S. being at an economic disadvantage in regions China and Russia have effectively colonized into their vertically integrated mercantilist system. Similar mercantilist systems fell out of favor with the rise of the industrial revolutions when trade combined with rapid growth in technology created previously unimaginable gains in wealth and standards of living. Russia and China have anticipated that the growth enabled by industrialism may not last forever, and there are reasons to think they are right.4

I. What Existing Regulations and Sanctions Miss
Integration of the state with corporate and criminal models is not addressed by the main international economic regulatory agency, the World Trade Organization (WTO). The WTO has mechanisms for adjusting government subsidies of industry, assuming that a business is under the umbrella of a state but not part of the state. WTO regulations are not adequate to the problems posed by states in which industrial plans are fully integrated with the state’s goals. Russia and China have mercantilist-oriented economies characterized by frequent vertical integration of business and the military, diplomatic and intelligence apparatus of the State. The WTO was not built for the purpose of controlling expansionist, mercantilist powers that integrate economic and state interests in this way.

Nor are our existing national strategies adequate to the challenge. The United States has heretofore attempted to address Russian and Chinese models with trade sanctions. The ‘trade sanctions’ model is built on the assumption that trade is for the purpose of building national wealth. Trade sanctions aimed at a country hurt the country. Yet national wealth is not the end of Russia or China’s integrated systems. Insofar as they are concerned with wealth, it is the personal wealth of the ruling factions and their allies that concern them. Their real concern is not wealth at all, but expanding their region of control.

In the gray zone where economics mixes with multi-domain warfare, trade sanctions and embargoes are reactive measures that have dismal track record. Sanctions frequently fail to achieve their objective because they do not appropriately target the bad actor’s center of gravity, nor do they adequately drive up the cost of defecting from international norms. For some defectors, indeed, flouting international norms is very profitable. As we know from game theory, when everyone else cooperates defection can be lucrative. What is needed are tools of economic warfare that make defection less advantageous.

II. Center of Gravity
Clausewitz described the center of gravity as “the hub of all power and movement on which everything depends” and advised “that is the point against which all our energies should be directed.” For Clausewitz, who was writing in the Napoleonic period, this was assumed to be a military target. That is no longer the case.

Retired Marine Colonel and National Defense University researcher T.X. Hammes offers a generational model for understanding the evolution of war since Napoleon. Hammes’ central claim is that “each succeeding generation reached deeper into the enemy’s territory in an effort to defeat him.”5 The most current generation of warfare, Fourth Generation warfare (4GW) “…directly attacks the minds of the enemy decision makers to destroy the enemy’s political will.”6 (Emphasis added.) Fourth Generation warfare is effective because it bypasses military power and the State to target the real center of gravity, the minds of enemy decision makers.

No dictator, strong-man or leader of a one-party state stands alone. “Despotic rulers stay in power by rewarding a small group of loyal supporters, often composed of key military officers, senior civil servants and family members or clansmen.” Bruce Bueno de Mesquita wrote in the New York Times in 2011. “A central responsibility of these loyalists is to suppress opposition to the regime. But they only carry out this messy, unpleasant task if they are well rewarded. Autocrats therefore need to ensure a continuing flow of benefits to their cronies.” The center of gravity of these regimes is the leadership plus the loyalists who defend that leadership. Attacking the flow of benefits to cronies is an effective strategy.

In Eastern Europe Russia has used banking, business and industrial ties left over from Soviet era to capture key business sectors and leverage business leaders as sources of influence and supported political groups favorable to Russia.7  Russia has found that in the global economy it is easier to capture a country through business mergers and elections than armed invasion. This capture is almost a soft colonialization creating markets that are advantageous to Russia and potentially blocking or hindering access to firms from other countries.

To combat the threat of this new type of warfare, analysts and NGOs have advocated increasing anti-corruption efforts, funding investigative journalism and democracy promotion campaigns. And when needed, economic sanctions and embargoes. A more effective and yet unexplored option may be direct business and political competition against the vertically integrated defectors.

III. Eisenhower’s Vision Attained
In 2015 Congress and the Administration, wittingly or not, opened the door for direct business competition against Russia by ending the oil export ban. For more than forty years U.S. oil producers had not been able to sell crude for delivery outside the U.S. With the end of the ban on oil exports, coupled with an expanded ability for American producers to sell and deliver Liquified Natural Gas, drillers and frackers in Texas and Oklahoma were competing directly against Russian firms like Gazprom and LukOil. But Gazprom and LukOil are not just energy firms. They are part of a Russian effort to dominate European energy markets.

In economic warfare the dynamism of American business can also be used to compete head-to-head against crony capitalist oligarchs vertically integrated with defector states as part of a deliberate strategy. Sanctions and controls should be used to reinforce this capacity, not as the primary means of economic warfare. Dynamic competition strikes directly at the defector state’s center of gravity. It cuts into the flow of benefits to cronies.

