Theories on war and diplomacy (Part 4: Sanctions)
Phuah Eng Chye (16 July 2022)
Nicholas Mulder relates sanctions were described as the economic weapon or l’arme économique in “the wartime practice of blockade…During World War I, the Allied and Associated Powers, led by Britain and France, had launched an unprecedented economic war against the German, Austro-Hungarian, and Ottoman empires. They erected national blockade ministries and international committees to control and interrupt flows of goods, energy, food, and information to their enemies. It was the severe impact on Central Europe and the Middle East, where hundreds of thousands died of hunger and disease and civilian society was gravely dislocated, that made the blockade seem such a potent weapon”.
He notes “the original impulse for a system of economic sanctions came at the 1919 Paris Peace Conference from the British delegate, Lord Robert Cecil, and his French counterpart, Léon Bourgeois…envisioned deploying the same techniques of economic pressure used on the Central Powers against future challengers of the Versailles order. Such recalcitrant countries would be labeled aggressors – a new, morally loaded legal category – and be subjected to economic isolation by the entire League. The methods of economic warfare were thus repurposed and refined for use outside a formally declared state of war. What made interwar sanctions a truly new institution was not that they could isolate states from global trade and finance. It was that this coercive exclusion could take place in peacetime”.
Nicholas Mulder explains “the significance of the birth of economic sanctions lies in this momentous shift in the meaning of war and peace. A coercive policy that used to be possible only in time of war – isolating human communities from exchange with the wider world – now became possible in a wider range of situations. Commercial and financial blockade, a policy developed as a form of economic war, was reconceived as a prophylactic against war…the struggle to create and use the weapon of sanctions deeply shaped the interwar world and thereby the structure of the political and economic order that we inhabit today. For one thing, it marked the international emergence of a new form of liberalism, one that worked through a technical and administrative apparatus of lawyers, diplomats, military experts, and economists…In a period when European governments granted suffrage and extended welfare and social insurance, sanctions made them see other populations as suitable targets of coercive pressure. Long-standing traditions, such as the protection of neutrality, civilian noncombatants, private property, and food supplies, were eroded or circumscribed. Meanwhile, new practices, such as police action against aggressor states and logistical assistance to the victims of aggression, arose. All of this amounted to a major and complex transformation of the international system”.
In 1919, US President Woodrow Wilson was a critic, describing sanctions “as something more tremendous than war: The threat was an absolute isolation…that brings a nation to its senses just as suffocation removes from the individual all inclinations to fight…Apply this economic, peaceful, silent, deadly remedy and there will be no need for force. It is a terrible remedy. It does not cost a life outside of the nation boycotted, but it brings a pressure upon that nation which, in my judgment, no modern nation could resist”.
Nicholas Mulder concludes yet “today, economic sanctions are generally regarded as an alternative to war. But for most people in the interwar period, the economic weapon was the very essence of total war. Many sanctionists regretfully noted the devastating effects of pressure on civilians but nonetheless wholly accepted them…Internationalists were exceedingly honest about this awful reality for a good reason. By deliberately spelling out the horror of enforced deprivation, they hoped to dissuade revisionist states from even thinking about challenging the Versailles order. A fear of being blockaded would keep the peace”. Hence, “the initial intention behind creating the economic weapon was thus not to use it. To interwar internationalists, economic sanctions were a form of deterrence, prefiguring nuclear strategy during the Cold War. Of course, sanctions were not nearly as immediately destructive as nuclear weapons. But for anyone living in the pre-nuclear decades of the early twentieth century, they raised a frightening prospect. A nation put under comprehensive blockade was on the road to social collapse. The experience of material isolation left its mark on society for decades afterward, as the effects of poor health, hunger, and malnutrition were transmitted to unborn generations…The economic weapon thereby cast a long-lasting socio-economic and biological shadow over targeted societies, not unlike radioactive fallout”.
In reviewing the recent Western sanctions against Russia, Nicholas Mulder notes “in the past century, the 1930s is the only decade that offers a precedent for sanctions against states with a similar weight in the world economy. Within six weeks of Benito Mussolini’s invasion of Ethiopia in October 1935, the League of Nations crafted a sanctions package against Italy, the world’s eighth-largest economy. It was implemented by 52 of the roughly 60 sovereign states in the world at that time. The measures included an arms embargo, a freeze on financial transactions, and export prohibitions on a number of raw materials vital for war production. But the most significant measure was a ban on all imports from Italy. This was possible because the Italian economy’s structural current account deficit meant that such a ban hurt Italy more than it did the sanctioning states. From October 1935 to June 1936, Italian industrial production fell by 21.2 percent, while in the first five months of sanctions, exports plummeted by 47 percent before stabilizing at roughly two-thirds of their pre-sanctions level. The League’s ban on imports from Italy drove up international prices for foodstuffs such as meat, fruit, and butter as well as raw materials and manufactures such as wool, textiles, and leather goods. Crucially, the sanctions failed to stop the Italian conquest of Ethiopia, in large part because the United States and Germany, the world’s largest and third-largest economies, were not League members and did not join the sanctions. As a result, Italy continued to import coal and oil and managed to withstand eight months of serious hardship”.
