The Great Economic War (GEW) (Part 2: Strategic concepts and implications)
Phuah Eng Chye (13 August 2022)
Economic attacks have become the weapons of choice among superpowers. In the past decade, the US relied on a narrow range of sanctions and controls to restrain their adversaries. The Great Economic War (GEW), launched as an asymmetric response to Russia’s invasion of Ukraine, broadened the economic attack into an attempt to comprehensively isolate the superpower.
In assessing GEW consequences, it should be noted an economic war works differently from a military war. A military war is physical with troops, vehicles and weapons used to re-establish geographical boundaries. A physical war is bounded and limited. In contrast, the economic war will be fought mainly in the information realm – on policies, laws and their enforcement in trade, technology, communications, finance, currency and narratives. Military war can thus be confined to relatively small theatres (e.g. Ukraine and Taiwan) but an economic war is relatively unbounded. The effects of a military war are mainly immediate. In contrast, the effects of an economic war take time to snowball and cascade across multiple channels and are difficult to reverse. As societies become informationalised, the number of conflict theatres has expanded – the internet, social media, semiconductors, information infrastructure, intellectual property, standards, data, education, culture and talent. Past conflict in the information realm was driven by commercial competition for control of space, gateways and assets. The GEW, with the high levels of government, political and military involvement, will elevate the conflict to another level.
An economic war can also be more destructive than a military war. A military war results in physical destruction and human casualties but the damage is geographically limited. An economic war also causes physical damage to infrastructure but due to lack of funds for maintenance and repair. The effects of sanctions on impoverishment and causing deaths due to malnutrition and illnesses are well documented. While damage from economic wars isn’t immediate, the damage to infrastructure and human lives may be more severe and widespread over the longer term.
However, there is a lack of theoretical understanding of how conflict in the information realm works and its consequences. Traditional warfare has a reasonably defined tree of possibilities to calculate benefits and costs, anticipate the opponent’s moves and to design strategies. No such theoretical framework exists for conflicts in the information realm due to effects such as transparency, polarisation, ambiguity, transience, complexity and convergence. The complexity of interdependencies between reasonably-matched opponents makes it difficult to calculate gains and losses. The predominantly geopolitical motivations mean GEW is likely to result in losing economic propositions for both sides. Rather than produce a winner, the GEW is likely to turn into a “last-man standing” contest. The GEW is largely intangible and thus its features and consequences will follow the logic of information disruption.
The GEW will provide a rigorous test of existing theories on conflict in the information realm.
Infinite game. The military invasion of Ukraine is a finite game as it has a definite ending with either one side capitulating or a ceasefire negotiated. But it is only a small part of a larger economic war with the features of an infinite game.
- “The only purpose of the game is to prevent it from coming to an end, to keep everyone in play”. It is difficult to envisage a situation where sanctions can be fully unwound. The consequences of asset seizures and confiscation, shifts in supply chain relationships, debt defaults, business exits, and contract non-performance cannot be easily reversed to restore status quo. Even if eventually there is a peace agreement, the vaporisation of ownership, debt, contracts and access rights would have already destroyed trust.
- “The rules of an infinite game are changed to prevent anyone from winning the game and to bring as many persons as possible into the play” . The GEW has infinite game features of expanding participation and being unbounded by geography or domain. Many countries have already been affected by inflation, supply shortages and hardships like debt crises and hunger. Secondary sanctions and counter-sanctions are being prepared. The recent escalation in Taiwan reflects the East-West conflict is reawakening. The GEW is thus a global conflict to rewrite rules and reshape the world order.
Reversion to scarcity. In colonial days, wars were fought to gain control of resources. While there was destruction, physical facilities and economies could be rebuilt once order was restored. In contrast, “resource needs” have faded in an era where information and global interdependencies (globalisation) created abundance. GEW will inevitably lead to deglobalisation and the unwinding of abundance. In this context, the strategic objectives of the GEW to “re-arrange” global interdependencies are doubtful. GEW will result in “immediate” destruction of existing supply relationships for uncertain “medium and long-term” construction of alternative arrangements. This will inadvertently result in unplanned supply gaps and over-capacity.
In earlier sanctions, supply shortfalls were negligible and their impact easily minimised by substitution and trade re-routing. GEW supply shocks are too large to be offset. The historical option of conquest to secure alternative sources of supply is not feasible in today’s world. As a result, the global economy will be subject to more frequent bouts of scarcity. These supply gaps or shocks are artificial in that they are mainly caused by heavy-handed government policy interventions in relation to sanctions (export and financing bans), decoupling (tariffs, reindustrialisation and friendshoring), climate change and the pandemic. Governments are also making more decisions on how much can be bought and sold, from and by whom, and even setting prices (subsidies, tariffs or price controls).
