Wednesday, October 11, 2017

But ... so what? The Economics of Ambiguity and Threat

Threats -- the subject I addressed in a previous blog -- are interesting, I tried to argue, from an economic perspective. They are used when one lacks other resources and are, as it were, a currency through which a leader (on behalf of his or her country or party or ruling group, etc.) tries to buy (as it were) things. The currency of threat is both internal and external. Internally, a threat may be good for the leader. It may buy him or her support or praise, particularly if their support is shaky. Thus, and just as an example, the North Korean leadership continually threatens other countries (using its control of the media) both to try to win it international respect (that it has no other means of attaining) and to ensure its support at home. This, too, it has little other means of attaining other than through censorship (which, sooner or later, will fail).

Recently, as I read over the news, I noticed a Washington Post story that Donald Trump planned to declare the Iran nuclear deal bad for the American "national interest." You can find the story here. He also, apparently, however, would not say whether or not he would, on behalf of the US, abandon the deal. That story is here. What does this mean? There are a range of different ways of assessing these statements but if we look at them from an economic perspective and think about their relationship to the economics of threat, we can use such statements as examples that serve to illustrate broader patterns (as opposed to something that is valuable in itself). What is that broader pattern?

One of the problems with threats, I suggested, is that they have a shelf life. This does not mean that you cannot take them out, dust them off, and use them again down the road, after memory has faded a bit. In fact, if you look at North Korea, this is what its government has tended to do. What of Trump? How do his threats work? These threats noted above are interesting from this economic perspective because they show us two things.

First, Trumpian threats are backed up by something vaguely ominous but unclear. This is different the Trump administration's approach to environmental protection legislation. They simply try to get rid of it. They don't threaten anyone. They just move ahead and do it. (I'm not saying that is good. I'm saying it is action that is characterized by a lack of public threatening.) In the case of the Iran nuclear deal, a very different tact has been taken. What happens to the deal if Trump "declares" that it is not in the American "national interest?" It sounds bad, but is it? Does this declaration have any criteria that go with it? Who gets to decide what is and is not in the national interest? Are any laws passed because of this declaration? Does it have any effect on Iran?

Said differently, we have what looks like a definitive statement cum threat that, when looked at closely, is more akin to a house of cards.  Having Trump declare that a nuclear deal with Iran not in the national interest is not like establishing a no fly zone in Iraq or Kosovo. It is not like a certification has been revoked, nor a trade agreement scuttled, nor even a soccer tournament canceled. Trump makes a statement -- some people like it, others criticize it, talking heads chatter over it -- but ... and this is the point, nothing really happens afterward ...  except ...

And, it is that "except" that is vital to the Trump administration's economics of threat. The except is that we don't know.  Will this mean that the US will abandon its deal with Iran? And, what are the implications of abandoning it? Again, it does not sound good but we don't know. This is important because knowing removes the threat. If, for instance, the US stated clearly that it was pulling out of the deal, the Iranian government would say "that is a drag" and go back to their old program. The US might want a new deal but negotiations would have to begin anew. And, as we saw from the first deal, the US does not have a lot of leverage. It could make a stronger threat, say military action, but does anyone seriously believe that they would follow through with that?

Thus, ambiguity is needed for the threat -- or, in this case implied threat -- to actually work. The ambiguity creates pressure and sounds like it creates negative consequences that the other party seeks to avoid. And, from Iran's perspective, seeking to avoid a broken deal might be a good thing and so the treat gains some leverage. But, at the exact minute it stops being ambiguous, the threat loses its leverage, forces Iran to make decisions (whatever these might be) and, because of that, because it convinces Iran that decisions must be made, the US government loses its traction (regardless of what the decision actually is). It can threaten but what if those threats are taken seriously? It now must "fish or cut bait." The beauty of the ambiguity Trump creates is that right now, at least, it need do neither. In other words, to maximize its leverage, the US government needs ambiguity and it needs irresolution.

This is, btw, exactly the same approach the US government has followed with regard to NAFTA. What is the US position on NAFTA? It wants to renegotiate it, but this desire for renegotiation is periodically interrupted by musings out loud about ditching the deal. We can ask in another post, what happens if that were actually the case, but you see the point with regard to the economics of threat. The ambiguity is better than a defined position. Looking at just at Canada, if the US ditches NAFTA (which, it might, of course), that removes the ambiguity and Canada needs to make decisions about what it does with its US trade. Canada makes those decisions on the basis of what is good for Canada. Ditching NAFTA outright, in other words, does not win the US any concessions from Canada. But, ambiguity might. In order to maintain the deal, Canada might be willing to make concessions (say, limiting the export of softwood lumber, or buying even more dairy, or purchasing some military equipment from Boeing). Canada might do this because it is worth something, to the Canadian government and Canadian business, to avoid disruption. But, once that disruption has occurred, the Canada government enters into a different series of calculations. One looks for different markets, rethink energy proportionality, expands supply management programs, etc. Ambiguity, in other words, serves people well in negotiations.

Now, I am not trying to say that the Trump administration is filled with geniuses.  What I am trying to say is that there is an economics to threat and it is different in this case than in the case of North Korea (where a different but similar economics is at play). In both cases irresolution works to advance the state objectives except that North Korea is really looking for either (a) permanent irresolution or (b) the attainment of their aims (which seems unlikely). The US government, one assumes, is looking to attain certain aims and long-term irresolution will not work to meet its aims. This ambiguity with regard to NAFTA has, in this sense, a time limit because sooner or later the US government will want to show results, if for no other reason than to get re-elected.

Same thing with the Iran deal. The deal with Iran might be bad. It might be good. That point is irrelevant. The US wants a deal because it does not want to deal with nuclear proliferation. That was, after all, why it signed the deal in the first place. The current administration is gambling that ambiguity can help it meet its goals in that renegotiation as well. Ambiguity, in this sense, becomes a currency that it is using to try to buy its objectives.
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