1. Economic Statecraft
February 11, 2014

2. Overview Economic statecraft: instruments and objectives
Economic sanctions: not always successful, but still useful
Economic incentives: an under-appreciated instrument of statecraft?
Economic interdependence: source of political harmony or conflict?

3. Economic statecraft
Statecraft: the use of instruments by central political authorities to serve foreign policy purposes (diplomatic, military, economic)
Economic statecraft: the use of economic tools and relationships to achieve foreign policy objectives. Part of the wider array of foreign policy instruments, where economic measures are used in conjunction with military and diplomatic tools

4. Economic Statecraft - overview
Long history of use, at least to ancient Greece
But used much more heavily in modern times
174 recorded use of sanctions between
Strong economies with many economic instruments are more likely to use economic statecraft than weaker economies

5. Despite widespread use, economic sanctions don’t often appear to be that successful
However, many argue that still have important role, even if they don’t solve major problems
Can be useful to signal intentions, build consensus, or even set stage for military action

6. Economic statecraft: instruments and objectives
Tools of economic statecraft include:
Trade restrictions
Financial sanctions
Investment restrictions
Monetary sanctions

7. Trade restrictions
Trade restrictions are placed on given exports or imports of a particular country
Countries that rely heavily on imports or exports, or in general, or of particular commodities, are more vulnerable
Examples:
1973 OPEC crisis, UN sanctions against Iraq, US trade embargo of Cuba

8. Financial Sanctions
Often used alongside trade restrictions in effort to increase pressure on a government
Includes things like cutting off of economic or military aid or the blocking or freezing of access to lending institutions (e.g. World Bank)
Sometimes target specific assets of government leaders held in other jurisdictions
Examples:
US freezing Iranian assets during hostage crisis, freezing assets of suspected terrorist/supporters

9. Investment restrictions
Restricting foreign direct investment (FDI), which affects the state’s infrastructure
Particularly powerful for countries that are highly dependent on FDI for economic growth and development
Have been used by Western nations against Iraq, Iran and Libya
Also used against South Africa during the 1980s

10. Monetary sanctions
Destabilizing a given currency/exchange rate (buying and selling of large quantities of a target state’s currency)
If effective can create serious financial crisis for target state
Examples: US against the UK during the Suez Crisis

11. Negative uses of sanctions (sticks)
Governments use economic sanctions to satisfy a range of foreign policy objectives:
Altering the domestic politics of a target country (e.g. over human rights practices)
Influencing the foreign policy behaviour of a target country (forcing an end to a conflict, or the withdrawal of troops)

12. Affect the economic or military capabilities of a target country (e. g
Affect the economic or military capabilities of a target country (e.g. slowing military growth)
Attempting to bring about regime change (forcing political capitulation)

13. Positive uses of sanctions (carrots)
Trade promotion (promise or actuality of expanded trade)
Increase aid/transferring of significant resources (Marshall Plan)
Encourage foreign investment
Support a country’s currency
Promise of economic rewards to lock in a series of desirable, long-term changes (EU enlargement)

14. Economic sanctions: not always successful, but still useful
Economic sanctions offer a possible alternative to war as a means to settle disputes and contain aggression
Both League of Nations and the UN encouraged members to use sanctions before war
Cumulative post-war experience suggest that economic sanctions were for the most part an ineffective form of statecraft.

15. Implementation difficulty
So why is it so hard to for sanctions to work?
Difficulty of maximizing economic pain
Target states always have options to work around sanctions, even the majority of states are cooperating with sanctions
States can respond over time to diversify their economy to produce what can’t get

16. Even the imposition of economic pain does not necessarily translate into desired political changes
Instead of creating political disarray and pressure domestic pressure on the government can have the opposite effect
Can create solidarity, political integration with the target country or rally around the flag effect - unit against external enemy
E.g. Castro in Cuba

17. Sanctions can be costly to the ‘sanctioner as well as the target, making political support difficult to sustain over time.
In increasingly integrated economy hard to impact economy of one country without creating ripple effects on others (allies or own)
Examples - Reagan lifting US grain embargo on USSR, China-US today

18. Can create political and public relations problems for sanctioners when the effects fall disproportionately on vulnerable groups
Can’t guarantee how the sanction will be felt inside the country and by whom
Those with means inside the country can still find access, while the poorest and most vulnerable can be most impacted

19. Sanctions can be so effective actually create a humanitarian crisis inside the country, which can cause backlash against sanctions themselves
E.g. Iraq, Haiti
Has led to ‘smart sanctions’ that attempt target damage more precisely
E.g. target certain sectors of economy (e.g. weapons imports), or the assets of leaders & supporters

20. Usefulness
In spite of the challenges, governments still find sanctions useful for a number of reasons:
Sanctions may satisfy some, if not all, of a state’s goals.
Sanctions may pave the way for use of military force.
Sanctions may be a relatively attractive option in the absence of alternatives.

21. An instrument increasingly used in post-Cold War era (though not necessarily more effective)
Globalisation: has important cross-cutting implications for economic sanctions (increases both vulnerability and options)

22. Economic incentives: an under-appreciated instrument of statecraft?
Positive economic statecraft:
Promise or provision of economic benefits to get a state to do something. Two basic types:
1) Tactical linkage: Operates at the immediate level, offer a specific benefit for a specific action
The economic reward is tactically calculated to gain maximum effect.
The reward usually conditional on the action

23. 2) Structural linkage: more of a long-term effort to use a steady stream of economic benefits to reconfigure the balance of political interests within a target state.
It tends to be unconditional

24. Given the importance of economic relations in foreign policy it’s not surprising that scholars have begun to rediscover the agenda of positive economic statecraft
Some argue that US foreign policy objectives would be better served by employing carrots rather than sticks, even in relations with seemingly intractable states such as Iran and North Korea

25. Economic interdependence: source of political harmony or conflict?
Liberals argue that economic interdependence decreases incentives for conflict.
Realists argue that economic interdependence is more likely to lead to state conflict.
Each position has its own empirical support. It may be useful to search for intervening variables that help to explain the circumstances under which economic interdependence leads to war or peace.

26. Conclusion
Economic statecraft is important and widely used aspect of foreign policy
Sanctions, despite not always achieving major objectives, are widely used and can have important impacts on foreign policy
Have seen a growth in use of sanctions since the end of the Cold War