Government interference results in large-scale rationing not only of supply but also of demand. Demand-supply imbalances (and costs) are worsened by second-order network effects such as risk aversion; diminishing intermediation capacity and liquidity; reputational, logistical and financial frictions; and loss of scale effects on market efficiency. Overall, government-imposed policies or controls are causing marginal revenue to fall below marginal costs. It is too risky to leverage or to expand output capacity. This leads to rationing of goods, labour and credit. Price caps fail because suppliers would choose to withhold or divert supply from the market. The failure of markets to rebalance excesses and shortfalls causes the governments to intervene even more. Under such “wartime” conditions, the outcomes are inflation and profiteering – as the opportunity to earn excess profits replace market mechanisms in addressing scarcity.
There are monetary implications from reversion to scarcity. Since Russia cannot use Western currencies, they have to “barter” their resources using their currency, yuan and gold. This results in commodification and goods price inflation. This limits the ability of Western countries to pursue “money-printing” to finance trade deficits. Reversion to scarcity is likely to trigger widespread political and economic instability. In lieu of military conquests, this could trigger a geopolitical scramble to assert influence over regimes to gain indirect control over a country’s resources.
Battle over space. The GEW resembles a game of Go where players compete to control space and access by positioning their pieces (allies and MNCs) via military or information means (e.g. multilateral or unilateral rules and policies) to reduce the opposing team’s degrees of freedom (squeeze their space and reduce their connectivity). In this strategic game, powerful nations attack interdependencies to dominate space (leadership, market share, alliances) and to project gatekeeping power over access (trade, finance, logistics and infrastructure) and enforcement capabilities across as many jurisdictions as possible.
This opens up a lot of new theoretical ground. For example, do traditional strategies such as containment work the same way in the information realm? One distinction is the difference between control and ostracization. Traditional wars rely on containment to maintain control over space (resources and markets). In the GEW, the West seeks to contain Russia through ostracization to isolate its economy. Hence, efforts are being made to cut Russia’s access and invalidate its rights in “global” trade, business, finance, airspace, shipping, technology, communications, and even sports and cultural activities. From a perspective of space, the elimination of all dealings with a large supplier and market like Russia also means the West is effectively containing itself by shrinking its own space or sphere of influence. Containment and ostracization cedes space and access; and are, in reality, forms of retreat. In addition, it is difficult to control space and access due to the ambiguous, transient and complex features of information. For example, it is difficult to pin down the nationalities of individuals, firms, finance and technology. Citizenship and ownership can be changed or transferred while flows can be re-routed as borders are blurry, transient and porous.
Overall, “winning” in the information realm should be associated with expanding control of space but contesting for space is escalatory. In “contested” space, aggressor will seek to exploit their asymmetric advantages. Hence, the US tries to exploit its advantages in finance, technology and its alliances while Russia and China would seek to exploit their strengths in energy and industrial production. But players cannot easily cede ground because it places them at a greater disadvantage. To eliminate space where they have an asymmetric disadvantage, superpowers are likely to over-react by hardening the terrain so that it can no longer be used as a point of leverage. Examples are Hong Kong, Ukraine and recently Taiwan. The contest for space is therefore escalatory.
Unbounded and ambiguous conflict. Military conflicts among great powers tend to be limited to “designated” theatres. In contrast, convergence is fusing military, technology and competition into unbounded conflict in the information realm. A Rand Corporation report points to a “transition to new ways of warfare…toward more information-based, unmanned, semiautonomous, and AI-driven platforms…One implication of these trends is to raise the possibility of truly boundaryless warfare with tactical, operational, strategic, and homeland targets, military as well as civilian, all engaged at the same time from the first moments of warfare. The combined effect of these technologies is to reduce significance of range, blur boundaries between levels of war and the battlefield and homeland, and fundamentally expand the attack surface”. “These trends demand new thinking about concepts of operations…recognizing the emerging all-domain reality…grounded in information-network destruction and manipulation and point toward a future characterized in part by unmanned, semiautonomous, dispersed, and swarming systems. The major powers that master this new approach will have a decisive advantage in war and possess predominant power and influence”.
Frank Hoffman and Andrew Orner notes Andrew Mumford’s presciently “identified four trends that he believed would increase policymakers’ interest in, and the frequency of, proxy fights…a War on Terror syndrome, the rise of private military companies, the impact of digital technology, and China’s rise”. “Similarly, Mumford correctly assessed that cyber warfare could evolve into a mode of proxy war” and that “attendant with China’s rise, the world was likely to witness the use of indirect mechanisms in an attempt to alter the balance between [the United States and China]; and this is increasingly likely to involve some form of proxy, largely because of the high levels of Sino-US economic interdependence. This possibility may be altered by China’s significant military modernization, which has changed the balance of power in Asia”. As Chinese interests expand globally and its capabilities grow, Chinese intervention is set to increase and this could be problematic for international stability and U.S. security. Frank Hoffman and Andrew Orner adds other factors identified by Mumford influencing proxy conflicts include “a post-pandemic redefinition of security, a diffusion of technology, a glut of foreign fighters, and an increased number of protracted civil conflicts”.