Nicholas Mulder also notes “Japan was the world’s seventh-largest economy in the late 1930s and a trading state even more open than Italy. Between the summer of 1939 and August 1941, a growing coalition of Western states seeking to restrain the Japanese war of conquest in China imposed sanctions that gradually diminished the number of available trading partners. The onset of World War II caused the British Empire and its colonies and dominions in Asia and the Pacific (India, Australia, New Zealand, and Canada) to restrict exports of strategic raw materials and prioritize them for intra-imperial use. By the end of the decade, Japan was thus even more dependent than before on imports of raw materials (especially oil, iron ore, copper, and scrap metal) from the largest Pacific economy that remained neutral: the United States. In response to Japanese conquests in 1940 and 1941, the United States gradually escalated its economic measures until it finally imposed a full oil embargo, together with the British Empire and The Netherlands. It also froze yen reserves held in the United States. By late 1941, Japan’s trade had fallen by 20 to 25 percent in just 18 months. Faced with a collapse of its access to key imports, Japan attacked the United States and European colonies in Southeast Asia to secure the raw materials it needed to sustain its war machine. Whereas Italy had borne the brunt of embargoes against its exports, which reduced its ability to earn foreign exchange, Japan was hit more severely by a foreign asset freeze and a ban on its capacity to obtain vital imports from its one remaining large trade partner”.
Sanctions in recent decades
Despite historical reservations, the use of sanctions have grown over the recent three decades. Peter A.G. van Bergeijk estimates sanctions increased by 59% during the 1990s. “The year 1990 marked the end of the Cold War, the sanctions in response to the Iraqi occupation of Kuwait, and the start of a significant increase in the speed of globalisation. These three events were at the time readily identified as factors behind the increase in the use of economic sanctions…Indeed, the end of the superpower conflict enabled the UN sanctions to be implemented quickly and comprehensively: the severe, wide-ranging, and almost watertight sanctions against Iraq in 1990 were implemented in four days, and for the first time in history traditionally neutral Switzerland participated. This experience was the basis for a UN sanction wave. Globalisation, stimulated by the breakdown of communism, opened up many economies that previously could hardly be hurt by economic sanctions”.
Peter A.G. van Bergeijk estimates sanction implementation in the 2010s increased by 73%. “Economic sanctions as a policy tool proliferated in the 2010s. However, the apparent increase in sanction use to an average of almost five hundred imposed sanctions per year is, from a geo-economic perspective, more difficult to understand. First, the geopolitical context of the 2010s is actually the mirror image of the détente and perestroika that led to the demolishment of the Berlin Wall and the Iron Curtain. Currently a Cold Trade War – if not a New Cold War – is emerging. US-Chinese rivalry is one important driver. Other determinants are the sanctions and counter sanctions between Russia, the EU, and the US. Second, the other major cases of the 2010s, the sanctions against Iran and North Korea, were protracted and characterised by unstable sender coalitions. Third, the financial crisis in 2008/9 was a turning point for globalisation, with global openness decreasing even before the trade wars initiated by President Trump, the exit of the UK from the EU, and the trade crunch of the COVID-19 pandemic”.
Sanctions have thus gained favour as a mainstream asymmetric weapon. Globalisation and technological advances increased connectivity and interdependencies and expanded their use. Peter A.G. van Bergeijk explained “the increase appears to have been driven by the combination of a reduced role of armed conflict resolution and the growing importance of strategic trade policy considerations…the enhanced efficiency and the reduction of collateral damage may have helped to increase the number of sanctions over time. The former decreases the costs for the sender; the latter reduces unintended costs for the target’s population. In the same vein, the process of implementation and compliance regarding US sanctions has been improved thanks to major investments in staffing, procedures, communication, and monitoring. Also, new sanction modes were developed extending the sanction domain into tourism, trade preferences, and the international payments system”.
The most endearing feature of sanctions is political expediency. Mary E. Lovely and Jeffrey J. Schott notes “the attraction of sanctions for American policymakers is their ability to punish targeted individuals and entities with seemingly few negative spillovers for US interests. Sanctions are a big club wielded by the United States on the beat as the world’s policeman, leading international efforts against rogue regimes in Cuba, Iran, Libya, Syria, and Russia, among others. When allies do not support such actions, US officials often act alone, imposing unilateral sanctions against individuals and entities in the targeted countries. These so-called primary sanctions effectively prohibit US nationals from doing business with and freeze the US assets of named firms and individuals. The effectiveness of US sanctions, even when imposed unilaterally, is enhanced by their application not only to those targeted but also to their customers, financiers, insurers, and shippers abroad. This extraterritorial application of US sanctions compounds the pain inflicted on those targeted, isolating them from international business partners and suppliers. US law requires the enforcement of so-called secondary sanctions against non-US nationals who must stop doing business with those included on the US Specially Designated Nationals and Blocked Persons List (SDN) or risk becoming themselves subject to US penalties and sanctions. Given that the SDN list now runs more than 1,500 pages and includes more than 6,000 names, foreign firms must spend significant resources self-enforcing US sanctions”.
Politicians can thus be seen to be “doing something” in lieu of sending troops (which can be politically costly). In the past, sanctions were imposed on small countries or, in Russia’s case, on a limited scope. With decoupling, the US resorted to sanctions creep against China and, following the Russian invasion of Ukraine, has now deployed the widest range of sanctions ever imposed. Sanctions have been elevated to being the weapon of “first use” rather than the weapon of “last resort”.