This model requires skills rarely developed during a career in government service. On the political side, professional consultants may be needed for message development, polling, advertising and organizational training. On the economic side, experienced venture capitalists, private equity managers, traders, business consultants and engineers will be needed to turn pro-western firms into large, respected business institutions. Business and politics will likely overlap, with capital investment in and business consulting expertise provided to entrepreneurs and executives who could gain political office or support policies and politicians favored by the U.S.

Even in the 1950’s Eisenhower’s NSC recognized that these skills were not to be found in government agencies, leading to the inclusion of finding “ways effectively to utilize U.S. private organizations” in economic warfare. Combined with the need for secrecy and deniability, these are efforts that do not lend themselves to openly bid government contracts. The best course of action, as unsavory as it is, may be for the NSC to work directly with firms connected to and supportive of the administration.

It may sound even more unsavory once one appreciates the secrecy necessary to the model. To preserve secrecy, only the politically-connected principles will know the purpose of the tasks their direct reports are performing for the U.S. government. This means that the transparency of a publicly-traded firm may already be an unsuitable tool.

Closely held firms, venture and private equity are the most suited to this nimble and opaque operating environment. The Administration and Congress in conjunction with industry should carefully review U.S. statutes and regulations that prevent U.S. business from competing directly against defector states and their aligned native businesses.

How this would look in action is not far from the proposals and discussions from the Eisenhower administration. The NSC, with its access to intelligence and diplomatic reporting, could identify aspiring political leaders and businesses who prefer the Western model. These candidates would be assessed by NSC-approved businesses and political consultants. The most promising and initially well positioned would then be approached and supported.

Such support might even be indirect, to provide a further opportunity for evaluation. Indirect support could be arms-length business transaction that profit pro-Western firms and in the case of politicians and parties, financial contributions from local subsidiaries of U.S. companies. This first step of indirect support will allow the U.S. to get a closer look at the potential recruits before making larger, more sensitive investments. In some cases, indirect support may be all that is needed for the pro-western business or politician to compete effectively against a Russian or Chinese backed opponent. Being competitive is the benchmark, because successful competition is what breaks up the flow of cash to Russian or Chinese cronies.

If the assessment after indirect support is still promising, the recruits would likely be approached more directly. Various recruits within a country or an industry could be introduced to each other under color of coincidental mutual benefit. Their effective competition to Russian or Chinese mercantilist giants can be further supported with legislation, tariffs, and even sanctions as necessary.

IV. Conclusion
The international norms of the WTO and current tools of economic warfare are not designed to deal with defectors using a mercantilist system that vertically integrates some selected businesses into the apparatus of the state. By competing directly against the companies vertically integrated and acting on behalf of defector states, the U.S. can drive up the price of defecting from the international system and possibly check Russia and China’s expansion of soft colonialism through economic and political capture.

Failure to compete could result in the U.S. having limited access to some markets and raw materials. Natural resources used to be captured with armies, now it can be captured with a combination of private equity and tilted elections. In terms of national security, cooperation against transnational threats and truly rogue states would be hamstrung as defector and captured states play to the advantages of their oligarchs.

As the global economy evolves, with financial and equipment capital being more mobile; as robotic manufacturing and 3D printing advance; a country’s comparative and absolute advantages—the foundations of free trade economics—will become less distinct from competitor nations. And if the pace of technological advancement does not keep up with the rate established during the Industrial Revolutions, the mercantilist, vertically integrated model of defecting from international norms and colonialism through economic and political influence could become a more attractive if not a more viable system. We must prepare for that possibility.

To meet these challenges, the U.S. should follow through on Eisenhower’s vision and bring all tools to the table to compete directly in business against defector states using many of the defector state’s rules.

 

Footnotes:

  1. U.S. Department of State, Office of the Historian, Memorandum of Discussion at the 209th Meeting of the National Security Council, https://history.state.gov/historicaldocuments/frus1950-55Intel/d187
  2.  U.S. Department of State, Office of the Historian, Memorandum From the Director of the Bureau of the Budget (Hughes) to President Eisenhower, https://history.state.gov/historicaldocuments/frus1950-55Intel/d210
  3. Joseph Votel, et.al, “Unconventional Warfare in the Gray Zone,” National Defense University Press, http://ndupress.ndu.edu/Media/News/News-Article-View/Article/643108/unconventional-warfare-in-the-gray-zone/
  4. Robert Gordon, “Is U.S. Economic Growth Over?” National Bureau of Economic Research, August 2012, http://www.nber.org/papers/w18315
  5. T.X. Hammes, The Sling and the Stone, Zenith Press, 2004, Page 31
  6. Ibid., Page 2
  7. Heather Conley, et.al, “The Kremlin Playbook” Center for Strategic and International Studies, Oct. 13, 2016, https://www.csis.org/analysis/kremlin-playbook

About the Author

JD Johannes

JD is a Marine Corps Veteran, combat documentary filmmaker and war correspondent whose reporting from Iraq & Afghanistan has appeared in TIME and National Review. JD is the President of VCreek/AMG a polling, research and forecasting firm with clients ranging from Fortune 500 companies, industry associations and major political campaigns.