Overall, conflicts in one theatre can trigger conflicts in another theatre. Because conflict can spread so easily, it becomes difficult to segment or contain (establish guardrails for) conflict. The open nature of conflict makes it difficult for countries to prevent their economy, citizens and firms from getting pulled into the conflict and to insulate themselves from contagion effects.
Weaponization of interdependence. Interdependency is a core concept for conflict in the information realm. Weaponizing interdependence theories is built on the concept of a dominant network owner exploiting asymmetric advantages. Hence, they are effective against smaller countries like Iran, Venezuela, North Korea and Afghanistan because their dependent relationships with the West means the effects are largely one-sided. The economic war against Russia represents a real-life test of theories for interdependent relationships among equals where the adverse effects are two-sided. Theories for this are lacking.
The West’s economic war against Russia does not seek control of its resources but to starve it of resources through ostracization. But ostracization negates the panopticon and chokepoint benefits from networks. Panopticon benefits are reduced as the West loses access to Russia’s information. The dominant network will lose potency due to information blackouts. Chokepoint advantages, which tend to be temporary in a modern economy anyway, are reduced as Russia’s expulsion means it is no longer subject to Western rules and enforcement on their chokepoints (IPs, finance). Other areas requiring clarification include:
- The differences between weaponization, expulsion and ostracization. Weaponization implies sanctions are limited by the need to allow adversaries to remain within the network. This would allow gatekeepers to inflict damage on adversaries while maintaining panopticon and chokepoint advantages. Expulsion refers to removal of access and rights in a network. Ostracization covers expulsion and includes the complete Western withdrawal from Russia. As a matter of comparison, traditional conquests aim to control a country’s resources and markets. The success of ostracization depends on the Russian economy collapsing which in turn is dependent on the West’s ability to prevent other countries from trading with or investing in Russia. In this regard, Russia’s existence as a military and resource superpower are not threatened by ostracization. Instead, the West has voluntarily given up external and internal control over Russia by freeing it from complying with the “international rule-based order” and handed it total control over their own economy. Russia can now chart an independent path to build or participate in competing spheres and to exploit opportunities in contested space (allies and global south countries reliant on Russian energy and commodities) to inflict economic pain. The West find itself distracted by the complications and costs of attempting comprehensive isolation.
- It is too complex to analyse a comprehensive attack on interdependencies and only possible to analyse individual sanctions. For example, does it hurt Russia or the West more if the latter stops buying Russian energy or stops exporting technology. This depends on whether each side can find substitutes and, on a practical note, whether isolation is effective. In general, ostracization functions like a barrier. It is a close space strategy with well-documented contractionary drawbacks similar to tariffs or export bans. Winning strategies require open space strategies that promote expansion of influence or control. An interesting question is how countries like China or Russia should respond to close space strategies. Responding in kind – imposing barriers in retaliation – would be self-damaging. They are better off increasing their openness and continuing efforts to attract external businesses, capital and talent.
- Some suggest sanctions could be calibrated to reduce self-harm. But it is difficult to calibrate policy measures or to control the situation in interdependent relationships. Russia is likely to respond by imposing countermeasures on Western interdependencies. Supply and price shocks on energy and commodity products is already having severe global spillover effects – e.g. shipping and insurance sanctions have affected transportation of energy and food. Contagion effects on global economic and social stability are not easily managed for either side.
- The GEW is a lose-lose economic situation but the GEW losses are not equally distributed. The globalised Western economies and China have more to lose than Russia which is less globalised. The high energy and commodity prices result in a major wealth transfer to large exporters (like Russia, US and the Middle East) from major importers (like Europe, Japan, China and India). GEW costs are also disproportionately borne by the private sector – investors, intermediaries and firms (excepting the defence and energy industries) – and by consumers.
Do we understand how weaponization of interdependencies work? Can tightening interdependence prevent an economic war? China probably thought its strategy of hugging its adversary through deepening interdependence would protect it from hostile actions. It was probably surprised by the willingness of the US, and lately Europe, to accept the adverse consequences from decoupling and an all-out economic war against Russia. A major problem with analysing weaponization of interdependencies among equals is that these conflicts are wholly motivated by geopolitical ambitions and lack economic rationale or even clear strategic goals (apart from defeating the enemy at all costs). Hence, conflicts would continue to escalate as long as the superpowers are willing to stomach the pain from interdependency losses.