Analysis of sanctions
In tandem with its growing deployment, the range of sanctions and justifications for their use has expanded. First there is a need to differentiate between sanctions imposed by a multilateral organisation like the United Nations (which grants international legitimacy) and those imposed unilaterally by a country (the US) or a group of countries (its allies). Unilateral sanctions may be challenged on the basis that it infringes sovereignty and may not be recognised by other countries. Sanctions can be formal (legal based on extraterritorial application) or informal (economic coercion). In theory, countries claim sanctions are based on principles. In reality, their application is selective and targets ‘unfriendly” countries. The justification for sanctions has expanded to cover authoritarian or anti-democratic regimes, terrorism, human rights abuses (including forced labour), unfair economic practices, trade imbalances, currency manipulation, and technology, cybersecurity, military or propaganda concerns. These justifications are used to trigger a broad range of sanctions which can be applied to countries, firms or individuals, such as on trade (tariffs, bans and export controls); on finance (access to USD-denominated international financial system, freezing currency convertibility and investments in the country’s debt/assets); freezing or expropriating ownership rights (asset seizures); withdrawing travel, transport and communication access (ports, airspace and cyberspace); expulsion or suspension of membership or rights in multilateral organisations (WTO, IMF, World Bank, UN), and other forms of cross-border exchange (culture, sports, entertainment and research). We have defined sanctions loosely to cover the wide range of economically and socially coercive actions.
While the debilitating effects of sanctions is clear, questions hang over their purpose and efficacy. Mark Harrison argues “for more than a century, great powers facing war have looked for the magic bullet that would collapse the adversary’s economy in weeks without spilling blood. The magic bullet was found more than once in food sanctions, oil sanctions, credit sanctions, and so forth. Every time, it disappointed. International relations since 1945 have provided many cases of economic sanctions aimed at forcing states to change their behaviour without bloodshed, most of them apparently unsuccessful. In cases involving core national interests, economic pain rarely translates into political gain. Sanctions were likely to succeed only when stakes were low or when military disparities were very large”.
Mark Harrison notes Mançur Olson’s analysis showing “strategic success was achieved only if the enemy’s fighting power was weakened as a result…Olson argued that the…strategy would generally be undermined by the adversary’s adaptation…substitution…the cost that the adversary actually pays for losing access to some external resource or facility is not the sudden stop of all the activities related to what has been denied but the cost of adaptation, which will generally be less…supply-chain disruption was ineffective mainly when the economy was wealthy (so any commodity had many inessential uses) and when the commodity concerned was only partly interrupted (so enough remained for essential uses)”. Great Britain survived three major conflicts – the Napoleonic War and two world wars – without famine because it was wealthy. In contrast, “other countries that entered the war nearly or entirely self-sufficient struggled and sometimes failed to feed their populations. They failed because they were poorer, and so had fewer inessential uses of food at the outset, or because their economies were insufficiently integrated, so that efficient substitutions did not take place – or both”. Olsen also notes “substitution had its limits”. For example, given its lack of natural oil reserves and Germany created the German synthetic oil industry in 1944–45 to “substitute for a commodity in short supply”. But “repeated bombing of the oil plants…permanently reduced supply below consumption”.
Tanner Greer points out parallels between “the logic of the strategic bomber” and sanctions. Prior to World War 2, planners had a flawed belief that strategic bombing could create a panic that would cause adversaries to capitulate. But strategic bombing “could not attain its planned purpose. Bombs were dropped; governments did not fall. Cities were burnt to the ground; the war continued. Slowly the goal of strategic bombing changed from shock to pain. The trouble was…The amount of pain these nations could absorb were staggering. Neither Japan nor Germany was pushed to the negotiation table by the firebombing of their cities. Only the singularly destructive power of the atom bomb was capable of doing that…Instead of making war by attrition obsolete, strategic bombing turned out to be nothing more than another instrument of attrition. No one argues for old style strategic bombing anymore. It took several decades – including an utterly futile strategic bombing campaign over North Vietnam – for the U.S. military to fully realize the limits of strategic bombing”.
In this regard, Tanner Greer argues “neither trade embargos nor financial sanctions targeting entire banking systems are precision instruments. Just as the bombers of World War II did not have the means to distinguish civilian targets from military ones, so too do attacks on a foreign economy fall hardest on vulnerable civilians. We imagine that the pain these civilians experience will translate into political change – either a change in regime, or a change in regime behavior. But as was the case with strategic bombing, the mechanism by which civilian suffering leads to change is not made clear”.
Tanner Greer notes “there are many plausible reasons one might inflict economic harm on an opposing country: pain might be used to try and compel a foreign power to change its behavior. Restrictions might be intended as a bargaining chip for the eventual war settlement negotiations. Or they might be kept in place to degrade the Russian economy over the long term, thus frustrating Russian attempts to modernize their military in the decades to come. The use of sanctions may be principally about credible deterrence – the threat of sanctions will only deter hostile powers from taking actions if they believe we are willing to accept the costs of employing economic weapons…It is not clear to me which, if any, of these rationales motivate our current sanctions regime”. He notes however there is “extraordinary disregard” for questions on what sanctions are supposed to achieve and how it would work to deliver better outcomes. “The aims of our sanctions regime remain under theorized”.
Tanner Greer explains sanctions aimed “at compelling an enemy to change their aggressive behavior…is labeled coercive diplomacy”. “The goal of the sanctioning state is to offer a choice: you can stop this now or suffer worse. But in order to offer this choice, the sanction setters must also define the minimum necessary remedial steps that the target state must take for pain to be removed”. This is the flaw in the current sanctions on Russia. “Do we have any clear idea of what specific steps the Russians should take for the West to let up on the pain it now inflicts? On the other hand, can we credibly commit to escalate the pain we impose if Moscow does not change course? Or have we repeated the error of sanction’s regime against Iraq, where the sanctions were so onerous to begin with that the U.N. could neither negotiate easily nor threaten further?”
Tanner Greer argues the reason “for this discrepancy: Washington has a stronger memory of Cold War style conflict bargaining. We know what nuclear brinkmanship looks like and have long theorized how to respond to it. We know what military coercion is; libraries have been written on the sort of response it demands. In the realms of diplomacy and hard power we have reduced the linkage of ends, ways, and means down to formula. This is not true when it comes to economic coercion…So much is still lacking. We lack any systemic account of economic and financial coercion… tools for action. We need theorists who can detail the ways and means of a successful sanctions campaign. We need theorists who can lay out the principles of the strategic interaction in the coercive economic domain”.
