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2.2 Economics as a Form of Power: Kirshner’s Tools for Economic Statecraft
The forms of economic coercive power are: Trade, Finance, and Monetary Power. And they are affected, in varying degrees, by their reliance on the existence of a “modern, somewhat integrated, international market economy” (Kirshner, 1995, p. 24). It is not altogether necessary here to go into detail about the differences in their perspective reliance’s on a global economy, suffice it to say: Trade and Finance both are moderately dependent since they both depend on a relatively common set or system of rules in order to exist and provide guarantees for assets although both could be undertaken in some form bilaterally; Monetary Power is most dependent on a global economy and the flow of currencies. Our global economic reality is characterized as interconnected and globalized and there is little that could have the chance to undo that reality;
therefore, this is only useful as it pertains to the effect of economic coercive action on the global economy as a whole, and it is fair to say all would have profound effect on all countries
connected to the globalized economy.
Besides the effect economic coercive action could have on the globalized economy, the remaining two considerations that will drive our analysis of how economic power is create and utilized are: the efficiency of each respective tool for economic coercion; and the limitations that each economic coercive form would face in implementation. There are three ways in which economic instruments of power can be limited in their effectiveness: Feedback, circumvention, and defense. First, feedback is largely a problem of perception, all the more so if the actions are highly publicized. From a domestic societal view, the question is how will the citizens and markets react to the actions taken, from a domestic institutional standing, what affect will this have on future conflicts – economic and otherwise – with the target country. Lastly, from international political view point will the international community respond positively to the use
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20 of economic powers by condoning or even taking part in the economic actions as part of a
coalition, or will they respond negatively, either because of fear that they can also be targeted or because it is an abuse of economic power with the greater globalized system.
Circumvention is simply the methods or actions a target country can take in an effort to escape the negative effects of the sanctions imposed by the agent country. Circumvention usually needs the cooperation of another country either by seeking new sources of finance or new markets for goods after trade sanctions. A country is rarely, if indeed ever, truly isolated today and therefore circumvention is always a part of the equation when applied to the use of economic coercive power.
Lastly, defensive actions are undertaken by target states in an effort to protect themselves from the potential use – or as a way to combat the further use – of sanctions. The most common form of defensive action would be matching trade restrictions or tariffs on the importation of goods. It is notable that defensive measures are only really feasible if the target country
understands what is happening and who is doing it. Therefore, this is an important consideration as it applies to the advertisement of economic coercive action as we will see below.
Efficiency, to Kirshner, “refers to the ability of the home state to wield the instrument skillfully and to direct specifically at the target government” (Kirshner, 1995, pp. 27-28). There are three ways in which efficiency can be determined: level of independence of the central government; the level of publicity surrounding the use of economic coercion; and how focused is coercive measure. Level of independence is important because states must be able to decisively take action without interference. Domestic or International factors could play a part in this consideration. For example, countries belonging to the World Trade Organization would have to
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21 show justification and abide by the WTO rules when applying sanctions or taking other
economic measures against another country. Likewise, the tool needs to be in the hands of the government as we will see with the use of trade, the government can restrict trade by law or by increasing tariffs, but in practice trade is an action taken by people and businesses making the possibility of illegal trade or circumvention too high for effective use.
Advertising the use of economic coercion can be a limitation and an opportunity. Some components of economic power are necessarily public and do not provide a choice and are therefore much more limited; however, where a choice can be made it is usually to the benefit of the agent country. There are two faces to publicizing economic coercive measures. First, making the economic coercive measures known would increase the chances that an agent state can gather support for their effort from third parties; however, publicity can make the
compliance difficult and can actually strengthen rather than upset the security of the target government because it may inspire nationalism, strengthening the will of the target to resist or boycott trade, as well as possible pushback internationally (Baldwin, 1985, p. 108).
Furthermore, if economic coercive actions are made public it provides the opportunity for the use of defensive measures to be taken, and the more that is known the greater the chance of success.
Ideally the agent country would be able to obtain enough economic pressure unilaterally or could construct an economic environment where opportunities of circumvention can be minimized or eliminated making the advertisement of their actions unnecessary. Some tools for economic coercion are necessarily public while others are private, however, since private components can be made public when it suits the agent country and public components do not have that freedom, private tools of economic coercion are generally more efficient.
