Everybody Sanctions

September 2018 - TradeSecure

The New Abnormal of Economic Statecraft

States now reach for economic levers to achieve foreign policy objectives.

This is a working definition of economic statecraft – that emerging global modus operandi – which may hasten what economist Paul Krugman referred to as the “great unraveling.” The latest instance of unraveling and economic statecraft is the curious case of Turkey and its otherwise stalwart treaty ally, the United States.

As a dictum of contemporary international economic practice, states would be wise, to paraphrase Joe Nye, to recognize that “manipulating the asymmetries of interdependence is an important dimension of economic power.” Companies would be wise to recognize their vulnerabilities in such a dynamic.

President Trump greets Turkish President Erdoğan during less turbulent relations.

On 20 August, the Trump Administration imposed sanctions on two Turkish government officials over the detention of an American pastor being held on espionage charges, the immediate effect of which was to further deflate the already enfeebled Lira. President Recep Tayyip Erdogan’s characterization of the sanctions is illustrative of the above-mentioned trend, describing, in a recent speech, the strong United States dollar as among “the bullets, cannonballs and missiles” foreigners are using to wage “economic war” on Turkey.

The United States is the biggest destination for Turkish steel exports, with 11 percent of the Turkish export volume. The Lira fell further after Trump’s tweet. In response to U.S. threats, Erdogan’s government announced that it would be implementing retaliatory tariffs on American cars, alcohol, tobacco, and over 100 other products. Not to be left out of the fun, on 23 August, Congress blocked the proposed sale of 100 F-35s until the Pentagon issues a report assessing the “overall strategic relationship with Turkey.”

Like much about the current Administration, the petulant and profligate use of sanctions and tariffs is unprecedented. The Turkish case is particularly unique insofar as the Administration is not only gut-punching a NATO ally (yes, he’s already threatened the Europeans with similar tariffs and with exiting NATO), but doing so to curb Ankara’s perceived wayward behavior through economic statecraft rather than the traditional diplomatic means. This, of course, has downstream consequences.

The list of aggrieving behavior includes Turkish support of jihadist groups in Syria, cultivating closer relations with Iran, and contracting to purchase S-400 surface-to-air missiles from Russia, the use of which would compromise the strategic integrity of the aforementioned F-35s. Foreign economic policy is also most likely being used for domestic political purposes: as red meat to the evangelical vote, the Administration is turning the economic screws on Ankara to free the American cleric in the lead up the November mid-term elections.

On 15 August, President Trump tweeted the following:

While not exactly correct in the broader U.S. economy sense, the President is correct with respect to government revenue, at least until 1913 with the institution of income tax (the 16th Amendment). Since the end of WW2, the U.S. has promulgated and sponsored at considerable effort a free trade agenda (i.e., tariffs ‘hugely’ bad), with sanctions serving as a non-military, discrete adjunct to foreign policy.

Now, tariffs and sanctions are indiscriminately, inconsistently applied to a range of political and economic issues. The forsaking of its custodial responsibilities over the system it helped construct sets a larger tone and creates a leadership vacuum. If the emerging tools of contemporary statecraft are tariffs and sanctions, expect more and novel engagements between allies, frenemies and adversaries.

States must become, in the words of Japanese scholar Toshifumi Kokobun, “sensitized to and creative in the use of such statecraft.” Companies should strap in for a wild ride.