Overall, sanctions are multi-purpose and complex. In theory sanctions can function as a bargaining chip to be withdrawn in exchange for concessions, as a blockade to impede a country’s ability to replenish its military supplies (e.g. Russia) or to impede its technology advance and international expansion (e.g. China). Severe sanctions that seek to isolate a country and devastate its economy are aimed at creating political instability to engineer regime change or simply act as a form of punishment. But theory does not hold up to scrutiny. In practice, sanctions do not act either as a deterrent or as a bargaining chip.
Most commentators think sanctions are unlikely to change behaviour or act as a deterrent. Zhang Yun points out “the intensifying unilateral economic sanctions on North Korea under Obama’s policy of strategic patience, or the comprehensive sanctions under Trump’s maximum pressure campaign on Iran, they did not work as expected. Since sanctions were ineffective against North Korea and Iran, would they be effective on Russia? After the Crimea incident in 2014, the US already imposed strict sanctions on Russia, including freezing assets as well as imposing travel bans and financial and trade restrictions. However, the US did not assess the results of these measures. While sanctions have undoubtedly affected Russia’s economy, the past eight years have proven that Russia has adapted with its domestic development and diverse economic partnerships, and has even grown its foreign exchange reserves to become the fourth largest in the world”. I suspect that the deterrent effect doesn’t work on the countries that has been sanctioned but more as an example or warning to other countries or firms.
It is also difficult to assess the effect of sanctions because of the long lags. Mark Harrison adds that “generally, the effect of economic measures on the adversary’s military power is indirect and slow. Indirect, because it runs through the economy; slow, relative to the speed of military action. Therefore, the more severe are the economic measures that a country faces, the more likely it is to find that its best response lies in violent escalation, despite the gamble involved. The fact that economic measures have their effects indirectly, if at all, has implications for civilian support for aggressive policies. Economic warfare affects the enemy’s fighting power indirectly, via the economy. Collateral damage to civilian lives and property is inevitable, and will be greater, the more the government works to shield the supply chain of war. As civilian losses mount, whom will civilians blame – their own government or the adversary? The question is vital. If most civilians blame the enemy, they will be more willing to tighten belts and make do with substitutes that would be unacceptable in peacetime. If most become disaffected from their own government, the opposite can be expected. If most civilians blame the enemy, they will be more willing to tighten belts and make do with substitutes that would be unacceptable in peacetime. If most become disaffected from their own government, the opposite can be expected”.
Apart from the doubts surrounding the objective and efficacy of sanctions, another major drawback is that in recent years sanctions don’t seem to get withdrawn. Zhang Yun notes “sanctions easy to impose but hard to lift…Lifting sanctions could damage the so-called international credibility of the dominant country…The US wants the sanctioned countries to either unreservedly acknowledge its unilateral failure or beg for mercy, because only then would the US government be able to raise its political status domestically and establish more authority internationally. However, this is a difficult feat as sanctioned countries are unlikely to follow the US’s bidding. Besides, Congress must approve any US actions or sanctions before they can be implemented…Hence, the sanctioned countries are completely uninterested in holding talks, as they know that any concessions made are useless, because even if the US government commits to anything, it can still be easily rejected by Congress…For example, for over 20 years, the US has defined Russia as an authoritarian state and vilified Putin, making anti-Russian sentiment a form of political righteousness. As economic sanctions are considered the most important tool to reprimand Russia, the US can only ramp up sanctions instead of easing them. In other words, there is no mechanism to undo economic sanctions”.
In addition, Erik Sand notes rather than accept demands, sanctioned states may react by adopting “riskier strategies”. “For example, after the United States imposed its oil embargo against Japan in August 1941, Japan decided to attack the United States despite knowing that it would almost certainly lose the war. In the summer of 1941, Japan’s new Total War Research Institute, staffed with the most promising mid-grade officers with access to the most accurate information Japan possessed, wargamed a conflict between Japan and the United States if Japan were to seek to secure oil in Southeast Asia. The analysis reached the unequivocal conclusion that the war was unwinnable…And yet, less than four months later, he started the war he had been told was unwinnable to resolve the problems created by the American effort at economic isolation”. Similarly, “economic isolation drove Germany to risky strategies in which Germany expanded its wars in ways that swelled enemy coalitions, and ultimately brought about its defeat. Although economic isolation effectively constrains the strategies available to the target state, that does not mean it is always wise to impose it. Economically isolated states are frequently defeated because they respond to economic isolation with escalation”.
There is also a need to consider what happens in a sanctions war among superpowers or among equals. To win a sanctions war, the superpower needs to succeed in comprehensive isolation of its rival. But this is challenging if not impossible in a globalised and informationalised economy as superpower rivals can relatively easily source their needs while imposing an information blackout would make it difficult to police the cordon. Due to the large interdependencies, the sanctioning countries would also have to cope with the self-harm from its own sanctions on itself as well as from counter-sanctions.
In effect, sanctions and other forms of economic coercion operate like blackmail. Once a country finds leverage over another country, it can be weaponised repeatedly. Even if a country gave in today, the same threat can be used again to make more demands tomorrow. This is why sanctions are leading to hardening of conflicts and is, in nature, escalatory. In this regard, sanctions reduce the room for negotiations and diminish the role of diplomacy. Diplomacy no longer helps to advance peace negotiations but instead is used for intensification of rhetoric with the aim of recruiting new allies or preventing backsliding among existing allies.
