Economic Diplomacy Boom: Will It Last Long?

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BRATERSKY, Maxim

As the international crisis around Ukraine escalates,

countries in the West, especially the United States, have
increasingly used economic diplomacy against Russia, and
threaten to expand the scale and reach of sanctions. Sanctions
have also been a key mechanism by which America exerts
pressure on Iran and many other countries. Why are these
tools of economic coercion increasingly becoming a basis for
pursuing the policy of containment and the main instrument
of Western countries pressure? Is it because economic
diplomacy is so effective compared to other instruments of
foreign policy? Or is there a different reason for so frequently
resorting to economic instruments of foreign policy?

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Why Russia Should Avoid a

Symmetrical Response to US
Sanctions

Economic diplomacy (economic statecraft) is the use of the

full spectrum of economic tools a state has at its disposal to
achieve its foreign policy goals. Instruments used in economic
diplomacy are divided into the negative (sanctions) and the positive (rewards), and can take
many forms. The most well-known being economic sanctions, on the one hand, and various
rewards for loyalty, including economic and military aid, access to markets, etc., on the other
[1].

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Economic diplomacys place in the foreign policy arsenal

States pursue foreign policy and protect their national interests through a variety of instruments.
Foreign policy tools that the state has at its disposal can be divided into several groups as follows:
information propaganda, timely and properly delivered facts; soft power attractiveness of its
socio-economic model, national culture; diplomatic negotiations, agreements and alliances;
power threat of violence, violence; economic goods, services and investment; monetary
access to markets.
It is necessary to draw a line between economic instruments of foreign policy and a states foreign
economic policy. The fundamental difference between the two is that economic tools of foreign
policy are used to achieve non-economic objectives, while foreign economic policy, in contrast,

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uses economic and non-economic instruments to achieve the economic goals of the state. The
following example illustrates the difference between these two categories.
Imposing a trade embargo against a country to force it to abandon its WMD development
programs is categorized as economic diplomacy [2]. The use of political pressure to force a
country to reduce import restrictions is categorized as foreign economic policy. The American
embargo against Cuba illustrates an unsuccessful attempt to use economic sanctions for political
purposes. The introduction of countervailing duties by the United States in response to Chinese
subsidizing exports of auto parts in 2012 illustrates the use of sanctions for commercial purposes.
Of course, it is not always possible to distinguish between these two types of public policy, since
the states often pursue both political and economic goals simultaneously.
Economization of foreign policy began not so long ago

Economic instruments of foreign policy occupied a prominent place in the foreign policy arsenal
of economically developed countries after World War II, when the global trade in goods and
services started developing rapidly [3].
Many countries, particularly the United States, saw the growth of international trade as an
excellent opportunity to exert influence on foreign governments. In the 1990s, the United States
and other economically powerful countries obtained operating control over an important foreign
policy tool. Encouraging or limiting foreign countries participation in global economic processes
made it possible to attain major foreign policy goals without resorting to military force, when
traditional diplomatic methods had failed. The possibility of using economic measures is
determined by the economic vulnerability of the state and the type of foreign-trade policy that it
pursues. It is difficult to exert influence on a state such as North Korea, as its foreign trade is
negligible. On the other hand, it is easy to assert influence over a country that imports all vital
goods and does not produce any of them itself.
Foreign economic instruments at states disposal today include international trade and economic
sanctions, establishing regional trade blocs and regimes, managing international financial flows
and the use of external debt, the use of foreign direct investment, economic and humanitarian
aid, as well as influencing the activities of international financial institutions. Financial
instruments of foreign policy are today becoming more important than those involving trade.
Thus, forty years of trade sanctions could not force Iran to reconsider its position on the nuclear
issue, while financial sanctions imposed by the West were quick to bring Iran to the conference
table.
Improved efficiency of using financial instruments in the world economy is primarily due to the
peculiarities of the current stage of globalization. The volume of financial transactions heavily
exceeds the amount of financial services rendered in the international trade in goods and
services. In 2013, global exports of goods and services amounted to 17.8 trillion dollars [4], while
the volume of the world equity market alone (excluding bonds, derivatives, currencies) amounted
to $55 trillion [5]. The globalization of trade has diversified world markets, except for certain
specific goods (such as weapons, some high-tech products, and gas). Goods can be bought and
sold in many markets, which makes manipulating the commodities markets for political
purposes increasingly difficult. In contrast, the global finance system becomes increasingly
vulnerable to targeted interference. The number of global reserve currencies used in international
transactions is decreasing, and corresponding accounts are settled in the three or four centers
that service an increasing share of the world economy. 90 per cent of FOREX transactions and
80 per cent of trade finance world over was conducted in American dollars [6].
The combined use of trade and financial pressure mechanisms appears a particularly effective
political tool to promote a states foreign policy interests.
Not all players enjoy the opportunity of using economic instruments (financial and commercial)
in foreign policy to protect their interests in the modern world. Minor economies are helpless in a
world scarred by political struggle, just as militarily weak countries cannot use military power to
advance their political interests.
The successful application of economic instruments requires at least partial control over the
commanding heights of the world economy, such as the world reserve currency, a major
financial and payments center, strong positions in international economic organizations that
provide an opportunity to use not only ones own financial resources, but those of other countries
too (that are managed by international financial institutions) to its political ends. Most of the
sanctions that proved politically successful were imposed by the United States, although there
were instances of successful sanctions imposed by other countries (the UK against Rhodesia in
1966). In contrast, the Russian sanctions against Georgia and Moldova in the mid-2000s failed to
achieve their political goals, although they were relatively economically successful.
Sanctions as the main tool of economic diplomacy

