War by Other Means

by Robert D Blackwill

  So it is for many countries—the theater of foreign policy engagement has for some time been predominantly markets. Many states today are as likely or more likely to air disagreements with foreign policies through restrictions on trade in critical minerals or through the buying and selling of debt than through military activities. “Most nations beat their foreign policy drums to largely economic rhythms,” as an astute early observer of this phenomenon put it.2

  The decline of geoeconomics in American foreign policy making in recent decades proves to be a complicated story, with lots of variables, subplots, and nuances. But the short version is a combination of neglect and resistance. American economists tend to resist putting economic policies to work for geopolitical purposes, in part because the notion of subjugating economics in this way challenges some of their deepest disciplinary assumptions. As Michael Mandelbaum put it in his latest book, “The heart of politics is power; the aim of economics is wealth. Power is inherently limited. The quest for power is therefore competitive. It is a ‘zero-sum game’ … Wealth, by contrast, is limitless, which makes economics a ‘positive-sum game.’ ”3 Because many U.S. economists and economic policy makers tend to see the world through this positive-sum logic and have little appreciation for the realities of power competition among nations, they tend to be skeptical of using economic policies to strengthen America’s power projection vis-à-vis its state competitors.

  The notion has also encountered ambivalence from foreign policy strategists. Although they are steeped in traditional geopolitics and are not averse to viewing economic instruments of statecraft within a zero-sum logic, most strategists fail to recognize the power and potential of economics and finance as instruments of national purpose.

  Thus embraced by neither most economists nor most foreign policy strategists, the use of economic and financial instruments as tools of statecraft has become an orphaned subject. For a time, it seemed of no great consequence. In the years following the Cold War, the United States faced no serious geopolitical rival, no real struggle for international influence or in the contest of ideas. Liberal economic consensus pervaded. And as it did, what began as a set of liberal economic prescriptions aimed at limiting the rightful role of government in the market morphed over time into a doctrinal unwillingness to accept economics as subject to geopolitical choices and influence. Thus, certain liberal economic policy prescriptions, such as trade liberalization, that found favor initially at least in part because they were seen as advantageous to U.S. foreign policy objectives came over time to be justified predominantly on the internal logic of laissez-faire liberalism, not on the basis of (perhaps even in spite of) U.S. geopolitical grounds. “A policy of free trade logically can—and should—be viewed as a technique of economic statecraft,” David Baldwin, international relations theorist at Columbia University, once put it.4 “This is not to say, however, that the economic doctrine of laissez faire liberalism [has been] conducive to viewing free trade in this way, at least not in the 20th century.”5

  But now, of course, the so-called end of history has itself come to an end.6 The United States once again finds itself competing for global influence and ideas—and doing so alongside a set of states, many of them rising powers, that pledge no particular allegiance to these same liberal economic understandings, do not make any such disciplinary divides between geopolitics and economics in their own policy making, and are thoroughly comfortable with harnessing economic tools to work their strategic will in the world. The result is a set of challenges for which the current tools of U.S. statecraft, dominated by traditional political-military might, are uniquely unsuited. In short, the time has come for America’s foreign policy and national security establishment to systematically rethink some of its most basic premises, including the composition of power itself. A new way of addressing U.S. national interests and power must aim for a foreign policy suited to a world in which economic concerns often—but obviously not always—trump traditional military ones.

  There is some inkling that policy makers may be beginning to appreciate the point. A growing chorus of U.S. foreign policy leaders has argued that America must reorient its foreign policy to succeed in an era importantly defined by the projection of economic power.7 But it will not be easy. This shift will require a reprogramming of certain aspects of America’s foreign policy DNA—not just its policy objectives and priorities, but also the strategies and tactics it deploys in pursuing these aims.

  As former Secretary of State Hillary Clinton noted in one of her final speeches as secretary, “Delivering on the Promise of Economic Statecraft,” in many ways the current era calls for the introduction of a new discipline, endowed with its own set of questions, assumptions, and organizing principles, to help guide U.S. administrations through specific cases.8

  But high-level calls and some positive steps notwithstanding, too little about the logic and conduct of U.S. foreign policy has so far changed. One reason is that what has been written on the often fuzzy intersection of economics and geopolitics has had little relevance to the making of U.S. foreign policy.9 Certainly plenty of observers have taken up aspects of economic power projection in piecemeal, typically with sanctions as the favored focus, and several have asserted economic considerations to be newly salient to national power projection. These arguments tend to come, though, as part of larger calls for foreign policy to be preoccupied in the first instance with restoring domestic economic growth (this is especially true in the American context).10 Others have noted that, going forward, state-to-state struggles will be largely about economic aims, not military ones (in recent times this view was put forth most notably by Mandelbaum, a professor at Johns Hopkins).11 Although a basic intuition about the role of economic power projection in driving foreign policy outcomes seems to be slowly growing throughout the operational and intellectual ranks of U.S. foreign policy makers, conceptual accounts of economic and financial techniques of statecraft still remain little studied or developed, especially compared to the vast literature on the mechanics of political-military power projection.12