The use and purpose of sanctions are thus still not well understood. Because sanctions are escalatory, sanctions are not an alternative to a military war but may well be a cause. It is critical for scholars to identify pathways for de-escalation of sanctions. But unwinding sanction regimes is difficult largely due to its reputation effects and long-tail nature. For example, US creditability would be damaged and there will be a tremendous domestic political backlash if sanctions were unwound. In addition, all sides have embarked on policy initiatives to systemically rip out each other’s components from its supply chain while MNCs would be hesitant about investing in an adversary’s economy.
The rise of counter-sanctions
Sanctions used to be a one-way street; stronger nations imposing sanctions on smaller nations. But not anymore. We are entering a phase of counter-sanctions; the weaponization of interdependencies among equals. The US and West still have the upper hand but nations like China and Russia are laying the legal groundwork to retaliate with counter-sanctions.
Mary E. Lovely and Jeffrey J. Schott notes “for decades, European governments promulgated laws and regulations to block the extraterritorial application of US secondary economic sanctions against their nationals doing business outside of US jurisdiction. The most prominent of these so-called blocking laws were issued by the United Kingdom in the 1980s (the 1980 Protection of Trading Interests Act) and the European Commission in the 1990s…The UK and EU blocking laws were designed to deter the application of unilateral US measures taken against the Soviet Union and later Cuba, Iran, Libya, Russia, and Syria to European firms that continued to do business with those targeted by US sanctions. Under US law, European firms may be liable for fines and other penalties – including placement on the US SDN list – if they do not comply with US sanctions that restrict commercial transactions with those on the US SDN list. The EU blocking regulation prohibits EU nationals from complying with specific US sanctions and requires those affected by the US measures to notify the European Commission within 30 days and enables EU persons to recover damages caused by the sanctions in EU courts. Moreover, the EU law bars the enforcement of judgments issued by US courts against EU nationals in EU courts. The EU policy initially was a response to the US Cuban Liberty and Democratic Solidarity Act of 1996, more commonly known as the Helms-Burton Act. US officials waived sanctions against EU nationals under authorities provided in the statute – including the private right of action in which US claimants could sue foreigners who traffic in confiscated Cuban property (Title III) – until the Trump administration allowed the waiver to expire on May 2, 2019. Since then, however, US officials have not taken action against EU holders of Cuban property. European laws do not substantially change the tradeoffs that lead European firms to voluntarily comply with US sanctions barring transactions with those on the SDN list. EU individuals and companies may sue to recover costs they would incur by defying sanctions. They may also request compensation from the relevant member state for unrecovered losses. EU authorities, however, rarely demand notifications by affected companies and seem reluctant to subsidize affected firms for the cost of noncompliance. Moreover, enforcement is the responsibility of each member state; most have not passed laws to allow enforcement against violations of the EU blocking regulation. Thus, the EU blocking laws have done little to change the behavior of European firms. Rather than risk exile from US markets and potentially face penalties for noncompliance, EU firms voluntarily forego business with those targeted by the United States”.
Mary E. Lovely and Jeffrey J. Schott note “China is now borrowing a page from the European anti-sanctions playbook, adopting new Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures…and then reinforcing those administrative measures with a new Anti-Foreign Sanctions Law…to nullify the effect of foreign sanctions or other measures unjustifiably applied against Chinese nationals. The rules allow government officials to issue orders prohibiting companies from complying with them…counter all unilateral sanctions, not just extraterritorial measures, broadening the scope of potential Chinese reprisals against US sanctions restricting high technology trade and opposing abuses of human rights in Xinjiang and the suppression of political rights in Hong Kong. The new rules essentially force companies to choose between access to the Chinese market and access to the US market, with penalties possible in either direction”.
Mary E. Lovely and Jeffrey J. Schott explain “while similar in many ways to European blocking laws, the Chinese rules differ from the EU model in important ways. First, Chinese rules are not limited, as are the EU rules, to countering specific US actions. The new Chinese blocking rules cover in principle any foreign statute applied extraterritorially against Chinese nationals that unjustifiably prohibits or restricts normal business with a third-country national. For example, the blocking rules could be applied when US firms terminate commercial relations with Chinese nationals that are doing business with those on the US SDN list; or when US or other foreign firms stop exporting to China products subject to their own export controls or re-export controls required by the United States. Foreign firms with investments in China, and subject to the jurisdiction of Chinese courts, would be the most likely to be hit with compensation claims or other penalties. An important feature of the blocking rules, however, is that they do not apply to sanctions that are authorized by the United Nations Security Council (UNSC) or international agreements to which China is a party”. In addition, “the Chinese statute is being applied in the context of the Chinese legal and economic system…the directive is made more compelling by the fact that few Chinese firms want to get on the bad side of their government regulators. Unlike their European counterparts, affected Chinese firms are likely to provide the mandated notifications…the business case for voluntary compliance with US sanctions is much weaker for Chinese firms than it is for EU firms. While some domestic Chinese firms earn a significant share of revenue from sales to the United States, the domestic market is generally relatively too important for them to risk by flaunting domestic blocking rules, unlike the situation in Europe. And by complying, they will get the protection of Chinese courts against their competitors and possibly compensation…Furthermore, if an affected Chinese firm suffers significant losses resulting from noncompliance with foreign sanctions, it may find the Chinese government more willing to provide subsidies to develop domestic supply alternatives than European governments, which have been reluctant to compensate losses incurred by their own firms hurt by US sanctions”.
