Fall 2022 - Money, Sanctions and International Law
Sanctions and Decoupling After Neoliberalism

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December 20, 2022

David Singh Grewal, UC Berkeley 

This post is based on, and includes extracts from, an interview with Brian Ketterning of the Hewlett Foundation and an essay in American Affairs, entitled “A World-Historical Gamble: The Failure of Neoliberal Globalization.”

The year 2022 was not supposed to see the threat of nuclear conflict among major powers and the return of war to the European continent. Since the end of the Cold War, a world divided into hostile halves had become “one world”—or so we were repeatedly assured. The fall of the Berlin Wall supposedly signaled the “end of history.” Liberal democracy was declared a regime without rivals—and a lack of rivals meant no further need for the barriers between “economies,” perhaps even states. So strong was the assumption that nothing could change that most Western states, apart from the United States and the United Kingdom, refused to believe the obvious until Russia’s armies crossed the border into Ukraine.

Over the last thirty years, our unwillingness to believe the obvious has been cemented during a period of unprecedented optimism about the power of global markets to deliver freedom, wealth, and security. The hope of previous decades was that Russia’s (and China’s) incorporation into this “world without walls”—as WTO director Michael Moore described the new global economy—would not only prove profitable but would also strengthen the cause of international peace.

The fear now is the opposite. The world without walls that so many leaders and commentators told us was inevitable began in earnest only in 1995, with the inauguration of the WTO, but had already begun to crumble by the autumn of 2001, sometime between the terrorist attacks on the World Trade Center and Chinese entry into the global economy as its future anchor. The last two decades have been a drawn-out exercise in pretending otherwise.

In retrospect, the world without walls is better diagnosed not as an inevitability but as a world-historical gamble. The hope was that tying the world together through commerce would deliv­er not just greater wealth, but greater security and freedom too, in a self-reinforcing manner. But now we are once again in the awful position of testing the proposition that commercial integration among nations leads to peace. And, to the extent that it clearly does not, we are left wondering about how effective either monetary and economic sanctions can be—and, more broadly, what economic “decoupling” or, as Financial Times journalist Rana Faroohar has termed it, “homecoming,” looks like in a post-neoliberal world.

One might have thought the old doux commerce view exploded with the two world wars of the twentieth century, conducted among major economic powers, most of them commercial trading partners. But the great convenience of the Cold War that followed was that the geopolitical rivals of the West did not want to pursue economic integration on its terms. In that era, every free trade treaty could be counted as a kind of victory for the American-led order, and U.S. economic and military power could advance together abroad without contradiction. The complexities of navigating a world of geopolitical rivals that are also commercial trading partners did not have to be faced squarely, and so the major problem in geopolitics since the seventeenth century seemed to vanish away. Its return with the end of the Cold War did not present the “end of history,” as was briefly but loudly proclaimed, but rather a reversion to the dangerous historical norm under which warring states have been keen to profit off each other during any pause in their fighting.

The Neoliberal Gamble

The economic correlative of the “end of history” view is “neoliberalism,” a term used to characterize a mar­ket‑oriented approach to domestic political economy. But neoliberalism has an inter­national dimension as well, which assigns a market-led order pride of place in setting the terms of international economic relations while basing these, in effect, on a credit and currency system centering the US dollar. States are supposed to defer to and enforce the private cross-border orderings of the global market, which mainly means letting a transnational price system deter­mine where production goes globally, and thus who gets what in globalization.

Practically, this has meant not only incorporating China (in 2001) and Russia (in 2012) into the World Trade Organization, but a whole series of related decisions that brought them into the financial architecture of what had been a Western-led alliance. It also required turning a blind eye to their violations of international law, including aggression against neighbors, particularly states or regions within what they viewed as their civilizational matrix or their zone of historic influence. Russia’s first invasion of Ukraine took place two years after its accession to the WTO when it seized Crimea. Over the next eight years, and despite some low-level sanctions insisted upon by the United States, it managed to amass foreign currency reserves worth over $600 billion, an extraordinary haul for an economy only the size of Spain’s. Europe’s consumers, in particu­lar, fed Russia’s war chest, because their increasing energy dependence was rationalized as the continuation of Germany’s Ostpolitik, the decades-long policy of friendly commercial engagement with the Eastern bloc.