After World War II, the practice of imposing economic sanctions gained momentum. In 1950,
there were 15 cases of the imposition of sanctions, in the 1960s 20 cases, in the 1970s 37, in
the 1980s 23, and more than 50 cases in the 1990s. Most were imposed unilaterally by the
United States, and in recent years countries in Western Europe began to apply sanctions more
actively, although such sanction coalitions have usually been formed by the United States [7].

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The attitude of governments and international public opinion towards the issue of when sanctions
are justified and appropriate has changed over the last decade. From the beginning of the First
World War to the end of World War II, sanctions were imposed to prevent military intervention,
and as a part of the governments broader war effort. In subsequent decades, the spectrum of
ends to be achieved by imposing sanctions widened and included putting an end to regional
conflicts, promoting the spread of democracy and political freedoms, enforcing human rights,
preventing the proliferation of nuclear weapons, winning the release of hostages and the
liberation of occupied territories.
The efficiency of trade and economic sanctions as a political tool has long been seriously
discussed. More and more experts [8] tend to believe that sanctions are not effective in principle.
Nonetheless, sanctions remain a favored tool of politicians and the frequency with which
sanctions are imposed around the world does not decline.
The reason for this decline in the efficiency of economic sanctions should be sought in the nature
of the modern globalized economy. The world is becoming, and in many ways has become, a
single market, and the relative dominance of the American economy and the economies of its
political allies in the world is weakening. The United States and the West as a whole have lost a
significant part of their control over and influence on the world economy and trade in goods and
services. Since, historically, most economic sanctions were imposed by them, the effect of their
imposition has consequently also lessened. Great Britains share of global merchandise exports
fell from 18.5 per cent to 2.6 per cent (2012), the share of Germany from 18 per cent to 7.7 per
cent [9], and that of the United States decreased from 12.56 per cent in 2000 to 8.21 per cent in
2012 [10].
Globalization has had a twofold impact on the use of sanctions in world politics. On the one hand,
globalization diversifies export and import markets, making the effective imposition of sanctions
more difficult, since any state can find alternative tracks for exports and imports. On the other
hand, the financial and information components of globalization make it easier to track
international payments and financial flows, providing developed countries with world reserve
currencies better opportunities to meddle in world trade finances and block trade operations.
This is why, in recent years, the emphasis on the imposition of economic sanctions has shifted
from trade sanctions to financial sanctions. In terms of financial sanctions, limited access to the
capital markets has come to the fore.
Thus, the relative decline in the efficiency of trade and economic sanctions is largely due to the
global nature of the world economy, which offers little if any opportunity for the introduction and
maintenance of truly severe restrictions on the flow of goods and services, except for specific
groups of goods, such as weapons, dual-use technology, etc. Another reason for sanctions limited
effectiveness is that they impact the population of the target country rather than its political
decision-making elite. In a democratic society the political elite, aware of public discontent
sparked by a drop in living standards, is likely to react by taking the required decision. The elite in
authoritarian political systems, against which sanctions are most often imposed, remains
unaffected by sanctions and can afford to ignore them. The imposition of sanctions against Iraq
under Saddam Hussein serves as an apposite illustration of this point.
Reasons for economic diplomacy