Mary E. Lovely and Jeffrey J. Schott point out “even if the Chinese never invoke their new blocking rules, their existence creates new risks for multinational firms doing business in China…Chinese companies that incur losses because of another party’s compliance with those laws can sue for damages in Chinese courts…the new rules give MOFCOM extensive latitude to order Chinese firms not to comply with foreign laws that restrict normal business operations with targeted Chinese entities…with the passage of the Anti-Foreign Sanctions Law; Chinese countermeasures now can be applied to block compliance with all US sanctions, including export controls, in ways that greatly complicate American attempts to expand their jurisdictional reach”. “Foreign-invested enterprises are registered as Chinese legal persons and, thus, are clearly covered by the new rules, placing them between a rock and a hard place when confronted by the extraterritorial application of US law. If they comply with the Chinese statute and refuse to enforce US sanctions, they risk losing access to the US market while facing US penalties and fines. If they comply with US sanctions and refuse to deal with a targeted Chinese company, they risk losing access to the Chinese domestic market. The cost of violating the new blocking rules may be quite consequential for some firms operating in China. US affiliates on average direct 83 percent of their sales to the local market. These sales may be jeopardized by noncompliance as they risk Chinese fines and penalties and the prospect of being sued in Chinese courts for damages. Indeed, since damages may be recovered through asset seizures, failure to comply with a Chinese blocking rule may end in expropriation of the foreign firm’s Chinese assets. Importantly, China’s new rules could be used to punish foreign companies operating in China for complying with US sanctions against Chinese primary targets…Given the uncertainties built into the new statute, the cost of refusing to comply with China’s blocking rules is largely an unknown for international business enterprises. Would noncompliance result in complete exclusion from the Chinese domestic market or something less costly? What level of penalties and fines are to be levied and how aggressively will recovery be pursued in local courts? Foreign firms are also mindful of the arrests and detainments surrounding US efforts to prosecute Huawei officials for sanctions violations. Such behavior elevates decisions about legal compliance well beyond monetary costs”. “When the new Chinese blocking rules fully kick in, foreign firms doing business in China could be caught squarely in the middle of such tensions. Will they isolate their Chinese affiliates from the rest of their operations, or choose one market over the other? Whatever the choices made by multinational firms, pressure builds for further disintegration of the economic links between China and the West”.
So far, Russian and China counter-sanctions have been limited but are likely to escalate. Russia’s immediate priority was to stabilise its economy and focus on its war operations. But it is moving on the offensive. In June 2022, Russia restricted the export of noble gases or inert gases, such as neon, argon, xenon, and others crucial to the semiconductor manufacturing process. This was apparently in retaliation for the EU’s ban in April on the exports of semiconductors, machinery and other equipment…Moscow wants to remind so-called unfriendly countries that they also depend on Russian exports when it comes to semiconductor manufacturing”. Over time, Russia is likely to extend export bans to other minerals and commodities to increase its leverage.
China has been restrained on taking on the US and EU directly but has instead targeted economic coercion on allies such as Australia, Canada and lately Lithuania. Matthew Reynolds and Matthew P. Goodman notes on November 2021, Lithuania allowed the establishment of a “Taiwan Representative Office” (rather than “Taipei”) which China regards as violation of its One China principle. The measures were “disproportionate and informal…Overnight, the small Baltic country disappeared from China’s customs system, effectively blocking all bilateral exports and imports. However, due to the small amount of trade between the two countries, Beijing found that its actions had little economic or political effect in Lithuania…After its export embargo failed to change Vilnius’s position, China unveiled a new tactic not seen before: informal secondary sanctions. In December 2021, Beijing warned firms that sourced products from Lithuania that they too could find their commercial relations with China restricted…reported that automotive parts produced by Continental, a major German company that sources components from Lithuanian firms, were unable to clear customs in China…The full impact of China’s secondary sanctions on German firms is not known, as individual firms decline to comment publicly for fear of retribution. These informal secondary sanctions have also increased the economic price borne by domestic firms in Lithuania. Before the new measures went into effect, Lithuanian firms could exploit the country’s membership in the European Union to shift production of China-bound exports to subsidiaries in third countries, circumventing the restrictions and limiting the already minimal economic impact of China’s actions. This was the approach favored by Lithuania’s laser industry, one of Lithuania’s most exposed sectors, with 30 percent of its exports going to China”.
China’s economic coercion of Lithuania makes for an interesting discussion on sanction strategies. Matthew Reynolds and Matthew P. Goodman highlights that “on the fundamental issues the small Baltic republic has yet to yield to China’s demands”. In their view, “this illuminates another feature of Chinese economic coercion: its frequent ineffectiveness…To be sure, it is difficult to measure the deterrent effect that China’s coercion may have on third countries, which may decline to adopt policies that run counter to Beijing’s interests after witnessing the examples made of countries that did. However, overall, it seems that China’s use of economic coercion has not furthered its long-term strategic interests but instead has often had the opposite effect. Over the last decade, Beijing’s bullying behavior has not only contributed to a precipitous decline in its favorability rating around the world, but it has also often failed to achieve its intended policy objectives. For example, Australia has remained defiant in the face of Chinese calls to address the 14 grievances and instead moved to strengthen security ties with the United States. Although Tokyo eventually released the Chinese fishing boat captain whose detainment sparked a spat with Beijing in 2010, Japan has since diversified its critical mineral supply chains away from the mainland. Likewise, Ottawa released Huawei’s Meng Wanzhou but now appears poised to block Huawei from its 5G networks. In South Korea, although the outgoing administration promised no future deployments of U.S. missile defense systems, those batteries already deployed remain in place, and the newly elected conservative president has expressed support for overturning his predecessor’s moratorium…Beijing appears to be headed toward scoring another own goal in Vilnius. The European Union as a whole has remained united behind Lithuania. French president Emmanuel Macron pledged that during France’s EU presidency, he would vigorously pursue the adoption of an anti-coercion instrument to respond to economic aggression directed at member states. The European Union also moved quickly to initiate a WTO case against Beijing over its arbitrary trade restrictions, and in late April, Brussels approved a €130 million support package for firms affected by China’s coercion. The United States, too, is discussing its own $600 million trade support package for Lithuania. However, in an ironic twist, it is the support provided to Lithuania by Taiwan that best underscores how China’s use of coercion can work against its own interest. China’s coercive actions against Lithuania aimed at undermining Taiwan’s legitimacy have instead created a strategic opportunity for Taipei to solidify its dominance in the semiconductor market. Taiwan has adroitly sought to develop and incentivize joint ventures between its semiconductor firms and Lithuanian laser firms, whose products represent key components of photonic chips”.
