The Lessons of Reagan’s Pipeline Crisis for Competing with China

President Joe Biden promised to restore good relations with allies after the friction and acrimony of the Trump years. It is one thing to avoid antagonizing allies, as President Donald Trump seemed to relish. But mobilizing them in a common cause is another matter altogether. The catastrophic U.S. withdrawal from Afghanistan caused European allies to openly question America’s competence and ability to lead. As the Ukraine crisis began to brew last fall, a common Western policy was hobbled by Germany’s reticence. Only once President Vladimir Putin actually launched his invasion did new German chancellor Olaf Scholz reorient his country’s policy on Russia and announce a program of defense spending unprecedented in the post-Cold War period.

However, notwithstanding the current transatlantic coordination on Russia sanctions and support for Ukraine (notable achievements that we applaud), Washington should not expect to find common ground with its allies and partners in Europe and even in Asia quite so easily in the event of a major security crisis with China. While policymakers and analysts debate whether America is in a “new Cold War” with China, the original Cold War offers cautionary lessons for managing alliances while confronting a hostile great power.

 

 

Consider the transatlantic crisis that faced the Reagan administration in the early 1980s over the construction of the Trans-Siberian Pipeline, which would supply Western Europe with natural gas from the Soviet Union. As one of us describes in the forthcoming book The Peacemaker: Ronald Reagan in the White House and the World, the pipeline dispute dominated headlines and poisoned relations on both sides of the Atlantic for the better part of 1982. Incidentally, it also piqued the interest of a Harvard undergraduate who wrote his senior thesis on the dispute, later published in 1987 as a book. That student, Antony Blinken, now serves as the U.S. secretary of state.

While the most obvious parallel between the Siberian pipeline rift and today is the recent imbroglio over the Nord Stream 2 pipeline built to carry Russian gas to Germany, the 1980s pipeline crisis also offers some deeper, if less immediately apparent, insights for allied relations in managing and countering threats from China.

The Trans-Siberian Pipeline

The roots of the dispute are found in the oil shocks of the late 1970s, when Europe’s near-total reliance on Middle Eastern fossil fuels contributed to a sharp recession that lasted into the early 1980s. In order to mitigate this dependency, Western European countries looked east to diversify their energy supply — to the Soviet Union and its vast oil and gas reserves. West German Chancellor Helmut Schmidt launched talks to build a pipeline with the Soviet Union in 1980. Other European governments, including the United Kingdom, joined on, in part to abate their high unemployment by winning construction contracts. These NATO member states would get jobs and energy — in return, Moscow would get a steady stream of hard currency.

The Reagan administration worried that money flowing to Moscow would lead to a stronger Red Army and tighter Soviet control over its satellite states in the Warsaw Pact and the Third World. The weak buying power of the Russian ruble had left the Kremlin struggling, but selling gas in exchange for much stronger Western European currencies would give the Soviet Union an easier medium in which to pass money on to its satellites while bolstering its own military and fragile economy. The construction of the pipeline by European firms promised additional benefits to Moscow, including access to cutting-edge Western technology, and provided a tool with which to geopolitically blackmail Europe should the Kremlin ever decide to turn off the spigots. European leaders were well aware of this risk, but prioritized job creation and energy security over the long-term threat of a more formidable Soviet Union. Once again, the tangible concerns of Europe won out over the strategic objections of the United States.

When the Polish communist regime imposed martial law in December 1981, Washington (correctly) saw Moscow’s shadow behind this and retaliated with sanctions. These measures prohibited the use of American-made technology in the pipeline project. Left unclear was whether the ban applied to technology made by European subsidiaries of American companies or to contracts already in force.

Months later, when martial law continued and the United Kingdom, France, and West Germany refused to drop the pipeline, President Ronald Reagan escalated by applying the sanctions both extraterritorially and retroactively. European allies erupted in anger. Reagan’s close British counterpart Margaret Thatcher lamented that her nation felt “deeply wounded by a friend.” Schmidt griped that the sanctions were tantamount to the American government asserting sovereignty over Europe. While the United States dangled alternative contracts to some companies, others like Britain’s John Brown Engineering could not be otherwise compensated and stood to go out of business if they were not able to execute the contract, costing thousands of British jobs in the midst of a recession. The sanctions also had unintended impacts, such as halting an unrelated construction project in Australia. The frustrated Europeans eventually granted permission for firms to ignore the American sanctions and implement the pipeline contracts. European grousing also highlighted apparent American hypocrisy, since Reagan had lifted the U.S. grain embargo so American farmers could sell grain to the Soviet Union, while trying to prevent European commerce with Moscow.