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22 The last consideration is: How focused is the coercion on the country or a specific
industry being targeted. The goals of economic sanctions are most often met when they can contribute to the destabilization and overthrow of a recalcitrant government, followed by a new government that changes the offending policies (Hufbauer, Schott, & Elliott, 1990). This is a bit ambitious in the context of our analysis, but economic coercive actions that can put pressure on the government that can destabilize or threaten destabilization of the government or economic sector being targeted will have the greatest efficiency and chance for success. Furthermore, targeted attacks require less political and economic resources to achieve success along with minimizing the chance of negative backlash. It is a good idea to analyze each economic
component – trade, finance, and monetary power – for their respective limitations and levels of efficiencies when applied to economic coercion:
1. Trade is not very efficient. Although trade can be very focused in targeting countries and/or economic sectors, it is a very public form of economic coercion as they are usually legislated and/or taken in the form of a coalition with other countries. Lastly, the government is not totally independent or in control of trade as a form of economic power since trade decisions are often dominated by domestic concerns and private actors are often quick to find ways around restrictions.
Trade also faces many limitations as feedback from domestic constituents makes it hard for economic sanctions to be sustained after the negatives of trade reduction are felt, and defensive measures are easily constructed and applied in the form of
reciprocating tariffs or trade barriers, which can lead to a trade war. Trade is also easily circumvented. Even if a broad coalition of countries is found, goods will almost always be accepted elsewhere or a black market can be established.
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23 2. Finance is moderately efficient since the central government is somewhat more
autonomous than with trade. The government is also the largest provider of finance internationally, and changes in government finance policy are less public than trade.
Although, financial sanctions have the potential to cause a financial or general economic crises they are not necessarily as flexible in targeting of specific economic sectors.
Economic coercive measures centered around finance are also moderately limited in scope. Although, they are less limited by feedback from domestic constituents they do impose some cost on the agent countries mainly by forgoing economic
opportunities in the target country. Unlike trade in goods, financial trade must be done through formal and official channels therefore the creation of a black market is exceedingly difficult; however, the formation of a coalition is more difficult as more countries will see greater opportunity from the exit of another country from the market. Outside of circumvention, financial sanctions are difficult to defend against.
The only tool available is the threat to default on loans if they exist.
3. The exercise of monetary power is remarkably efficient. Since governments alone can print money they exercise complete independence and control over the use of monetary power. Changes in monetary policy are also largely private. It might become clear after a while that the country is manipulating its currency in an effort to harm another country, but for the large part it can be explained away and is very hard to prove. Monetary power is less focused than other forms of economic power, but when combined with other economic factors can be highly effective in destabilizing the currency of the target country.
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24 Monetary Power is traditionally the least susceptible to problems of feedback since monetary power is usually a function of international currency reserves and savings which can affect the government’s wealth and spending, but be isolated from the private sector and citizens. Furthermore, circumvention is largely impossible short of totally readjustment of one’s currency which is costly and inefficient. Kirshner says,
“such a strategy would be akin to committing (monetary) suicide in order to escape murder” (Kirshner, 1995, p. 27). Lastly, defense is difficult geopolitically as the best option requires the willingness of another country to intervene and play as a protector.
Assuming there is such a country it would trade currency vulnerability for outright currency dependence.
It will be necessary to revisit these three components of economic power as we look more closely at the economic realities that exist between China and the United States in the next chapter which shows real figures between the countries; however, this provides a good basis for understanding what the prerequisites are for each tool and what limitations exist to their use as we apply them to the case studies. The limitations and prerequisites of the components of economic power alone cannot fully explain when economic coercive measures are taken.
Wielding economic power is the exploitation of dependencies of another the target country;
therefore, in order to understand when the United States or China can exercise their respective mechanisms for economic coercion it is also important to understand concepts such as Roach’s theory of Co-dependency as it is applied to the United States-Chinese relationship, and the advancement of Keohane and Nye’s theory of complex interdependence (Keohane & Nye, 1987;
Roach, 2014). As the next chapter outlines and as the case studies in chapters four and five prove neither country has absolute power over the other and what little relative leverage exists it is hard
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25 to exploit. This is especially true because the United States – Chinese economic relationship is such that relative strength is split between the areas – Trade, Finance, and Monetary Power. As the next chapter shows, this leaves the countries fairly well match in terms of theoretical power as well as largely interdependent.