In my view, the Lithuania example reaffirms several key features of sanctions. It highlights sanction impositions don’t work in changing behaviour and has drawbacks. At best, it may have pre-emptive or deterrent effects – punishing one country may deter others from crossing a red line. The most curious point about sanctions rigidly tied to red lines is that they result in automation of sanctions. China cannot back off sanctions without undermining its red lines on the “One China” policy. In a highly-charged political environment, this has escalatory effects.
Global implications of sanctions
Sanctions on large economies like China and Russia have ramifications highlighting the relationship between geopolitical conflicts and deglobalisation. Peter A.G. van Bergeijk argues “the increase in imposed sanctions is coinciding with a deglobalisation phase. This contrasts with the upswing of globalisation that characterised the 1990s. Indeed, the exponential increase in sanction impositions creates trade uncertainty and this is a strong incentive for firms and countries to reduce international specialisation. It is tempting to conclude that the rise in the application of economic sanctions has reduced the extent of international worldwide exchange, but it is of course equally possible that economic sanctions are a symptom of the underlying disease of deglobalisation that started around 2008–09. If so, this may offer a structural explanation for the stark increase of sanction implementation in the 2010s and suggests that the increasing use of economic sanctions will be sustained in the foreseeable future”.
Esfandyar Batmanghelidj points out “Western states that painstakingly rebuilt a liberal economic order after World War II are increasingly dependent on an economic weapon that fundamentally undermines that order. In the near term, sanctions on Russia are creating dysfunction in global markets, driving the prices of energy products, metals, and foodstuffs to new heights. As a result, Russia will not be the only country impacted by the sanctions placed upon it. Vulnerable populations around the world will see their economic welfare eroded as basic foodstuffs and goods become more expensive…How can we have internationally coordinated economic sanctions on a very large scale without equally internationally coordinated measures to stabilize global food, energy and commodity markets? The answer is that sanctions are implemented on a shoot first, ask questions later basis. Sanctions will change the structure of the global economy itself…the willingness of states to engage in liberalized trade in the first place, committing to build common markets and networks that facilitate economic exchanges. It is likely that the expanded use of sanctions will spur countries to pursue models of economic development that increase friction for the global economy”.
Of greatest concern is the impact of sanctions on global food supplies and prices. As Anis Chowdhury and Jomo Kwame Sundaram describes, “economic sanctions are the modern equivalent of ancient sieges, trying to starve populations into submission. The devastating impacts of sieges on access to food, health and other basic services are well-known. Sieges are illegal under international humanitarian law. The United Nations Security Council (UNSC) has unanimously adopted resolutions demanding the immediate lifting of sieges, e.g., its 2014 Resolution 2139 against civilian populations in Syria. But veto-wielding permanent Council members are responsible for invading Ukraine and unilaterally imposing sanctions. Hence, the UNSC will typically not act on the impact of sanctions on billions of innocent civilians. No one seems likely to protect them against sanctions, today’s weapons of mass starvation”.
They note “unless approved by the UN Security Council (UNSC), sanctions are not authorized by international law. With Russia’s veto in the UNSC, unilateral sanctions by the US and its allies have surged following the Ukraine invasion. During 1950-2016, comprehensive trade sanctions have cut bilateral trade between sanctioning countries and their victims by 77% on average…The US has increased using sanctions since 2016, imposing them on more than 1,000 entities or individuals yearly, on average, from 2016 to 2020 – nearly 80% more than in 2008-2015…During January-May 2022, 75 countries implemented 19,268 restrictive trade measures. Such measures on food and fertilizers (85%) greatly exceed those on raw materials and fuels (15%)”. The escalation in sanctions, secondary and counter-sanctions will exacerbate the humanitarian threat in the poorest countries.
Put more bluntly, when economic policies are weaponised and aimed at each other, this is likely to magnify adverse spillover effects on the global economy. A sanctions war among superpowers will re-create the “beggar-thy-neighbour” economic conditions of the Great Depression.
Do we really understand sanctions? Opinions vary widely. Scholars are voracious critics about the purpose, efficacy and humanitarian damage caused by sanctions. Yet politicians and media are usually in favour of levying more sanctions. This dilemma reflect that superpower geopolitical tensions are becoming more difficult to resolve given nuclear restraints. Sanctions may appear to be an expedient alternative to military action to project power. But in reality, it is an expression of helplessness or an inability to bend an adversary to your will.
Nonetheless, this doesn’t change the fact that sanctions are a tool with severe limitations. Used judiciously, sanctions can buy respect and time. But there are constraints to the number and types of sanctions that can be imposed before it turns into a full-fledged economic war and perhaps even provoke a military war. In this regard, the wide-ranging and stringent sanctions imposed on Russia is taking us into a new phase of great power rivalry in the information sphere and marks the beginning of the Great Economic War (GEW).
