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Lose-lose trade sanctions

Mar 20,2022 - Last updated at Mar 20,2022

NEW HAVEN  —  One of the strongest arguments for free trade is that it promotes peace between participating countries. There is an undeniable correlation between the two, even if it is not always clear whether peace is a pre-condition for the free movement of goods and services, or whether commerce creates the economic incentives for all participants to maintain peace.

Back in 2016, as anti-China rhetoric in the United States grew increasingly shrill, one could not help but feel that we were on the verge of a new cold war. During Donald Trump’s presidency, the tensions boiled over into something unprecedented in recent history: The weaponisation of tradeduring peacetime.

Recent research shows that the US-China trade war has had substantial economic costs. But the political costs may be even worse. International cooperation has broken down, multilateral institutions have been disempowered, and the world has entered an era of increasing polarisation, both within and across countries. The best hopes for the future have seemed to lie in regional blocs and alliances, auguring a new, more fractured form of globalisation.

There are striking parallels between the current era and the 1930s, when the United Kingdom’s dramatic shift toward protectionism set off a global chain reaction. Economic historians have argued that this change not only contributed to the decline of international trade in the interwar period, but also made trade more bilateral and regional. Many observers at the time worried that international rivalries would be exacerbated. They were right: We now refer to this era as the pre-belligerence period ahead of World War II.

A trade war in the 1930s was the harbinger of a military war, and the events leading up to Russia’s invasion of Ukraine fit this paradigm. The war in Ukraine will inevitably lead to a further unraveling of globalisation; but it is as much a result of the breakdown of international cooperation as it is a cause.

Would Russian President Vladimir Putin have pursued his war without the assurance of a lifeline from China? And would China have given Putin agreenlight and risked a further deterioration of its relationship with the West if it had not been relentlessly vilified by American and (to a lesser extent) European politicians? There can be little doubt that Western policies toward China over the last decade have left that country in a position where it has little international goodwill left to lose. If China is destined to be the villain in Western political narratives, it may as well do what it thinks is in its best immediate interests.

As the war in Ukraine unfolds, trade policy is being weaponised further as part of the new sanctions regime against Russia. The explicit objective is to cut off Russia from international markets, isolate it economically, and… then what? Imposing sanctions on the aggressor may make one feel morally superior, especially when such measures entail real economic costs for the countries that impose them, but that does not mean they will bring an end to the war.

Trade sanctions have a long history. The West has used similar measures against Cuba, Iran, North Korea, Venezuela and Afghanistan. In each case, sanctions hurt the people in the countries they targeted but showed little sign of limiting the power or changing the behaviour of the countries’ political leaders.

The sanctions against Russia will certainly cause hardship there, impoverishing an emerging middle class that could become a force for reform. If the goal is to topple Putin, history suggests that this is unlikely to happen in the near term. Putin’s domestic position may even be strengthened as Russia’s disenfranchised middle class turns inward and embraces nationalism, as has happened in Western democracies over the past decade. More broadly, sanctions are likely to strengthen the Russia-China alliance, deepen global polarisation, and hammer the last nail into the coffin of multilateralism.

The weaponisation of trade will also have costs for the wider world, owing to Russia’s importance in energy and food markets. The economic consequences of various scenarios are difficult to predict, because the reallocation of trade flows and the resulting price movements will depend not only on market forces but also on political decisions. Still, one thing is certain: As with the trade war between the US and China, there will be political as well as economic costs. Concessions to current pariah countries (such as Iran or Venezuela) may be inevitable; and even then, the trade sanctions may end up being self-defeating.

Another certainty is that weaponising trade will not end the conflict. Western leaders must recognise this and double down on diplomacy. Russia needs a face-saving way out. One question that is rarely considered fully in the West is why Russia invaded Ukraine. Certainly, it is about more than one power-hungry autocrat’s delusional ambitions (the standard line in the US). Miscalculation on both sides contributed to the escalation of conflict: Ukraine believed that NATO and EU membership were feasible in the short run and that it could count on the Alliance’s military support; Russia, extrapolating from its largely bloodless annexation of Crimea in 2014, underestimated Ukrainian resistance. Finding some common ground might seem impossible at the moment. But a negotiated solution is probably the only way to avoid a long-term disaster that would de-stabilise the entire region, if not the world.

The weaponisation of trade is a convenient way for governments to deflect attention from real problems like the economic fallout from the pandemic, widespread demoralisation and reluctance among workers, spiraling mental-health crises, and rising debt levels. There are no easy remedies to these problems. So, why bother with them when you can direct people’s attention to graphic images showing the plight of those who have it worse? Ultimately, the biggest winners of the war in Ukraine may be self-interested politicians around the world who have found a convenient way to avoid dealing with problems at home.

 

Pinelopi Koujianou Goldberg, a former World Bank Group chief economist and editor-in-chief of the American Economic Review, is professor of Economics at Yale University. Copyright: Project Syndicate, 2022. www.project-syndicate.org

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