Comprehensive isolation. The most critical part of the West’s strategy is to isolate and damage an adversary’s economy. François Langot, Franck Malherbet, Riccardo Norbiato and Fabien Tripier estimate “that an embargo only by the EU would cost Russia three times as much as it would cost the EU. However, if an embargo were imposed by the EU and other countries unfriendly to Russia, the relative cost would be 13 times higher for Russia”.
But if the West is unable to completely isolate Russia, their strategy would fail and this would damage their credibility. The US has solidified support among developed allies but it is proving difficult to bring the Global South on board. Some have close relationships with Russia, some depend on Russian energy and food, and some are eyeing business opportunities created by the Western exodus. The prospects for success of its isolation strategy are low because the incentives to trade and invest with Russia are high
To reinforce its isolation strategy, it is anticipated the West would identify targets for secondary sanctions. But the implementation of secondary sanctions is costly. One, it may be escalatory as major powers like China and India guard their autonomy and may implement retaliatory countermeasures. Two, this would further damage the global economy and hurt their own MNCs. Three, as economic costs rise, badly-affected allies may defect unless they receive support. Four, if secondary sanctions are applied on too many countries, then the isolation strategy fails. Five, countries like India or in the Middle East perceive they have the bargaining advantage and will make demands instead.
Generally, the Global South has preferred to remain non-aligned. It is likely the West would try to pick off individual countries but this is time consuming and a costly distraction. It is difficult to anticipate the West’s reaction if its efforts to isolate Russia fails. Was the West really naïve to expect its isolation campaign to succeed or perhaps there is a deeper strategy that is not yet visible.
Network competition. The expulsion of Russia from the Western network implicitly assumes it would hurt the adversary more than it hurts the network and its members. However, the expulsion of Russia raises new strategic challenges. Networks thrive on openness and scale. When major economies are expelled and their (ownership) rights are no longer recognised, this shrinks the size and value of the dominant network.
The expelled large player is forced to either start up or participate in the formation of alternative networks. In this context, Russia can work off a significant base which includes its neighbours in Eurasia, other sanctioned countries, and members in multilateral groupings like BRICs, the Collective Security Treaty Organization (CSTO) and the Eurasian Economic Union (EAEU). This highlights the limits to the West’s ability to apply secondary sanctions. The more countries and firms expelled, the greater the loss for the dominant network and the greater the likelihood a new competing network will emerge.
The new networks are likely to be inferior to the dominant network which benefits from the presence of large and sophisticated players and established legal processes. Nonetheless, the dominant network faces a genuine competitive threat for the first time. As in commerce, start-ups are unencumbered by legacy and can offer unique value propositions. First, it can leapfrog legacy architecture and operate highly-efficient digital currency models offering almost-instantaneous settlement to drastically reduce hedging and financing costs, and counterparty and settlement risks. Second, it can offer anonymity from Western oversight and probably immunity from extraterritorial sanctions. There is a lot of “informal” finance that needs a home that is protected from anti-money laundering (AMLA) and sanctions oversight. Third, since global intermediaries are unlikely to be able to participate in the alternative networks, this creates a space to nurture non-Western intermediaries that will emerge as formidable global competitors. The start-up network is likely to have lower costs and will likely offer incentives to pinch customers from the dominant network. Lastly, there is a difference between the Western approach that emphasises on penalties as compared with the Russian-China approach that offers large profit opportunities to those willing to risk Western sanctions.
The biggest problem for the West is that it is conducting GEW in its backyard and damaging its own network and intermediaries. The range of self-inflicted wounds include loss of space (scale) and connectivity, damage to currency, asset and collateral functionality, and loss of liquidity and efficiency. Its system is getting clogged up by compliance and legal risks and disputes over seized assets. At the extreme, over-extension of secondary sanctions could backfire and trigger the implosion of the dominant network. In the future, network fragmentation and global governance and competition will emerge as key challenges. The rules governing the co-existence of competing networks will have a major impact on the reshaping of the world order.
Narrative and social movements. Control of public narrative is critical in war. Dan Ciuriak notes “technological conditions have shaped how wars are communicated. Looking back, the US invasion of Vietnam is often described as the first major television war, in that it was the first time that television surpassed print media as the main source of information for the attacking side…brought scenes of war into people’s living rooms, although the footage was heavily edited for American audiences. The choice of what to show and the accompanying narrative remained, therefore, under the control of US television networks. Although some have described the 1999 Yugoslavian Civil War as the first internet war, with the internet serving as a source of news dissemination, the 2003 US invasion of Iraq can be considered the first major internet war, in which warblogs gained readership rivalling that of the major political opinion journals and fact-checkers challenged accounts in the mainstream media. Nonetheless, impressionistically, communication of the US invasion of Iraq was dominated by the cable news networks, which continuously cycled reports from correspondents broadcasting live from Baghdad – but embedded with US troops. The perspective conveyed to most of the world was that of the invading side”. “Ukraine is different to some extent because this is the first war of the digital era in which the message is not almost entirely controlled by the invading side. It might be better described as the first war of the splinternet”. “Inside a largely closed Russian internet space, the message is controlled and the narrative is pro-invader”. “In the West, the internet is not under sovereign control, but it is contested and subject to heavy influence campaigns. Through platforms such as Twitter, Instagram, Reddit, Telegram and TikTok, Ukrainians have been sharing photos, videos and personal stories. These put a human, relatable face on the war and its impacts, free of the euphemisms and prepared lines of governments, the academic-style analyses by experts and the selectivity of the narratives created by media organizations”.
