Economic Warfare: Ukraine and Beyond

President Joe Biden's announcement March 11 that the U.S. and its allies will revoke Most Favored Nation trade status for Russia should drive the final nail into the coffin of economic globalization theory.  So sacrosanct was MFN status to transnational business that during the debate over granting it to China as part of its admission to the World Trade Organization in 2001, the term was changed to Normal Trade Relations so it did not seem that we were "favoring" Beijing's communist regime, only doing business with it like any other entity.  The only values that mattered were measured in dollars.

The atmosphere is changing.  Even before Biden's reluctant decision to cut off oil imports from Russia, energy firms BP and Shell cut ties to Russia.  The Econ 101 theory of trade (which I taught for many years, but not in isolation) sees resources, particularly capital, allocated to where they would be the most productive without regard to borders in pursuit of aggregate economic growth and profit.  The results would show on corporate accounts, not on any international balance of power, which was deemed an obsolete worldview.

Another change in terminology reflected the change in perceptions. Distinguished American academic John G. Ruggie, then U.N. assistant secretary-general for strategic planning, said in a November 20, 2000 speech, "Simply put, postwar institutions, including the United Nations, were built for an inter-national world, but we have entered a global world."

Yet the world is not a single polity, as economic theory assumes.  Where strategic industries exist is as important as where naval bases and airfields exist in a world still divided by political and ideological struggles for power and resources.  Territory is still the foundation of nation-states and imperial aspirations.  The notion that societies can always trade for what they need rather than control sources outright depends on an autonomous commercial system that does not exist.  Economic warfare has always been a part of the larger arena of conflict.  In that sense, there has been a "global" world of strategy for at least the last five centuries, but it is not an alternative to international relations; it is the landscape that those relations play across.

Flowing from trade theory was the concept of interdependence, which would prevent war because contending states could not afford to sever their economies ties without suffering prohibitive costs.  History has not treated this idea kindly.  The current situation adds a new twist.  Interdependence is not preventing war; it is aiding aggression by raising the costs of resistance.  Putin knew that his only chance of conquering Ukraine was to isolate it from outside military support.  President Biden has constantly assured him that America would not intervene to fight a Russian invasion.  Even more to the point, NATO did not bring Ukraine under its protection before the fighting started to deter an attack.  Instead, the alliance relied on a "sanctions only" strategy.  Yet President Biden has admitted that "no one expected the sanctions to prevent anything from happening," and "for weeks, we have been warning that this [invasion] would happen."

Putin did not fear sanctions, though they have done more damage to the Russian economy than he expected.  He believed that most measures would not last once he had won the war, and Russia would then recover.

China has watched these developments closely.  Beijing plays a much larger role in global markets than Russia, so much larger that it believes it has the world on a string.  An op-ed in the Global Times on Feb. 27 was entitled "West's potential sanctions on China over island won't work. " The island is Taiwan.  The Chinese Communist Party paper argued, "It is the largest trading partner of most countries worldwide, with an irreplaceable position in the global industrial chain, supply chain, value chain, and regional and global influence.  Any severe sanction against China will significantly backfire.  It will be a lose-lose situation from any point of view.  The question is whether the island of Taiwan is important enough for the West to squander decades of economic gains, which the welfare of their people depend on."  This is part of Beijing's larger argument that since the U.S. will not fight for Ukraine, it will not fight for Taiwan — a conclusion that makes Chinese aggression much more likely.

The prosperity of the Chinese people is also at risk in a war, as is the CCP, which has built its post-Tiananmen legitimacy on creating material progress.  The question is whether autocracies can survive economic stress better than democracies, where consumers get to vote.  Presidents Putin and Xi Jinping are betting they can, and President Biden fears they are correct.

Thus, President Biden has continued the efforts to decouple the U.S. economy from China started by President Donald Trump.  On February 24, the Departments of Defense, Energy, Commerce and Homeland Security, Health and Human Services, Agriculture, and Transportation released their one-year reports on developing more resilient, diverse, and secure American supply chains in accordance with Executive Order 14017.  That this effort is motivated primarily by national security concerns is shown by the fact that Jake Sullivan, assistant to the president for national security affairs, is the lead co-chair of the effort, along with Brian Deese, director of the National Economic Council.  They issued a capstone statement along with the six departmental reports.

The report from the DoD is the most comprehensive, setting the tone and presenting many of the topics addressed in the other reports such as electric batteries, microelectronics, critical materials, the role of small business, a skilled workforce, and a culture of innovation.  And then how these economic factors combine to produce weapons.  The report stresses the need to expand and rebuild domestic industrial capacity after decades of allowing key sectors to offshore capacity to vulnerable, even hostile, locations.  While reshoring strategic production is vital, the report also discusses "ally-shoring," where supply chains are redirected from potential adversaries to trusted strategic partners.  Other of the reports are less robust, indicating that the Biden administration is losing the momentum left to it by the Trump administration.  

The report from Health and Human Services shows little progress in securing supply chains in the high-priority area of pharmaceuticals.  The report admits, "At present, the U.S. Government has limited visibility into the supply chain for most pharmaceuticals. ... The U.S. Government has relatively limited information about KSM [Key Starter Materials] supply chains.  Little KSM manufacturing takes place in the United States."  Unfortunately, most of such production takes place in China.

Another disappointing report is from the Department of Energy, where climate change is the focus and fossil fuels are the enemy.  At least nuclear power is counted along with solar and wind as sectors that need secure supply chains.  Natural gas, once thought to be the prime green alternative to coal, is not.  Europe has embraced natural gas as a green energy source, which is why it has become so dependent on Russian supplies.  If the United States is to not only secure its own energy future, but help allies find secure sources as well, natural gas will have to boost production to provide exports.  A slower transition from oil and coal will have to take into account the speed with which green alternatives can be realistically fielded.

An "all of the above" approach to energy independence from hostile disruption is needed.  What energy secretary Jennifer Granholm said in Houston on March 9 was welcome: "In this moment of crisis, we need more supply ... right now, we need oil and gas production to rise to meet current demand."  The keys to energy are reliability, affordability, and security.  Eventually, some green innovations may meet these necessary requirements — especially security, because they will be located domestically by design.

In The Wealth of Nations, Adam Smith carved out an exception in economic theory for national security: "It may be advantageous to lay some burden upon foreign imports for the encouragement of domestic industry, when some particular industry is necessary for the defense of the country. ... It is of importance that the kingdom depends as little as possible upon its neighbors for the manufac­tures necessary for its defense."  Today, the number and scope of strategic industries are broader than in Smith's day at the dawn of the Industrial Revolution.  In the Biden administration reports, the term "Fourth Industrial Revolution" is used.

As Great Power competition is renewed as the norm in international relations, the scope of economics in national strength and warfare must expand.  Reactive ad hoc sanctions will not suffice.  A long-term strategy to produce a favorable balance of power built upon superior economic capabilities is required.  Policies must speed our own development while curtailing the advancement of rivals by deny access to capital, technology, and markets.  Only this kind of strength can deter aggression and prevail if deterrence fails.  The task has only started and will have little impact on the Ukraine war, but it can revive a more realistic set of policies to prepare us for future conflicts.

William R. Hawkins is president of the Hamilton Center for National Strategy.  A former economics professor, he has written widely on defense and foreign policy issues for a variety of scholarly and popular publications.  He has also served on the staff on the U.S. House Foreign Affairs Committee.

Image: Public Domain Pictures via Pixabay.

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