War, trade and utopia.

• Author: Lynn, Barry C.

IN THE spring of 2001 Andrew Grove, the chairman of Intel, made a remarkable statement. Any conflict in or around the Taiwan Strait that resulted in a break in trade, he said, would result in the "computing equivalent of Mutually Assured Destruction." The implication, at least for the vitally important electronics industry, was that the production systems of the United States and China had become entirely intertwined and interdependent.

Equally remarkable is how little attention this statement, by one of the world's most well-known industrialists, has received in the four years since. In part, this was a matter of timing. At the moment Grove spoke, the focus was on the diplomatic crisis that erupted after a Chinese fighter jet collided with an American spy plane in April 2001. Soon thereafter, the attention of the United States shifted dramatically, first to the attacks of September 11, then to the wars in Afghanistan and Iraq.

But we can put off examining the implications of Grove's words no longer. If the United States and China do in fact depend intimately on the exact same means of production, the political ramifications are immense. And if anything, the industrial ties have become only stronger in the years since. Not only have raw trade flows continued to grow dramatically, but the number of firms that have adopted super-specialized production models similar to those of the electronics industry has increased. Which leaves us with two closely interrelated questions: How does this interdependence affect the relative power of China and the United States to exert political influence over one another, and how does it affect the likelihood that the two nations will come into conflict in the future?

The second question is especially urgent. The idea that a break in trade would cause extreme damage to both economies is increasingly taken as a sort of proof that the United States and China will almost naturally steer clear of war and war-like actions. Yet a close examination of the reality and history of industrial interdependence demonstrates that, on the contrary, we can imagine at least some instances in which deep industrial interdependence may actually increase the risk of conflict between two nations.

OUR FIRST challenge is simply to admit the depth and nature of the industrial interdependence that has been forged between the two nations. Although the gross numbers on trade are impressive enough--the United States will import close to $250 billion in goods from China and Hong Kong this year--this tells only part of the story. The key fact is that there is hardly a complex product that rolls off an assembly line in the United States that does not contain multiple components from China, the absence of which would paralyze production, at least temporarily.

This is a shocking transformation from the near-complete industrial division between the two nations that existed as late as 1993. Trade agreements like the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and the normalization of trade relations between the United States and China can explain only part of the phenomenon. We must also look at the revolutionary changes that have taken place in the nature of the firm in recent years. Three especially are important. First is the long series of mergers, acquisitions, bankruptcies and strategic reordering of markets that has enabled ever more powerful oligopolies to consolidate control over ever more industrial sectors. Second is the literal disintegration of the Fordist model of the vertically integrated corporation that dominated the 20 century, which is what "outsourcing" really means. Third is the systematic adoption by American firms of the just-in-time production processes pioneered by Toyota and the adaptation of what was a regional strategy to global-scale systems. (1)

The radical reorganization of production that resulted from these three changes has altered the U.S. relationship not only with China but with all industrial nations. It is hard to imagine running our industrial system without Japan or South Korea or Taiwan or Canada--all of which have captured or been ceded control over certain key supplier activities on which we rely. This is increasingly true not only in electronics, but also in such industries as automobiles, aerospace, chemicals and pharmaceuticals. The rise in specialization, in other words, is a global industrial phenomenon. China, due to its size and the authoritarian nature of its regime, provides the most obviously political danger of the many new dangers posed by this system.

The second effect of the revolutionary reordering of production has been to alter how the average lead firm understands and responds to risk. Classical economics counts on big multinationals to limit their exposure to political risk and to manage other everyday threats to the production system, for instance, by stockpiling components and diversifying suppliers. Unfortunately, these firms appear to be ever less willing or able to do so. The reasons for this are many and complex, but consider just two of the effects of the collapse of the vertical-integration model of production. One result is that today's lead firms find themselves increasingly severed from the physical realities of production and hence increasingly unable to comprehend what poses a threat to these systems. Another is that as firms come to rely more on the same systems of supply, certain inter-firm competitive risks are lessened, even as risks to the system as a whole rise precipitously.

This radically new nature of production poses numerous and complex challenges. The system's growing fragility, for instance, has been made clear many times. Consider the industrial crashes throughout the electronics production system after the Taiwan earthquake of September 1999, or due to the shutdown of air transport after September...