Economic Statecraft

What is Economic Statecraft

Economic statecraft refers to the use of economic tools by a state to influence the behavior of another state. It involves wielding economic influence and leveraging economic power to achieve foreign policy objectives.

Economic statecraft can take both positive and negative forms. Negative economic statecraft involves the use of punitive economic measures like sanctions, tariffs, and trade embargoes to inflict economic pain and coerce a change in behavior of the target state. For example, in 1973 the OPEC countries used the “oil weapon” to punish the US for its support of Israel in the Yom Kippur War by cutting oil exports and hiking prices.

Positive economic statecraft provides economic benefits like trade deals, financial aid, and investment to induce cooperation from the target state. For instance, the US provided extensive financial aid to Western Europe under the Marshall Plan from 1948-1952 to help rebuild economies, create stable democracies, and counter Soviet influence during the early Cold War period.

Economic statecraft has been practiced for centuries, with examples like Athens placing trade sanctions on its rival Megara during the Peloponnesian Wars of Ancient Greece. It remains an important foreign policy tool for major powers like the US, China, EU and others as economic linkages between states continue to deepen.

Objectives of Economic Statecraft

Economic statecraft aims to use economic tools, relationships, incentives, and sanctions to achieve a range of foreign policy objectives. The key goals of economic statecraft include:

• Satisfying broader foreign policy goals of the implementing nation. Economic statecraft allows countries to wield economic influence to support their foreign policy agendas without resorting to overt military intervention.
• Influencing the domestic politics and foreign policy behaviors of the target nation. Economic incentives or sanctions apply economic pressure to push a target country to change its domestic policies or international behaviors aligned with the goals of the implementing nation.
• Affecting the capabilities of a regime or government. Economic statecraft can deprive a regime of financial resources to fund government operations, weaken institutions, and reduce political stability. Alternatively, economic incentives can provide resources to empower or stabilize friendly regimes.

The objectives and motivations behind economic statecraft may include security concerns, ideological differences, human rights advocacy, or commercial interests. Ultimately, economic statecraft serves as a tool for nations to project power and influence the behaviors of other states to align with their strategic interests.

Sanctions as a Tool

Sanctions are restrictive measures imposed by one or more countries against a target to achieve political or economic objectives. They are one of the main tools of economic statecraft. There are several types of sanctions:

• Trade restrictions limit or ban the import and/or export of goods, services, or technologies to or from a target country. For example, in 1973 the OPEC countries imposed an “oil weapon” embargo against the US in retaliation for its support of Israel during the Yom Kippur War.
• Financial sanctions restrict a target’s access to financial markets, assets, and banking services. In the 1970s the US imposed financial sanctions against Chile, freezing Chilean assets in the US.
• Investment restrictions limit investment and business activities like joint ventures or partnerships with entities from the target country. In the 1990s and 2000s, Western governments imposed investment restrictions on countries in the Middle East and North Africa.
• Monetary sanctions restrict access to foreign exchange needed to pay for imports or repay debts. For instance, in response to alleged currency manipulation, the US threatened monetary sanctions against China from 2018-2020 during the trade war.

By using these types of sanctions, countries attempt to inflict economic damage on a target in order to coerce changes in policy or behavior. Sanctions can also signal disapproval. Their effectiveness is debated by scholars.

Case Study: Russia-Ukraine Sanctions

The conflict between Russia and Ukraine began in 2014 when Russia annexed the Crimean Peninsula from Ukraine. This prompted economic sanctions by Western nations against Russia.

The United States, European Union, Canada, Australia, New Zealand, Japan, and others imposed a series of economic sanctions against Russia. These included:

• Restrictions on exports of certain oil exploration and production technology to Russia. This limited Russia’s ability to develop its oil resources over the long term.
• Bans on exports of dual-use and military items to Russia. This restricted Russia’s access to technology and equipment that could be used for military purposes.
• Freezing of assets and blocking access to capital markets for designated Russian banks and companies. This cut off sanctioned Russian firms from Western financing and investment.
• Bans on exporting infrastructure, energy, and defense goods and services for Russian deepwater, Arctic offshore, or shale oil projects. This blocked access to Western expertise and technology needed to develop these oil resources.
• Restrictions on providing financing or insurance related to exports to Russia of restricted goods and services.

The sanctions have had a sizeable economic impact on Russia. Its GDP declined around 4% due to the sanctions, and the ruble declined sharply in value. Restricted access to Western capital and advanced oil exploration technology may constrain Russia’s economic growth over the longer term.

However, the sanctions have also imposed economic costs on European countries with close trade ties to Russia. For example, Germany has faced declining exports and economic growth due to reduced trade flows. Many European countries rely heavily on Russian oil and gas imports, which increased in cost due to the conflict. The sanctions have revealed a tradeoff between economic interests and security policy for European nations.

Incentives as a Tool

Incentives can be used as a form of positive economic statecraft to induce changes in the behavior of a target country. Unlike sanctions which use economic pressure, incentives provide economic benefits and rewards to encourage cooperation.

There are two main types of incentives in economic statecraft:

Tactical Linkage

• Provides short-term economic rewards contingent on specific policy changes
• Used to influence discrete, near-term decisions
• Example: Offering a country reduced tariffs if they agree to certain trade terms

Structural Linkage

• Provides long-term economic integration incentives
• Aims to gradually change a country’s core interests and alignment
• Example: Offering a country access to a free trade area if they reform institutions and regulations

Incentives aim to make cooperation more beneficial than resistance. They create shared interests and incentives for target countries to maintain positive relations. However, incentives may also create economic dependence on the initiating country.