Pipeline Parallels

The United States had five key objectives with the Trans-Siberian Pipeline. Asia-watchers should note them closely because they parallel central elements in the strategic competition with China today. First, prevent the economic entanglement of allies with a major adversary; second, deny hard currency revenues to that adversary; third, prevent the transfer of sensitive Western technology to a security rival; fourth, prevent allies from being subject to potential energy blackmail; and finally, maintain a strong transatlantic partnership against a common adversary. Much like the failure of the Reagan administration to stop the Trans-Siberian Pipeline, current and future administrations will also struggle to pry other countries from China’s economic grasp. China holds the largest share of global GDP and global exports. Even close American allies with deteriorating geopolitical relationships with China continue to maintain deep economic ties, especially in Asia. China is the top export destination for U.S. allies Australia and South Korea and the second largest export destination behind the United States for Japan.

The strategic logic of the Reagan administration sanctions was undeniable: Using economic coercion to incentivize allies to abandon the pipeline could advance the first four goals. But the policy failed. Why? Because the Reagan administration severely underestimated the depth of allied commitment to the pipeline and because it expected its allies to suffer more costs than the United States was willing to bear itself. The central mistake of the Reagan administration was sacrificing its fifth objective — NATO unity — despite being unable to achieve any of the other four.

U.S. policymakers use many of the same justifications today to decouple economically from China as the Reagan administration did to justify isolating the Soviet Union. Just as American leaders today worry about the leverage China has over critical supply chains, U.S. officials in the pipeline crisis believed — with good reason — that Western European capitals were handing significant leverage to Moscow, which could simply turn off the gas supply in order to extract concessions and divide the transatlantic alliance. Western European countries saw the situation in the opposite way. They believed that being one of the few Soviet trading partners would entice the Soviet Union to moderate its behavior and sustain the cashflow from the pipeline. The pipeline exemplified the challenge of “weaponized interdependence” and showed that, like today, the United States and Europe had different approaches for managing economic relations with a geopolitical rival.

Strategy Over Sanctions

At an impasse and seeing the alliance under great strain, in June 1982 Reagan dismissed Secretary of State Al Haig, who had opposed the pipeline sanctions but had lost Reagan’s trust and confidence for other reasons. George Shultz, Haig’s replacement, inherited a mess of needing to deliver for angry members of his own administration while placating aggrieved allies. In November 1982, he convinced Reagan to withdraw the sanctions and begin strategic consultations with allies on export controls and East-West trade.

Shultz succeeded not because he was soft on the Soviets, but because he focused on keeping NATO allies on board for the bigger task in confronting Moscow: deploying American intermediate-range nuclear missiles in Europe the next year. Those missiles would frighten the Kremlin much more than the pipeline sanctions and give Reagan much-needed diplomatic leverage with his Soviet counterparts. The Reagan administration eventually found a more potent way to stifle the Soviet Union’s oil revenues while helping, instead of hurting, allied economies. In 1985, spurred in part by White House appeals, Saudi Arabia dramatically increased its oil production. This drove oil prices down worldwide, benefitting energy-importing countries in Europe and significantly reducing Moscow’s hard currency receipts.

The Reagan administration’s objectives in the pipeline crisis look much like the Biden administration’s priorities today for the strategic competition with Beijing. So far, the Trump and Biden administrations have had mixed results in getting Europe on the same page when it comes to China. Most European partners have signed onto U.S. efforts to prevent Huawei from providing critical telecommunication networks for Europe. However, despite the Biden transition team’s pleas to delay, the European Commission — led by Germany — went ahead with its Comprehensive Agreement on Investment with China last year (before the European Parliament suspended it a few months later). In particular, Germany — the European Union’s largest economy — seems to see China more as a commercial partner than a strategic rival. However, perhaps prompted by security concerns, allied nudging, and coalition politics, even Berlin is starting to hedge against Beijing, as evidenced by Germany’s unprecedented deployment of a warship to the Pacific and issuance of an Indo-Pacific strategy that aligns much more with the American vision for the region than China’s hegemonic aspirations. Given how leading European nations are in the midst of reassessing their economic and security postures towards China — not to mention the obvious galvanizing factor of Russia’s invasion of Ukraine — Biden’s trip to Europe last fall should be only the start of a sustained dialogue on the objectives, risk tolerances, and concerns from both sides of the Atlantic.

