Dr. Rebecca Harding
CEO Coriolis Technologies
June 10th 2019

That trade has been weaponised is now mainstream thinking; in a week where markets again will be confused by the inconsistent rhetoric of trade wars it is important to remember that the politics of trade are now over-riding its economics. The idea may have seemed like a crazy piece of sensationalism two years ago when “The Weaponization of Trade” was first published, but when the front cover of the Economist bears a headline, “Weapons of Mass Disruption” and the image is of a bomb dropping through the sky with ‘Tariffs’, ‘Tech Blacklists’, ‘Financial Isolation’ and ‘Sanctions’, economics has truly become a tool of policy.

Weapons, if used indiscriminately, cause mayhem. Their very existence suggests a perceived risk or threat and, more worryingly, creates the potential for ‘miscalculation’. A small piece of mishandling, an inappropriate or disproportionate retaliation can trigger an adverse reaction in an adversary and escalate tensions. This is precisely where we are as our weaponised trade increasingly becomes part of strategic trade: that is, trade policy that is used by a country as a tool to coerce other countries into behaviours that align with its strategy.

It doesn’t take a leap of the imagination to find examples in current policy, particularly in the US, but also in China’s Belt and Road Initiative and in Europe’s evolving industrial policy. Only last week, the US brought Mexico into line by threatening to impose tariffs of, initially, 5% on its imports rising to 25% if a deal to limit immigration was not reached. Tariffs, until now a protectionist measure to limit imports from a third country, have become a weapon of national security, like the US-EXIM bank, like the ban on US companies buying Chinese tech, and like the sanctions against Iran. All these measures are justified in national security terms and all are using trade-based tools to achieve strategic objectives.

Of course, everyone knows this now. So is why trade is being used in this way?

The answer to this rests in the fact that, post Financial Crisis, trade is taking the place of military strategy. Military budgets are stretched. Even pre-financial crisis the appetite for large scale ‘boots on the ground’ military wars had diminished: after Iraq, Afghanistan and Libya they were increasingly regarded as ineffective. Equally, use of the nuclear deterrent as a means of coercion has become less effective, if nothing else because mutually assured destruction means that no-one can ‘win’ a nuclear war.

As a result, the use of military to achieve strategic, coercive, objectives or to wield power is increasingly tactical, but arguably costly and ineffective.

More than this, a military, specifically a nuclear, deterrent, does nothing to arrest the power of China as it has emerged since the Financial Crisis. China’s growth to a large extent has been the product of globalisation and this is why it is an existential crisis for the western model of Capitalism. Ideas, technology, money and people have transferred across borders, fuelled by global companies who regard the rise of emerging Asia as an opportunity for more ‘business as usual’ rather than as a threat.

This marks a distinct shift in the type of national security threat and, therefore, the tools that are needed to deal with it. During the Cold War, Russia’s competed militarily and was a known threat; the strategy was to limit its motivation to use its weapons against the West by having bigger and more powerful attack and defence capabilities.

But China competes on economic grounds and threatens US hegemony, not just in terms of its share of business across the world, but also in terms of its economic model. How is it that a state-based capitalism can innovate and grow in a way that outplays a free market capitalism? The threat to national security is to the productive base and market dominance of the US, to its jobs and its financial well being.

This is a different type of national security thus the tools are different. And this is why the weaponised and strategic trade era that we are living in now is profoundly different to previous eras. The battle is about economic systems themselves, not about the best tools to defend them.

Make no mistake, as we watch the run up to the G20 Summit at the end of the month, it will be clear that the rules of a trade war are exactly the same as the rules of a conventional war. Tariff and restrictions on one side will be met by blacklisting and accusations of intimidation by the other. It is zero sum thinking at its worst and it threatens global stability and security just as much because it holds back investment and damages the multilateralism that the world has built since the end of the Second World War.

The end is likely to be a stalemate: the ultimate deterrent is financial. As the Economist correctly points out, the US could restrict Chinese trading on its stock exchanges affecting trillions of dollars of investment. But equally, the Chinese could sell the 30% of US debt in US Treasury bonds that they hold. Either step would create a global financial meltdown, the like of which we have never seen. For this very reason, the end of this strategic game will be a fragile, and sub-optimal, equilibrium. Let’s hope in the coming weeks policy makers on both sides see sense.