Why has economic diplomacy come to the fore in world politics in the last 20-30 years, becoming
a staple instrument of Western foreign policy?
This change was brought about by political, military, social and economic factors.
Restrictions on the use of military force are an important obstacle to conducting foreign policy via
traditional coercive methods. The use of military force is not only restrained by international law
and institutions (the UN Charter, the UN Security Council), but, more importantly, by the
substantial conventional military power and nuclear weapons that many countries hold in their
arsenals. Only weak countries can be attacked largely painlessly, while major global and regional
powers are almost immune to the use of military force from outside.
The second factor that makes economic diplomacy so popular is that politicians, executives and
legislators like such methods. They are in every way less expensive than military action, do not
antagonize people who do not want to take up arms and go to the front, and they seem relatively
humane: there is no bloodshed on TV, no reports of mass casualties. Of course, some national
manufacturers may suffer losses as a result, especially if they are exporters, but imposition of
sanctions is not regulated by international law, so the authors of the sanctions do not have to
enter into a conflict with international law. In short, economic diplomacy seems a much more
comfortable and politically acceptable method than war.
The third reason why economic diplomacy is so widely used today is ideological in nature. The
West, in the broad sense, stands for a liberal worldview that highlights the interests of the
individual. One of the basic interests of the individual appears to be the benefits and maximum
possible consumption provided by free trade. The imposition of economic sanctions reduces
consumption, makes the consumer market more expensive and sparse. However, the political
effectiveness of this economic pressure depends not only on the worsening economic situation,
but also on the society in questions commitment to the ideals of private gain and consumption,
quite apart from the political regimes readiness to consult private interests of its citizens. In this

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regard, society in different countries differs greatly, and a prime example of this is Cuba and
Iran, which for decades lived under sanctions.
The same is true for stimulating economic instruments of foreign policy. There are many states
that are ready to make political concessions in exchange for economic benefits, while there are
few examples to the contrary. Ukraine, which refused a giant package of economic assistance
offered by Russia for political reasons, is one of them.
The status quo is becoming less acceptable to emerging powers, and they (the BRICS, for
example) are beginning to build an alternative global financial architecture and to form their own
rules for international trade and investment. It seems that these efforts are starting to yield their
first results. For example, the decision was taken to set up the New Development Bank (NDB)
[11]. This means that economic diplomacy in its current form will face new restrictions. It is
becoming increasingly difficult to implement economic diplomacy in a world of alternative
finance, trade and investment using the traditional economic stick and carrot policy, and regional
economic integration projects are coming to the fore today as tools of global political and
economic competition.
In my view, the sanctions will remain in the arsenal of world politics, although their political
effectiveness is increasingly contested. The U.S. President argues that Russia's policy toward the
Ukrainian crisis has changed as a direct result of the sanctions. There might be an element of
truth in his words, but it is also true that the situation in South-Eastern Ukraine today is much
more in line with Russia's interests than it was a month ago.
There will be attempts to dispute the sanctions and the counter-sanctions in international courts
and the WTO.
It will be interesting to watch as events develop, but drawing up internationally recognized rules
on the issue of sanctions seems unlikely.
Maxim Bratersky is Doctor of Political Science, Professor, Head of the World Politics
Department of the Higher School of Economics.
This article was originally published on www.russiancouncil.ru

1. See: M. Braterskij. Nevoennye rychagi vneshnej politiki Rossii. Regional'nye i global'nye mehanizmy. Moscow, 2012, p. 78.

2. B. Steil and R.E. Litan, Financial Statecraft. Yale, 2006

3. Growth in world trade became particularly intense in the late 20th century. In 1986-2000, the volume of world trade in goods and services
nearly tripled.

4. http://stats.oecd.org/index.aspx?queryid=167

5. http://www.world-exchanges.org/files/2013_WFE_Market_Highlights.pdf

6. http://www.bloomberg.com/news/2014-07-15/dollar-dominance-intact-as-u-s-fines-on-banks-raise-ire.html

7. See: Gary Clyde Hufbauer , Jeffrey J. Schott , Kimberly Ann Elliott and Barbara Oegg . Economic Sanctions Reconsidered. N.Y., 2008

8. See: K.A. Elliot, G.C. Hufbauer, B. Oegg, Sanctions, http://www.econlib.org/library/Enc/Sanctions.html, pp. 1-15; V. Dimitrijevic, Sanctions,
Regime and People, Review of International Affairs, 1993 pp. 11-12.

9. See: Address by Deputy Minister of Economic Development A.E. Likhachev to the Federation Council on September 9, 2013

10. See: http://wits.worldbank.org/

11. Joint Statement of the Fifth BRICS Summit in Durban, March 2013 http://www.cfr.org/emerging-markets/joint-statement-fifth-bricssummit-durban-march-2013/p30341

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