September 29, 2023
Five takeaways on the state of economic statecraft
What a difference a year-and-a-half makes. Since the full-scale invasion of Ukraine in February 2022, economic statecraft—including sanctions and export controls—has played a central role in the West’s response to Russia’s aggression. New tools have been developed in real time, and old ones have been applied in new and innovative ways. Coordination among the Group of Seven (G7) countries and the European Union (EU) has been unprecedented, though not without difficulty.
On September 22, the Atlantic Council convened experts on economic statecraft from around the world at the Transatlantic Forum on GeoEconomics in Berlin to discuss the state of the field, including what has changed since the invasion and what needs to change going forward. Five themes stood out.
1. There is no single conception of economic statecraft
“Economics is increasingly seen as a central battleground in geopolitical competition,” explained Sigrid Kaag, first deputy prime minister of the Netherlands. On that point there seemed to be broad agreement across speakers. But economic statecraft still means different things to different countries.
In the United States, which has long had the most significant sanctions regime, economic statecraft has expanded to include new forms of domestic investment. For example, the United States’ unprecedented sanctions against Russia have coincided with the Biden administration’s embrace of industrial policy. The United States is increasing its subsidies for strategic sectors such as semiconductors and electric vehicles. And it has sought to strike mini-deals with allies, including its agreements with Japan and the Netherlands limiting semiconductor exports to China. As US Trade Representative Katherine Tai explained,
“The two challenges that we are trying to solve for together, on a US-EU basis, are, first, the global market distortions and the negative impacts to our producers that come from nonmarket excess production and capacity—so, unfair trade. The other challenge that we are linking arms to address is the need for a clean energy and industrial future . . . and so the other pieces of what we’ve been doing is trying to figure out how to align our markets to create incentives for cleaner production.”
Germany, for its part, seems to have recognized the limits of its export-oriented model which “relied on cheap Russian gas and the Chinese market,” as Robert Habeck, Germany’s federal minister for economic affairs and climate action, put it. “You see the problem,” he continued. “One is gone and the other one is systematic rivalry now. So, it’s problematic.” However, Germany remains committed to multilateral rules and institutions and is wary of true decoupling from China.
The Netherlands is somewhere in between. Kaag cited the International Monetary Fund’s estimate that geopolitical fragmentation would cost the world 7 percent of global gross domestic product and declared that “decoupling is, therefore, not an option to the EU or the Netherlands.” Still, she was encouraged that “de-risking” was getting more attention. And the Netherlands did join the United States and Japan’s semiconductor controls mentioned earlier.
2. Multilateral coordination has been impressive
With almost as many approaches to economic statecraft as there are countries implementing it, it’s impressive how much successful coordination there has been—especially on Russia. That coordination was clear from a discussion during the forum on building common ground in economic statecraft.
“Where we have had most impact, it’s where the sanctions coalition has acted simultaneously based on the same analysis,” said David Reed, director of the UK Sanctions Directorate. He cited as an example the collaboration on immobilizing Russia’s central bank assets following its invasion. The challenge, he added, has been to broaden that coordination to areas such as enforcement and communication—between partners and with the public and businesses.
Over the last year-and-a-half, policymakers in the sanctions coalition have made progress on understanding one another’s toolkits, too. (A new report on transatlantic statecraft includes a chapter cowritten by one of the authors outlining key facets of these systems.)
3. But there is still a lot of room for further progress
Coordination on economic statecraft remains quite difficult in some areas. Information sharing remains a key challenge, for example—even with an uptick in voluntary information sharing between coalition partners since the invasion.
Transatlantic partners need to be on the same page for economic statecraft tools to be effectively implemented and enforced. To do this, they need to improve the sharing of information among themselves, but they also need to create and maintain channels to share actionable information in real time with the relevant authorities in each jurisdiction.
Coordination is also important to better understand potential risks. Partners must develop the capabilities to assess the potential impact of economic statecraft tools on themselves, allies, the broader international community, and the global economy. Otherwise, they run the risk of overextending their use and unintentionally damaging their own or partners’ economies, or perhaps even degrading the strength of their own currencies.
4. Governments need to be more transparent with the private sector
Successful implementation of economic statecraft depends on the private sector, and especially on financial institutions, which function as “the eyes and ears” of compliance, as one conference participant put it, in a session held under the Chatham House Rule. “The private sector is the multiplier,” another participant noted. That was demonstrated by the numerous multinational firms that voluntarily pulled out of Russia, whether because of fear for their reputation or for other reasons.
But the expansion of economic statecraft has created new hurdles for companies. It’s not always clear, for instance, which types of products are considered “dual-use” technology, which makes it hard for companies to craft longer-term strategies.
Companies want clarity and simplicity: “When it comes to dealing with sanctions, obviously we stand 100 percent behind what was decided,” said Michael Schoellhorn, the chief executive officer of Airbus Defense and Space. But, he added, “the last sanctions package has triggered such a bureaucracy” and includes “a degree of minutiae that is killing small companies.”
The private sector wants more coordination, too. “The whole banking industry tries to do everything to be absolutely in compliance,” said Christian Sewing, the chief executive officer of Deutsche Bank. But, he said, “it would be fantastic to have more standards and sanctions that are better coordinated between the countries.”
5. Coercion is only half of economic statecraft
Sanctions and export controls are the most widely discussed tools of economic statecraft, but these coercive measures are only half of the toolkit. Economic statecraft involves carrots as well as sticks: “Positive economic statecraft” is the use of economic policy by one country to influence the behavior of another country by providing or promising it rewards and benefits. It is not new, but it remains underutilized and undertheorized.
These policies came up throughout the conference, particularly with respect to Ukraine. Speakers emphasized that coercive measures against Russia were pointless if Ukraine itself could not survive and thrive after the war. That means keeping the economy functioning as well as possible and funding reconstruction efforts. There was also notable unanimity among panelists about the need for reconstruction funding to Ukraine to be conditional on reforms, including more transparency and anti-corruption measures.
Russia’s invasion of Ukraine sparked a new chapter in economic policymaking, driven at first by unprecedented coordination on the coercive side of economic statecraft. But this new era of policymaking is just getting started, and the United States and Europe will need to spend as much time devising policies that will reward positive behavior as they have on enforcing punishments.
Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center.
Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the GeoEconomics Center.
Parts of this article were adapted from the GeoEconomics Center’s report on economic statecraft.
Further reading
Thu, Sep 21, 2023
The West won’t seize Russia’s reserves any time soon. Here’s what it can do with the funds instead.
New Atlanticist By Kimberly Donovan, Charles Lichfield
Frozen Russian assets could be invested profitably, with the goal of creating an annuity for Ukraine of at least two billion dollars a year.
Fri, Sep 22, 2023
US trade representative backs EU in China anti-subsidy investigation
New Atlanticist By
US Trade Representative Katherine Tai reiterated the importance of managing the US-China relationship at the Transatlantic Forum on GeoEconomics.
Fri, Sep 22, 2023
Financing Ukraine’s defense is a down payment for peace in Europe, says Dutch deputy prime minister
New Atlanticist By Katherine Walla
“If we lose the war in Ukraine, we’re all lost. No peace and security on this continent,” Sigrid Kaag argued at the Transatlantic Forum on GeoEconomics. "This is something we have to keep financing."
Image: Transatlantic Forum on GeoEconomics im Axica Kongress- und Tagungszentrum. Berlin, 22.09.2023.