Russia’s disinformation campaign in the 2016 US elections and China’s mobilisation of social movement for economic coercion highlighted how social media is changing narrative control. Modern narrative control revolves around managing short public attention spans and audience ratings. Creators and influencers hype and flood talking points across multiple channels to maximise public engagement. Players fight to control the news cycle as it allows them to set the play according to their tune or to deflect attention from problems, when needed.
The West demonstrated, before and during the Ukraine invasion, their ability to quickly seize control of the newsflow and public narrative in the English-language mainstream media and social media platforms. Its approach created a groundswell of public support for the Ukrainian cause which cowed allies to get in line. The Western narratives were also intended to pre-empt, distract and unsettle Russia and damage its credibility. Western governments clamped down to Russia’s ability to disseminate their narratives to Western audiences. This is fair game since Russia censors opposing views anyway.
But there are side effects. Modern narrative control and social movements are provocative, divisive and sow distrust. It reinforces polarisation by nationality, race or religion and triggers strong team dynamics (colour revolution, cancel cultures) that force individuals to choose sides. This works to solidify unity within a group (e.g. Republicans, Europe) but it inadvertently solidifies unity in the opposing group (e.g. Democrats, Global South). The middle ground shrinks drastically – leaving little space for objectivity, neutrality, facts, meaningful debate, compromise and diplomacy. The biggest risk is that because social movements tend to be emotive, anonymous and because it tends to lack a formal hierarchy, the “cause” is often hijacked by extremes.
While the US-led narrative and social movement campaign represents a step-up over Russia’s disinformation and China’s social movement campaigns, there are crucial differences. Russia’s disinformation campaigns were aimed at polarising Western societies, to put them at war with each other. The US-led disinformation campaigns are aimed at unifying and building resolve among allies with the aim of tarnishing the adversaries’ reputation and undermining its political stability. It will then similarly unify and build resolve among adversaries.
Modern narrative control is reinforced by social movements. To drum up support for the economic war, the Western narrative is to make Putin/Russia appear repugnant. However, the intention to manage carve-outs to protect self-interest got swept aside by the unintended wave of Russophobia – with boycotts against restaurants, sportsmen (even Russian para-athletics were not spared), employees and artistes. The intense public pressure on foreign businesses to not have anything to do with Russia turned sanctions into a blunt and petulant instrument of ostracization which damaged self-interest. In contrast to the West’s uncontrollable social movement, China’s government can exercise pragmatic control over its social movement. If the government believes the social movement is endangering China’s interest, it can easily turn the switch off. The West doesn’t possess a similar luxury.
The biggest victims of social movements are not governments but MNCs. In particular, Western MNCs are coming under substantial pressure from social and government activism to curb their businesses based on a wide agenda straddling geopolitics, human rights (covering labour, LGBT, women, race and religion), climate change and the pandemic. In the background, a social and political backlash against business, markets and globalisation is playing out. The West does not appear well served by the santisation dynamics that is damaging its own MNCs. The reality is that the battle for power is based on control, cynical self-interest and profits.
Modern narrative control is tailored to cater to short attention spans and can suffer from over-reach. An overdose of warnings and accusations can lead to saturation and diminishing returns. Audiences become exhausted, everyone’s credibility is undermined, public sensitivity is numbed and the social movement energy is dissipated. There are also dangers from believing too much in your own rhetoric as it can cloud your judgement. At some point, the gap between the narrative and the on-the-ground reality becomes too wide and reality starts to sink in. There can be rebound effects as disillusioned audiences turn on the authorities.
The current polarising nature of narrative control and social movements are also not conducive to diplomacy. Benjamin Jensen and Adrian Bogart point out “recent statements about regime change, alongside imposing costs on Russia in the long term, are counterproductive and would likely have been shown to be so if tested prior to signaling Russia. The fact is much of public signaling – which is central to crisis response – is left to speechwriters and principals, absent empirical testing and natural language processing that evaluates key themes, sentiment, and other vectors to help calibrate the message”. They argue it is important for the West to “directly engage Moscow. Talking does not mean reducing coercive pressure. Rather, it means clarifying red lines and expected behavior to better frame bargaining positions”.
