Despite the conclusion of US-China trade deal (phase-one), IMF’s latest global economic forecast sounds a pessimistic note on prospects of “durable resolution to trade and technology tensions”. As nations are interdependent for trade and investment, economic relations have become increasingly transactional. What the Trump era has done to this economic transactionalism is bring political disputes into the mix and settle scores out in the open. Welcome to the age of retaliation with an economic face.
America under Trump offers a case study in economic retaliation. Starting from threatening China with tariffs to imposing sanction on Iran, the Trumpian approach soon descended into economically hurting allies such as Germany, France, Canada, South Korea and Mexico, over non-trade issues like security, immigrants, and even personal slights. Perhaps, the most shocking was Trump’s threat to “destroy and obliterate” Turkey’s economy last year as US prepared for a withdrawal from Syria amid Turkish invasion.
That abuse of economic might, which is being celebrated by right-wing voices in America, has given autocrats around the world their own ideas to have a go at their nemeses and frenemies.
For instance, within the Middle East, Qatar was subjected to an unprecedented economic blockade starting June 2017. Saudi Arabia and UAE led a group of Gulf and African countries that imposed restrictions on travel, trade, and banking with the tiny state, besides expelling Qatari nationals. Chief reasons alleged were Qatar’s relations with Iran, and its ties with Muslim Brotherhood, among others. It was Turkey and Iran that came to the rescue of the tiny state.
The independent European Union is also in the crossfire. The 5G controversy over Chinese tech company Huawei has put the EU under pressure from both US and China. While America is EU’s chief strategic ally, China is a major trading and investment partner that cannot be antagonized. Already, Chinese officials have dropped hints that they may go after German automakers in China if Germany banned Huawei. The battle will heat up when EU releases guidelines on digital security in coming weeks.
It appears that religion is also entering the mix. For instance, India is reacting to overseas criticism of its ostensibly anti-Muslim policies. Mahathir Muhammad, the Malaysian PM, criticized India over Kashmir, and India has placed restrictions on imports of Malaysian palm oil, instead buying more of Indonesian. India has been number-one market for Malaysian palm oil exports for over five years now – but now Indonesia has significantly gained share in Indian palm oil imports.
Meanwhile, Pakistan is also caught up in economic schism over non-economic issues. After Pulwama episode in February 2019 that flared Indo-Pak tensions, India decided to withdraw the MFN status. Additionally, it started charging import duties up to 200 percent on Pakistan’s exports to India, leading to a sharp drop in Pakistan’s exports. After India annexed Kashmir in August last year, Pakistan retaliated by severing all trade ties with India, except for allowing import of life-saving medicines.
Meanwhile, a friendly fire seems to have forced Pakistan to fold on its independent diplomacy lately. Last month, the Saudis asked Pakistan to not participate in the Malaysia-led summit of Muslim countries. While it is yet unknown if any “carrot” was provided, the “stick” that was reportedly wielded was the threat of sending back millions of Saudi-based Pakistani workers as well as pulling Saudi billions out of central bank deposits. (For more on that, read: “With friends like these,” published December 23, 2019).
The instances cited above show a growing recourse to heavy-handed tactics by dominant players. While Qatar, Iran and Turkey seem to have absorbed the pressure, others succumbed. For instance, China has been at pains to avoid an all-out economic war with US; the EU has said it won’t ban Huawei; Pakistan didn’t annoy the Saudis after all; and Malaysia chose not to take on India. However, while punitive statecraft may be working for some, its continued use may result in loss of leverage for the mighty and accumulation of grievances among the recipients. That’s a recipe to pave way for next global conflict.