  This book aims to advance an understanding of how states are currently applying economic instruments to advance geopolitical ends—that is, geoeconomics—and what today’s geoeconomic practices imply for how America in particular should think about and conduct its foreign affairs. We do so by considering four broad sets of questions. First, what is geoeconomics, why is it growing in importance, and how, if at all, is its present use changing the international system? Second, what are the modern instruments of geoeconomics, and what determines their efficacy? Third, how is China using geoeconomic tools; how has the United States historically integrated geoeconomics within its foreign policy; and how is the United States using geoeconomic instruments presently? Finally, what might a more developed and effective U.S. geoeconomic strategy to defend and promote American national interests look like, and what would it require?

  Chapter 1 begins by staking out parameters for inquiry. Over the decades, scholars have given the term geoeconomics a variety of definitions. We are less interested in joining these definitional debates than in simply focusing on a set of international activities that, as a plain empirical matter, seems to account for a growing share of foreign policy headlines. Thus, we define the phenomenon as follows: the use of economic instruments to promote and defend national interests and to produce beneficial geopolitical results; and the effects of other nations’ economic actions on a country’s geopolitical goals.

  We explore the relationship between geoeconomics, so defined, and geopolitics. We then consider the many forms that geoeconomic policies can take. Next we distinguish our claim that geoeconomics is on the rise from the argument that national interests are themselves changing. Finally, we explain the relationship between geoeconomics and the concepts of mercantilism, economic liberalism, and international economic policy.

  If geoeconomics indeed now drives foreign policy for many nations, Chapter 2 asks why—what accounts for this
return of geoeconomics? For starters, some of the world’s most powerful countries, especially many of the so-called rising powers, seem to like it. Taking a largely inductive approach, we offer examples attesting to how countries such as Russia, China, and the Gulf states are increasingly using economic instruments as a preferred means of conducting geopolitical combat. This is not to suggest that military power will become passé, as military buildups in China, Russia, the Gulf, and elsewhere underscore. Especially for today’s most sophisticated geoeconomic actors, geoeconomic and political-military dimensions of statecraft tend to be mutually reinforcing, as has been demonstrated through Russia’s actions in Ukraine and China’s in the South China Sea. A second factor accounting for the modern revival of geoeconomics is that states today have vastly more economic resources at their direct disposal than in previous eras. This is largely a story of the modern return of state capitalism. Like geoeconomics, state capitalism is not new, but it is witnessing a distinct resurgence. Another factor in the return of geoeconomics has more to do with changes to global markets themselves; notably, today’s markets—deeper, faster, more leveraged, and more integrated than ever before—tend to exert more influence over a nation’s geopolitical choices and outcomes. To take one example, the fate of the European Union—a preeminent Western geoeconomic foreign policy triumph of the twentieth century and the closest U.S. international partner—has for the past several years been at least as much in the hands of bond markets as in those of European political capitals.

  Chapter 2 then moves to consider how the modern rise of geoeconomics, practiced on a globally significant scale, is changing the logic and operation of foreign policy. At times these tools endow leaders with a wider set of policy choices—Venezuela, thanks to its recent support from Beijing, has been far better able to buck U.S. prerogatives in the region. On other occasions, today’s form of geoeconomics comes with not only new options but also new diplomatic tools—globally competitive state-owned enterprises and deep-pocketed sovereign wealth funds, to name a few. Some of these instruments are, for a variety of reasons we will examine at length, largely unavailable to U.S. and Western leaders.

  Chapter 3 surveys seven leading instruments of today’s brand of geoeconomics: trade policy, investment policy, economic sanctions, the cybersphere, aid, monetary policy, and energy and commodity policies—again aiming only to take the geopolitical (as opposed to purely economic) measure of each. Compared to previous golden eras of geoeconomics—many point to the initial postwar years, as typified by the Marshall Plan and the early stages of the Cold War, as one such golden era—some of today’s favored geoeconomic tools are altogether new (those in the cybersphere, for example).13 Others, while not novel as such, are operating on such a vastly different landscape as to render them as good as new. For example, the American-orchestrated run on the British pound amid the U.S.-U.K. standoff over the Suez Canal crisis in 1956 stands as a canonical example of mid-twentieth-century geoeconomics. But the rise of new financial centers, combined with the complexity and leverage seen in today’s financial markets, would make any repeat of Suez vastly more difficult for Washington to pull off, not to mention far more damaging to U.S. national interests. Still other geoeconomic instruments continue to function more or less as they did in earlier eras; development assistance is one example. Even these, though, have attracted important new players and dimensions.