Dan Ciuriak notes “caught in the crossfire, the social media audience must decide for itself whom to believe. Many have argued that we live in a disinformation age or a post-truth world. Elsewhere, I have argued that humanity has always lived in a contested truth world, and so we have evolved an innate ability to detect deception – a smell test…Propaganda techniques and capabilities gain power in the new digital environment. At the same time, social media networks can help expose propaganda, and the decentralized nature of social media creates new challenges for authorities in controlling narratives. The net effect of the tension between information and disinformation cannot be established on an a priori basis”.
Dan Ciuriak concludes “the countering arguments do not have to make sense or stand up to serious scrutiny – all they have to do to succeed is to be endlessly repeated. This reflects the internet adage known as Brandolini’s law, which holds that the effort required to refute a falsehood is an order of magnitude larger than the effort required to create it in the first place. This is where social media has been something of a game changer. It commands a larger share of a population’s attention than traditional media; the replication of memes is highly scalable through bot accounts; and the techniques developed for the attention economy have been put in the service of propaganda for exploitation by seeding doubt and rage. Thus, when governments have market power in information space – as, for example, in Russia – social media appears to be a very powerful tool for shaping public opinion. When information space is contested – as in the much more open internet in much of the rest of the world – there is a pitched battle being waged to set the narrative. How that battle will conclude, which side’s memes and narratives take root in which parts of the world, is as yet unclear. There is no force attrition in this war. There will be no armistice. The tactics and methodologies are evolving, and we are all witting or unwitting participants through our engagement with social media”.
Slowness, irreversibility and contagion. Other features of policy-driven conflict in the information realm differentiates them from a military conflict. First, the effects of military battles are relatively quick whereas the effects of policy-driven attacks are relatively slow. Second, the final outcomes after a military war are definite. Victors are declared, territorial borders and reparations determined and countries can start rebuilding their economies. Due to the slowness of their effects, conflicts in the information realm are indefinite and generally irreversible. Policies such as sanctions and asset freezes can’t be easily withdrawn particularly if it hadn’t achieved its objectives. Court decisions on policies, seizures, enforcement and even private lawsuits can’t be easily reversed or unwound. Business relationships damaged by decoupling and business exits can’t be easily repaired. The trend towards production self-sufficiency can’t be reversed. Third, once policy effects build momentum, it becomes difficult to control the process as information disruption creates an emotive, polarised and transparent environment. The role of diplomacy is used more to rein in backsliding allies, to recruit new ones or for grandstanding rather than to negotiate with adversaries. Assurances are regarded as a trap, self-restraint as a weakness and concessions as appeasement. Instead, adversaries often respond by hardening the terrain to remove vulnerabilities being exploited by ambiguous warfare followed by counter-strikes. The features of slowness, irreversibility and contagion means it is easier to de-escalate a military conflict than an economic one.
The economic war against Russia is likely to escalate into an infinite and unbounded global conflict. Near-term escalation scenarios include legal or military conflicts to seize Russian or “sanctioned” assets even in neutral countries and international waters. While Russia is currently preoccupied with its invasion, it is unlikely to remain passive and, in the future, it would likely insist on the return of its assets and property rights and may target select countries for their failure to comply.
While the initial impact of the GEW appears limited to supply, demand and financial shocks, it has unleashed contagion effects crippling the global economy. In the same manner as the pandemic accelerated the shift from physical to virtual, GEW plunged a dagger into the heart of globalisation. Government dictates are overriding markets and private sector decisions, forcing the reconstruction of “resilient” supply chains and creating uncertainties about cross-border ownership, participation and costs. This is fast-forwarding decoupling, clogging up multilateral arrangements and cross-border flows, and accelerating fragmentation into competing spheres. The efficiency and multiplier losses from the unravelling of global economic and financial interdependencies will be massive. Nightmarish scenarios include a confrontation with China freezing the global economy and markets; a deepening rift between the Global South and West; or hot disputes spiralling into a third world war.
Conflict hardening and the Taiwan reset
For several decades, US and China accepted an equilibrium built around flexible strategic ambiguity on Taiwan. But events such as decoupling, the invasion of Ukraine and GEW (against Russia) reflected growing geopolitical dissatisfaction is upsetting the delicate balance. It has taken hardly a few months for the warlike tension to reach Taiwan’s shores. Thucydides’ trap may have been sprung. It would have been difficult to foresee this but US House speaker Nancy Pelosi could well become the face that launched a thousand ships in the Taiwan Straits. In a furious reaction to her visit, China
- Conducted live-fire military exercises encircling Taiwan and is now conducting “regular patrols”.
- Imposed unspecified sanctions on the 3rd highest ranking US official and her immediate family members.