Lessons for Today

This transatlantic dialogue should draw on insights from the Trans-Siberian Pipeline contretemps. It is easier — as a matter of politics and diplomacy — to govern economic activity by your own nation than by other nations. If sanctions are going to be employed, it is more feasible to sanction adversaries than allies. Do not try to impose more pain on allies than you are willing to bear yourself, and do not inflict costs on allies without providing them with an alternative way out. Shrewd alliance management should account for not only allies’ threat perceptions but their economic needs and vulnerabilities as well. Take the time to build a diplomatic consensus among allies for stronger measures, rather than imposing them rashly over allied kvetching. If you are going to lean on allies to spend political capital for a controversial policy, pick the policy with the greatest strategic punch — as Reagan and Shultz eventually did in focusing on securing allied support for the intermediate-range missile deployments while jettisoning the pipeline sanctions.

The situation may be more difficult for America’s Asian allies, who are simultaneously more economically interdependent with China and more vulnerable to potential Chinese aggression. Almost half of China’s exports go to other Asian nations, and Japan, South Korea, and Vietnam all trade more with China than do any European countries. Beijing will not hesitate to exploit these ties in pursuit of its foreign policy ambitions. For instance, China’s economic retaliation to deploying the Terminal High Altitude Aerial Defense ballistic missile defense system demonstrates that closer security relationships with the United States will come at a cost for Asian countries. Australia’s embrace of the AUKUS submarine development partnership might be hard to replicate. As Japan seeks to deepen technology-sharing and security cooperation with the United States, it may face growing external pressure from Beijing and internal friction from its constitutional constraints. The Philippines and other ASEAN nations are even more unlikely to break with China, as exemplified by President Rodrigo Duterte’s willingness to flip-flop between the Chinese and American camps despite being one of only two U.S. treaty allies among ASEAN members. Dialing back economic concerns while improving security cooperation will likely not work for the United States as it did in 1980s Europe vis-à-vis the Soviet Union.

Nonetheless, some recent American policies bear out Reagan and Shultz’s insights. The Trump administration’s “clean networks” initiative built a coalition of nations committed to deepening their technological engagement with each other while steering clear of compromised technologies peddled by Chinese companies such as Huawei, with its worrisome ties to China’s military and intelligence services. The United States has effectively targeted a chokepoint in semiconductor production by preventing the sale of essential equipment, Extreme Ultra Violet lithography, to Chinese companies. This ensures that the global microchip supply chain remains dominated instead by companies in Taiwan and South Korea, both American allies (albeit still vulnerable to Beijing’s hostile moves). In both cases, the United States found creative ways to restrict China’s access to valuable markets and technologies without unduly hurting the economies of friendly nations.

China, for now, is also a lesser geopolitical and military threat to Europe than the Soviet Union was. And, particularly in light of the Russia-Ukraine war, European governments are more fearful of Russian aggression in their own backyard than subterfuge from Beijing on the far side of Eurasia. This will make it harder for American officials to convince European counterparts to recognize the dangers of economic entanglement with China. And for Asian allies and partners who have born the brunt of China’s growing economic, political, and military coercion, keeping a coalition together through a crisis will be even harder. Given the preponderance of Huawei-built networks and Belt and Road infrastructure in the region, there are many more chokepoints where China could grind a country’s telecommunications or transportation system — and by extension, its entire economy — to a halt.

Almost all agree that America’s alliances are an immense strategic advantage, but the give and take of these relationships will determine how effective they will be in coming up with effective policy solutions. Biden should continue to listen to Europe’s concerns and identify areas to continue deepening and strengthening the transatlantic alliance. This does not mean backing away from American concerns about China, but rather taking the time to build support among European publics and leaders to partner with the United States in restricting technology and imposing costs on China. Beijing’s increasing belligerence, support for Russia, human rights abuses, technology theft, and other thuggish behaviors will help Biden to make the case that this is not a threat that Europe can ignore or trade away. 

 

 

Nicholas Romanow is an active-duty naval officer and a graduate of the University of Texas at Austin, where he was also an undergraduate fellow at the Clements Center for National Security. Twitter: @NickRomanow

William Inboden is executive director of the Clements Center for National Security and associate professor at the LBJ School of Public Affairs, both at the University of Texas at Austin. He is the author of the forthcoming book The Peacemaker: Ronald Reagan in the White House and the World.

The views expressed by the article do not reflect the official views of the U.S. Navy, the Department of Defense, or any part of the U.S. government.

Image: U.S. National Archives

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