Anis Chowdhury, Jomo Kwame Sundaram. (31 May 2022) “Sanctions now weapons of mass starvation”. Challenging Development +. https://jomodevplus.substack.com/p/sanctions-now-weapons-of-mass-starvation?s=r
Emily Kilcrease (7 March 2022) “Noteworthy: The new Russia export controls”. Center for a New American Security (CNAS). https://www.cnas.org/press/press-note/noteworthy-the-new-russia-export-controls
Erik Sand (Spring 2020) “Desperate measures: The effects of economic isolation on warring powers”. Texas National Security Review. https://tnsr.org/wp-content/uploads/2020/04/TNSR-Vol-3-Issue-2-Sand.pdf
Esfandyar Batmanghelidj (11 March 2022) “Is the West laissez-faire about economic warfare?” War on the rocks. https://warontherocks.com/2022/03/is-the-west-laissez-faire-about-economic-warfare/
Evan A. Feigenbaum (25 July 2017) “Is coercion the new normal in China’s economic statecraft?” Marco Polo. https://macropolo.org/analysis/is-coercion-the-new-normal-in-chinas-economic-statecraft/
Gabriel Felbermayr, Aleksandra Kirilakha, Constantinos Syropoulos, Erdal Yalcin, Yoto Yotov (18 May 2021) “The Global Sanctions Data Base: Mapping international sanction policies from 1950-2019”. Voxeu. https://voxeu.org/article/global-sanctions-data-base-mapping-international-sanction-policies-1950-2019
Gibson Dunn (4 February 2022) “2021 year-end sanctions and export controls update”. https://www.gibsondunn.com/2021-year-end-sanctions-and-export-controls-update/
Mark Harrison (25 March 2022) “Economic warfare and Mançur Olson: Insights for great power conflict”. Voxeu. https://voxeu.org/article/economic-warfare-and-man-ur-olson-insights-great-power-conflict
Mary E. Lovely, Jeffrey J. Schott (June 2021) “Can China blunt the impact of new US economic sanctions?” Peterson Institute for International Economics (PIIE). https://www.piie.com/sites/default/files/documents/pb21-13.pdf
Matthew Reynolds, Matthew P. Goodman (6 May 2022) “China’s economic coercion: Lessons from Lithuania”. Center for Strategic and International Studies (CSIS). https://www.csis.org/analysis/chinas-economic-coercion-lessons-lithuania
Nicholas Mulder (24 February 2022) “The history of economic sanctions as a tool of war”. Yale University Press Blog. https://blog.yalebooks.com/2022/02/24/the-history-of-economic-sanctions-as-a-tool-of-war/
Nicholas Mulder (June 2022) “The sanctions weapon”. IMF Blog. https://www.imf.org/en/Publications/fandd/issues/2022/06/the-sanctions-weapon-mulder
Peter A.G. van Bergeijk (5 January 2022) “The second sanction wave”. Voxeu. https://voxeu.org/article/second-sanction-wave
Peter A.G. van Bergeijk (2022) “Economic sanctions and the Russian war on Ukraine: A critical comparative appraisal”, International Institute of Social Studies, Erasmus University. https://pure.eur.nl/ws/portalfiles/portal/51751545/wp699.pdf
Phuah Eng Chye (5 June 2021) “Global reset – Two whales in a pond”. http://economicsofinformationsociety.com/global-reset-two-whales-in-a-pond/
Phuah Eng Chye (4 June 2022) “Theories on war and diplomacy (Part 1: Conflict theories)”. http://economicsofinformationsociety.com/theories-on-war-and-diplomacy-part-1-conflict-theories/
Phuah Eng Chye (18 June 2022) “Theories on war and diplomacy (Part 2: Integrated and ambiguous warfare)”. http://economicsofinformationsociety.com/theories-on-war-and-diplomacy-part-2-integrated-and-ambiguous-warfare/
Phuah Eng Chye (2 July 2022) “Theories on war and diplomacy (Part 3: The information realm)”. http://economicsofinformationsociety.com/theories-on-war-and-diplomacy-part-3-conflict-in-the-information-realm/
RT (2 June 2022) “Russia restricts export of gas critical to chip production”. https://www.rt.com/business/556478-russia-restricts-export-neon/
Tanner Greer (31 May 2022) “Of sanctions and strategic bombers”. The Scholar’s Stage. https://scholars-stage.org/of-sanctions-and-strategic-bombers/
Zhang Yun (9 March 2022) “Do US economic sanctions work?” ThinkChina. https://www.thinkchina.sg/do-us-economic-sanctions-work
 See Gabriel Felbermayr, Aleksandra Kirilakha, Constantinos Syropoulos, Erdal Yalcin and Yoto Yotov for their findings on the Global Sanctions Data Base.
 Peter A.G. van Bergeijk provides a case study of four major episodes: (a) the anti-Apartheid sanctions of the 1980s, (b) the sanctions against the Iraqi occupation of Kuwait in 1990, (c) the sanctions against Iranian nuclear capabilities and (d) the US and EU sanctions against the Russian annexation of the Crimea.
 See Gibson Dunn on “2021 year-end sanctions and export controls update” which analyses US sanctions and China’s counter-measures in 2021.
 See Emily Kilcrease on the new export controls following Russia’s invasion of Ukraine.
 Evan A. Feigenbaum describes the different ways in which China employs economic coercion.
 See Theories on war and diplomacy (Part 2: Integrated and ambiguous warfare) and (Part 3: The information realm).
 See RT.