- Suspended food imports from Taiwan and exports of natural sand (disrupting semiconductor production).
- Reduced communications on defence. Suspended cooperation on climate change, drugs, immigrants and cross-border crime.
While there has been a lot of focus on Taiwan, the most important development is that China is clearly resetting its relationship with US and the West. China is hardening of the terrain and unilaterally rewriting the “unwritten rules” by going all-in on its One-China policy and demonstrating its willingness to terminate relationships and even go to war, if needed. Effectively, this removes room for strategic ambiguity and is intended to pre-empt pending “provocations” such as the proposed Taiwan Policy Act 2022 being considered by US Congress which would treat Taiwan “non-NATO ally”.
There hasn’t been much coverage but my interpretation is that China is signalling a redrawing of its red lines.
- It will no longer tolerate freedom of navigation in Taiwan Straits.
- There will be escalatory responses to provocations supporting Taiwanese independence and strengthening it militarily.
- China is willing to engage in confrontation on border security issues – including reducing cooperation, dialogue, trade and on the military front.
There are many interpretations of China’s reactions. George Yin and S Philip Hsu notes views (not theirs) the extreme response is likely due to President Xi Jinping pursuing an unprecedented third term at the forthcoming Chinese Communist Party (CCP) congress. “One implication of these criticisms is that the current tension could be diffused after a few months. Once Beijing felt that it had sufficiently rebuked Pelosi and punished Taipei, the tension could subside”.
In my view, the gist of China’s reaction is to demonstrate it is prepared to go all the way in standing up to the US. The new red lines represent China’s deterrence strategy aimed at US, Europe and Japan rather than against Taiwan. In Taiwan, the strategy is to battle for the hearts and mind of its citizens and to isolate the “anti-China” political leadership. China has also generally avoided sanctioning businesses or impeding cross-strait flows. In confronting the US, the implication is that China will now openly strengthen its relationships with Western adversaries like Russia.
There has been a pause in the US on how it should respond to this obvious affront. If US doesn’t react forcefully, its prestige could be affected. It is mindful of the need to carefully thread a line between managing perceptions (demonstrating it is responding forcefully) and facing realities (a mutually destructive war). For example, if the US attempts to sail warships through the Taiwan Straits, it could find itself caught in a naval stand-off with China. What would happen then? The US is obviously taking its time to calculate and prepare its moves and consulting its allies to ensure a joint response.
But China has removed the room for calibration to exploit the geopolitical asymmetry of whether the US is willing to go to war over Taiwan. A cold war could get heated quite quickly. While the focus is on military possibilities, we need to look beyond as the West would probably prefer to counter-attack on the economic and technology fronts where it has an asymmetric advantage. Each side thinks the other’s economy is more vulnerable but both recognise further deterioration in the economic relationship would have a devastating effect on the global economy. But the military and economic wars are interlinked. For example, can the conflict remain non-military if they choose to cut off critical supplies and sanction each other’s companies. And vice-versa, a military conflict would lead to a complete break in economic relationships. Is there a path for de-escalation over the Taiwan issue? Chinese military strategy suggest it is dangerous to corner a wounded tiger and that it is wise to leave open a face-saving route for the tiger to retreat. We shall see.
Strategic stability in the information realm
Weaponization of economic advantages is turning the information realm into a battlefield. The world is largely unprepared for the battles fought through beggar-thy-neighbour policies aimed at hurting the economies of adversaries. To defend themselves, countries are compelled to seek to greater self-reliance and this will accelerate deglobalisation. Deglobalisation will be accompanied by the loss of trust, the breakup of long-term relationships and an atmosphere of enmity and non-cooperation among governments. This will cause the global economy to regress to higher levels of informality, information blackouts and legal chaos. This will result in a sub-optimal global economy knocked off balance by government mandates and subsidies. The economic fallout will affect most businesses – higher uncertainties, costs, inefficiencies from fragmentation and loss of scale – and will be borne by the civilian population. The locus of adversity will eventually shift from supply disruption to demand destruction and from inflation to an economic depression. Deglobalisation is thus ushering a new era of world disorder. If the rivalries are not managed through de-escalation and international cooperation, intensifying conflicts could put us on two unpleasant escalatory paths: an endurance race to withstand the rising levels of economic and social pain or a world war.
It is unfortunate the key question challenge of this decade to prevent conflicts from spreading and the economy from worsening does not receive sufficient attention. It is evident that global strategic stability, which existed while the US was the undisputed hegemon, has been disrupted by the rise of China. Instead, US and China seem to have fallen into a Thucydides’ trap. But this is a two-player game paradigm and may be where the West’s focus on Russia and China as primary adversaries are misplaced. The spread of knowledge and globalisation has diffused economic power among countries while informationalisation has weakened military power. Power dynamics change considerably when victory is increasingly unattainable either on the military or economic front. The inability of any single country to assert its will on the rest of the world reflects a shift from a unipolar to a multipolar, multiplayer infinite game. The West does not appear prepared or willing to accept this transition. In the absence of strategic stability, crises like the pandemic, climate change, income inequalities, food and debt crises are aggravated rather than resolved due to diverging national interests.
