The past two decades have seen a serious democratic recession. One of the main causes is China. Over the past three decades, China has achieved rapid economic development, becoming the world’s second largest economy and rapidly closing the gap with the United States in the fields of technology and defense. It has significantly grown its influence on the international stage, offering a real alternative to the previous belief that the only path to modernity is liberal democracy.
Meanwhile, China has become increasingly well-versed in leveraging its economic power to coerce democracies on values-related issues--human rights, Taiwan, etc. There’s a limit to how much money an individual, a business, or a country is willing or able to spend or lose in order to stand up to China’s economic bullying. The world’s democracies must respond collectively.
Security alliances and trade organizations exist, but they do not address economic coercion arising from values-related conflicts. Time has come to consider establishing a values-based “economic NATO” for the world’s democracies. The NATO principle of mutual military defense would be applied the economic sphere--when China retaliates economically against a member-state for standing up for democratic principles, all other treaty members must proactively come to her defense to help ease the resulting economic pain. This will help break the collective-action dilemma all the democracies have faced so far.
In response to values-related conflicts with China, mutual economic assistance between Japan, Taiwan, Australia, the Czech Republic, Lithuania and other countries has emerged in recent years. But the potential question is: How long can such beneficial and effective acts of mutual assistance last? The world’s democracies must set a standard for shared-values mutual assistance based on rules (treaty), rather than relying on the one-time discretion of individual states. In 2004, macroeconomists Edward Prescott and Finn Kydland won the Nobel Prize in Economics for their work on the concept of “time inconsistency,” in which they introduced an important conclusion: Rules are better than discretion, because parties are committed to not changing their policies even when doing so may benefit themselves. If each party has the discretion to change its policy, a time inconsistency problem arises, and credibility and commitment become difficult to establish.
The world is locked in a new Cold War. Increasing geopolitical divisions in the wake of Russia’s invasion of Ukraine have brought the new Cold War into sharper focus. It’s a Cold War because the conflict of values has become the root of enduring military, economic, and diplomatic conflicts. For the democratic world, the question is not whether to acknowledge this new Cold War, but rather how to fight and reign victorious. The values-based “economic NATO” that I propose is a fundamental and effective structural response to the grave challenge that China pose to world democracy.
