15 March 2024
What price sanctions?

What price sanctions?

When trade is made a weapon, the target isn’t always hit.

Following the presumed assassination of Russian political opposition figure Alexei Navalny, the United States, Australia and other Western countries rushed to strengthen their sanctions against Russia. Such sanctions are a common response to perceived unacceptable behaviour. They can be implemented quickly, and they give the impression of strong leadership. But are such sanctions effective? Can the costs outweigh the benefits?

International sanctions can come in many different forms. In a new book, The Trade Weapon, Ken Heydon sheds light on the growing practice of using trade policy as a geopolitical weapon. Heydon, a former senior official with the Australian government and the Organisation for Economic Cooperation and Development, argues that trade sanctions are often ineffective and can threaten economic growth, public health and the climate transition.

In this succinct and well-written volume (less than 200 pages), trade policy is seen as increasingly driven by geopolitics and national sovereignty rather than economic efficiency and human advancement. “As a result, we are seeing the trade weapon invoked in four interrelated and mutually reinforcing campaigns”, Heydon writes. In all four cases, the motivations for using the trade weapon embody an intent to impose harm on perceived aggressors, geostrategic rivals, sovereignty-infringing rule-breakers or suspected environmental free-riders.

First, trade restrictions, such as those sanctioning Russia’s invasion of Ukraine or China’s treatment of its Uyghur minority, have a long history. But the paradox, Heydon argues, is that while sanctions may command popular support, they tend not to work, imposing harm on the sanctioning country itself. The challenge is how to make sanctions more effective, such as inducing a response by “diplomatic carrots”.

Next, Heydon takes up the issue of global value chains and the call by world leaders ­– ranging from France’s Emmanuel Macron to China’s Xi Jinping – to become more self-reliant. The Covid-19 pandemic put the spotlight on facemasks, for example, while the invasion of Ukraine showed the heavy European reliance on imported heating oil from Russia. But as Heydon points out, the world economy and its leading companies have an impressive record of dealing with big shocks, whether the result of terrorism (September 11) or disaster (the 2011 tsunami in Japan). The quest for resilience, or the ability to bounce back, does not require resorting to costly protectionism. A well-managed economy, which is flexible and adaptable, is the best source of resilience.

Another global value chain issue taken up by Heydon is that of semiconductors. He argues that US measures designed to freeze China’s semiconductor technology at 2022 levels and impede its military development will raise costs to consumers without achieving a strategic objective. He argues American restrictions will harm the United States itself by perversely accelerating the development of China’s own chip-making capacity and by denying US firms the opportunities for growth through export.

This brings us to Donald Trump’s trade war with China (continued by President Joe Biden) with tariffs applied to imports of steel and aluminium because of alleged unfair trade practices. Heydon sees this as a case of the United States taking international trade law into its own hands. He instead calls for US actions to strengthen the rules-based multilateral system, notably the World Trade Organisation dispute settlement mechanism.

Heydon also turns attention to Europe’s Carbon Border Adjustment Mechanism, which he sees as a trade weapon used ostensibly to promote the climate transition by punishing perceived environmental free-riders. But Heydon sees open trade having an important role to play in tackling climate change – and the costs of closed markets can be seen in the constraints on solar photovoltaic materials by extensive tariff and non-tariff barriers.

Heydon draws in other examples to bolster his argument, such as China preventing trade from helping address the pandemic by blocking the import of more effective Western mRNA vaccines. But are we likely to see a diminished role for the trade weapon? It’s hard to hold much confidence. Governments like trade sanctions as a rapid reaction or quick fix, if for nothing else to give an impression at home about a decisive reaction.

That certainly appeared to be the case when China imposed wide-ranging trade sanctions on Australia after the then Morrison government called for an independent international enquiry into the origins of Covid-19. Despite China’s attempted strongarm tactics, most adversely affected Australian exporters were able to find alternative markets, while China suffered from shortages of commodities such as coal and could only eat Australian lobsters after they were smuggled in via Hong Kong.

For his part, Heydon is realistic, seeing America and China as continuing to be among the principal combatants with trade as a weapon. As China’s economy slows further, in the context of an ageing population and an inward-looking turn in its economic policy, that will leave the relationship between the powers more brittle.


This article was first published by the Lowy Institute's Interpreter on 15 March.
Tags: asia

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