How does one steer a path towards strategic stability in a multipolar, multiplayer game in the information realm. Current theories on this are underdeveloped and offer limited perspectives. The risks are that without a vision for strategic stability, a superpower could lose it and lash out in frustration. In my view, the major problem is that the major cause is that national security concerns are overriding economic goals. National security goals can only be satisfied by subjugating adversaries. But beggar-thy-neighbour policies are likely to lead to a global depression like in the 1930s and inadvertently leads to a major global war.
There is a need to identify a path for de-escalation to foster conducive conditions for global economic cooperation. The starting point is to reprioritise economic goals over geopolitical or national security ones or at least to find a better balance between these goals. Perhaps this is possible when a state of desperation or exhaustion creates the necessary conditions for diplomatic negotiations, compromise and de-escalation. Governments need to return to designing policies that facilitate the private sector (market-friendly) once again to be at the forefront of solving economic coordination problems. Hence establishing a framework for strategic stability in a multipolar game or a diffused, peer-to-peer network require the designation of safe space where rivals can co-exist without geopolitical concerns. Safe space can be defined as territorial locations or information networks (currencies, rights) where transactions, ownership rights, information privacy and freedom from prosecution is guaranteed, implicitly or otherwise, jointly by the superpowers. Safe space will provide the critical neutrality needed for adversaries to work together and is a vital stepping stone for promoting international cooperation and the provision of global public goods.
The GEW is a geopolitical conflict to reshape the world order. The West launched GEW to warn adversaries on the consequences of attempting to revise the existing rules of the game. All is well and good for the Western empire if they succeed. But how will the West react if they are unable to isolate Russia or if the economic war extends over to China. One possibility is for the West to accept the limits to their power and to retreat. But at the moment, it looks more likely that they will attempt to enforce their will. The GEW is thus providing a real-life test of conflict theories straddling the military and information realms. The most likely outcome is a fragmentation of the existing world order into competing spheres operating under different set of rules and multilateral organisations. We can only brace ourselves for what the GEW will bring when it shifts into the next phase of confrontation. At the moment, the most critical flashpoint is in global finance where a financial nuclear bomb was detonated.
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Zoltan Pozsar (31 March 2022) “Money, commodities, and Bretton Woods III”. Credit Suisse. https://media-exp1.licdn.com/dms/document/C4D1FAQHBG1Gbbc-RTQ/feedshare-document-pdf-analyzed/0/1648801229665?e=2147483647&v=beta&t=kDMzNr1SycLOMmbOEjQsDikK3CPAAirWIDYKhs7Me94
 See Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
 See “Theories on war and diplomacy (Part 3: Conflict in the information realm)”.
 See James P. Carse.
 Some sanctions and their effects are likely irreversible. See“Global reset – War and diplomacy (Part 4: Sanctions)”.
 See James P. Carse.
 See “Global reset – War and diplomacy (Part 4: Sanctions)”.
 Many governments have imposed export controls to ease domestic shortage constraints. Chad P. Bown and Yilin Wang (PIIE) analyse’s how China’s policies disrupt its trade flows and exacerbate price pressures on fertilizer, steel, and pork with global spillover effects.
 See Zoltan Pozsar.
 Go or Weiqi (encirclement) is a board game invented in China over 2,500 years ago where the players’ objective is to surround more territory than the opponent. https://en.wikipedia.org/wiki/Go_(game)
 See Henry Farrell and Abraham L. Newman, and “Global reset – War and diplomacy (Part 3: Conflict theories in the information realm).
 See Henry Farrell and Abraham L. Newman, and “Global reset – War and diplomacy (Part 3: Conflict theories in the information realm).
 See Simon Schropp and Marinos Tsigas on “Searching for optimal sanctions on Russia”.
 See Antonio García Martínez’s interview of Martin Gurri for an overview of narratives and social movements.
 See “Policy conversations and the language of information”; “Information rules (Part 5: The politicisation of content)”; “Information rules (Part 6: Disinformation, transparency and democracy)”.
 See “Information rules (Part 5: The politicisation of content)”.
 Scott Moskowitz advises “foreign businesses reassessing their China investments must be conscious of the tradeoffs: Nationalistic young consumers may continue to nurse grievances long after operational crises subside”.
 See “Theories on war and diplomacy (Part 2: Integrated and ambiguous warfare)”.
 See Jaydeegroot and Tyler Durden for Taiwan war scenarios.