Case Study: US-China Trade War

The trade war between the United States and China began in January 2018 when the US imposed tariffs on imported solar panels and washing machines. This was followed by additional rounds of tariffs by both countries throughout 2018 and 2019.

The background of the dispute centers around issues like the US trade deficit with China, theft of intellectual property, and forced technology transfers. The US argued that China’s unfair trade practices hurt American companies and workers. China contended the tariffs were an act of protectionism.

The US levied tariffs on over $500 billion of Chinese goods, while China imposed tariffs on over $185 billion of US products. The US tariffs targeted consumer goods, industrial equipment, and raw materials. China’s tariffs focused heavily on agricultural goods like soybeans, wheat, meat, and dairy.

The trade war negatively impacted both economies but hit China’s export-driven economy particularly hard. China’s GDP growth slowed to 6.6% in 2018, its lowest rate since 1990. US manufacturing and agriculture faced weaker demand and higher costs. Overall US GDP growth dipped to 2.3% in 2019 compared to 2.9% in 2018.

By using tariffs as a negative tool, the trade war caused economic damage on both sides without resolving the core disputes. After two years of escalation, the countries signed a “phase one” trade deal in January 2020 that paused further tariffs without making major structural changes.

Evaluating Effectiveness

Evaluating the effectiveness of economic statecraft policies like sanctions and incentives can be challenging due to the complex nature of their impacts. Some key considerations when assessing effectiveness include:

Metrics for success - What are the specific objectives being targeted and how can progress be measured? Common metrics include changes in target country policy/behavior, economic damage to the target country, and pressure on the regime’s stability. However, directly attributing observed changes to economic statecraft can be difficult.

Unintended consequences - Economic statecraft often has unintended side effects, both positive and negative. Sanctions may rally popular support behind the target regime or create lucrative black markets. Incentives may disproportionately benefit regime insiders. Such secondary effects can undermine or support the original policy goals.

Mitigating factors - The existing economic/political situation in the target country can determine how much leverage sanctions or incentives provide. Wealthy, stable regimes or countries with key geopolitical influence may be less vulnerable to economic pressure.

Duration required - Economic statecraft aims to alter a country’s long-term behavior, which requires sustained pressure over years in many cases. Short-term impacts often do not reflect the ultimate success or failure.

Costs to the imposing country - Economic statecraft also incurs economic and political costs for the country or coalition applying sanctions/incentives. These domestic costs can affect political will to maintain the policies.

Evaluating effectiveness requires tracking progress across multiple indicators over an extended period. Economic statecraft rarely achieves quick or decisive results, so setting realistic expectations is important. Analysts continue to study and debate the efficacy of high-profile examples like Cuba, Iran, and Russia sanctions.

Ethics of Economic Statecraft

Economic statecraft raises a number of ethical considerations, especially regarding the humanitarian impacts of sanctions and the moral justification of using economic coercion.

One concern is that broad economic sanctions often disproportionately affect civilian populations rather than regime elites. Sanctions on goods like food, medicine, and energy can lead to shortages and price increases that harm vulnerable groups and worsen humanitarian crises. This raises moral questions about intentionally using economic suffering as a policy tool. Just war theory principles like proportionality and discrimination suggest sanctions should target decision-makers rather than whole populations.

In terms of justifications, sanctions are often portrayed as an alternative to war. However, some ethicists argue economic coercion still amounts to a form of violence and aggression against another society. Sanctions can inflict major harm on people’s livelihoods and well-being. Therefore, the act of imposing sanctions requires a high burden of moral justification, beyond mere convenience or presumption of effectiveness.

There are also debates around the legitimacy and fairness of punishing civilians who have limited ability to change their government’s policies. While incentives aim to persuade through benefits, sanctions more overtly pressure populations through deprivation. This contradicts ideals of respecting national sovereignty and self-determination.

Overall, economic statecraft involves complex ethical tradeoffs. Policymakers must weigh geopolitical interests against principles of human rights and justice. A higher standard of moral scrutiny may be needed for sanctions that risk humanitarian suffering.

The Future of Economic Statecraft

The future of economic statecraft will be shaped by several key trends including increased globalization, the rise of new global powers, and advancing technologies that enable more targeted sanctions.

As the world becomes more interconnected through trade, investment, and financial links, states gain more potential leverage over one another via economic ties. However, increased globalization also means states have more options to find alternative partners if cut off from certain relationships. This could make economic statecraft less impactful in some instances.

The rise of new powers in the international system, like China, also stands to shape the future landscape of economic statecraft. As China gains economic clout, its ability to employ economic statecraft increases. The West’s long-held dominance in institutions like the World Bank and IMF may wane as Chinese alternatives like the AIIB emerge. This could lead to greater use of economic tools by China to advance its interests.

Finally, advancing technologies will enable more targeted economic actions in the future. Rather than broad country-wide sanctions, tools like blockchain and digital currencies may allow states to freeze assets or restrict transactions of specific companies or even individuals. However, adaptive technologies like cryptocurrencies could also help regimes circumvent economic statecraft. The cat-and-mouse game of sanctions and evasion will likely continue.

Overall, the terrain of economic statecraft faces new complexities. While states will continue developing tools to exert economic leverage, global trends create new difficulties and opportunities for the effective use of economic statecraft. States will need adaptable, nuanced approaches to stay relevant in this evolving domain.