  To be sure, a number of previous efforts have studied each of these in isolation—asking, for example, “Do sanctions work?” or “Are China’s holdings of U.S. debt more a strategic asset or a liability for Beijing?” This approach is understandable: each geopolitical instrument has been adopted by different countries and institutions, each is subject to distinct levers of state control, there are specific variables that determine whether each can be used effectively, and each raises specific concerns for U.S. national interests. But different as these geoeconomic instruments may be, there is also value in considering them comprehensively. By examining how countries integrate and use these instruments together to achieve particular geopolitical objectives, we can better illuminate how geoeconomics works in the real world. And including all seven of these tools within the scope of our inquiry also helps to bring to the surface important and often overlooked interactions—and tensions—between and among them.

  If these are the leading instruments doing so much of the work of foreign policy today, what determines their effectiveness? What are the underlying capabilities and attributes that dictate whether these tools work to greater or lesser effect? In the third chapter’s second half, we consider certain structural features—geoeconomic endowments, as we call them—that influence a nation’s ability to put domestic capital to strategic use: a given state’s decisions regarding commodity flows, a nation’s centrality to the global financial system, and domestic market features such as overall size, degree of control over inbound and outbound investment, and expectations of future growth. While far from perfect predictors, these factors play a clear role in determining how effective a given state is likely to be in its use of geoeconomic tools.

  Chapter 4 takes up the specific case of China. Beijing is often correctly described as the world’s leading practitioner of geoeconomics, but it has also been perhaps the major factor in returning regional or global power projection back to an importantly economic (as opposed to political-military) exercise. “Beijing has been playing the new economic game at a maestro level,” as Leslie Gelb, longtime foreign policy expert and former New York Times commentator, aptly put it, “staying out of wars and political confrontations and zeroing in on business—its global influence far exceeds its existing economic strength.”14 We explore China’s use of geoeconomics through six case studies: Taiwan, North Korea, Japan, Southeast Asia, Pakistan, and India.

  We then turn in Chapter 5 to two overarching questions that emerge from these case studies. First, how can we recognize geoeconomic pressure at work when we see it? When it comes to sizing up a country’s use of geoeconomics, it helps to have clear examples. Such cases, at least by recent historical standards, seem to be on the rise—shutting off gas pipelines in the dead of winter, tabling bailout offers to sway the foreign policies of embattled neighbors, attaching openly geopolitical stipulations onto either potential investment decisions or aid agreements. Often, though, evidence of geoeconomic behavior is more circumstantial in nature—especially where it is coercive. Take, for example, China’s decision to quarantine bananas from the Philippines amid escalations of tensions over competing island claims in the South China Sea, or Moscow’s ban on Moldovan wine in the run-up to Moldova’s deadline for signing a cooperation agreement with the EU. Compared to open political demands, such geoeconomic coercion is sometimes more difficult to measure. But like military power, geoeconomic sway can carry a long shadow of influence—it need not be explicitly brandished or attempted in order to register a desired coercive effect.

  A second fundamental question these case studies raise regarding geoeconomic pressure is “Does it work?” The answer, on balance, is yes. At least in the case of China, Beijing flexes geoeconomic muscle—both positive and negative—and often succeeds in advancing its geopolitical aims. On the back of economic pressure, China has managed to deter arms sales to Taipei and to steadily reduce the number of countries that recognize Taiwan; it has curtailed the activities of the Dalai Lama; it has restrained countries from offering political support for human rights issues; it has registered noticeable impacts on votes in the United Nations and frustrated various Western efforts to pressure Iran and North Korea; and it has raised the costs of challenging China’s territorial ambitions along its borders and in the South and East China Seas.

  At the same time, China’s geoeconomic savvy is also sometimes exaggerated. There are natural limits and internal tensions running through many of Beijing’s attempts at using geoeconomics to advance geopolitical objectives. China’s heavy hand has produced a collective desire on the part of Southeast Asian
states to draw closer to the United States. Japan is increasing its military capabilities. Both Japan and Vietnam overcame stiff domestic opposition to join the U.S.-led Trans-Pacific Partnership talks. The Philippines has granted the United States access to five military bases for rotating aircraft, ships, equipment, and troops. In China’s case, geoeconomic power, like most other forms of power, may well be most effective when implied rather than exercised outright. The same seems true for Russia and other leading practitioners of geoeconomics.

  Simply because countries have a mixed record when it comes to geoeconomics, however, does not mean they will abandon even the most counterproductive of attempts. This in turn raises a larger point: even where states try to wield geoeconomic power and either partially or fully fail to achieve their aim, the results and collateral damage can carry real, destabilizing consequences. Consider again the Cyprus bailout—an ordeal that was both largely (if mostly unintentionally) brought about by, and then further complicated by, geoeconomic factors from Russia, even as the EU’s package ultimately won out.15 Thus, even for those who remain skeptical that geoeconomics will ultimately secure the geopolitical outcomes these countries seek, there are reasons to take the phenomenon seriously.