Underneath all this globalized commerce was the monetary architecture that allows the system to continue to function—a product of policy decisions by states that then comes back to constrain them, at least relatively. Given the fact of this financial interdependence, the question of how much (and under what conditions) it could be utilized for “non-economic” ends, such as containing aggression or punishing malfeasance, becomes almost inescapable. And while policymakers everywhere are now trying to answer this question—and doing so in practice—what is striking is how little theoretical attention it has received to date. The conversation about global coordination has remained, for the most part, tied to an abstract model of a “rules-based international order,” which is supposed to somehow prove self-sustaining, tying greater wealth, freedom, and peace together in a new world without walls.

Recognizing the nature of these intertwined hopes for wealth, free­dom, and peace allows us to see that neoliberalism was always more than an economic agenda. It was—and remains—a geopolitical agenda, or what some scholars have called a “geoeconomic” one, an economic agenda in the service of a geopolitical direction. In fact, its own advocates have always made that clear in their discussion of its presumed political effects. The world-historical gamble of the post-Cold War only makes sense, on its own terms, if neoliberalism was intended as a geopolitical strategy.

The greatest hope was that international rivalry among great powers could be overcome through economic integration. Alas, it seems ever clearer that our neoliberal foreign policy after the Cold War has been a world-historical gamble that failed. All our investment in economic globalization has undermined the relative strength of liberal democracies vis-à-vis their authoritarian rivals and without bringing peace. Indeed, neoliberalism seems to have generated a new kind of geopolitical conflict among countries that were former Cold War antagonists, this time from within the very globalization that was supposed to pacify them.

Sanctions in the Global Dollar System

To come to the immediate point of this Roundtable, should anything change in this analysis of the failure of doux commerce because world commerce now depends disproportionately on an American fiat currency rather than, say, gold or bitcoins?

It has sometimes been assumed—as it was initially presented in the press—that the US dollar system was like a spigot that could be turned off, denying bad actors access to the world economy by denying them access to world financial infrastructure. Here, the earlier experience of US sanctions against Iran may have influenced what some commentators thought could be achieved against Russia. But Russia is not Iran, and access to the world economy is not governed by anything so simple as an on/off switch—even if that switch were one we were willing to use. Meanwhile, the Iranian government is still in power—and apparently selling Russia the drones it now uses to destroy Ukrainian civilian infrastructure.

It is impossible at present to say much about whether sanctions are “working” against Russia. This is fundamentally because—as Rawi Abdelal and Alexandra Vacroux note in their contribution to this Roundtable—what it would mean for them to “work” remains unclear. But supposing the obvious thought that they were meant to starve Russia of funds to continue its war against Ukraine? In that case, it has become clear that neither impounding a large portion of its foreign currency reserves nor partly cutting off its banks from the US-dollar based SWIFT system has proven sufficient. As Abdelal and Vacroux explain:

Russia may be spending over $300 million a day to fight the war. But it is earning $800 million or more every day from the sale of energy to Europe and the rest of the world. The war is expensive, but not prohibitively so.

The fact that the sanctions are not “working” is tied to Russia’s trade with China and other countries that have not joined in them. In addition to military and ideological cooperation, China under Xi Jinping has provided Russia the crucial market access it needs to mitigate the consequences of Western economic sanctions. Its centrality to the global economy allows it to serve as a global depot for Russian goods, something like its home market abroad.

Under these conditions, it is not obvious that even a greater willingness to accept economic pain by the nations of Europe—a willingness to act as if their own futures were at immediate risk in the bloodshed in Ukraine—would have made sanctions fully effective. It is likely that Russia would simply sell more energy to non-European consumers.

What of Russia’s access to dollar clearance and other financial mechanisms? It seems here not only that the jury is still out, but that we may never get a full verdict: Europe’s dependence on Russian gas has meant that full sanctions on the level of a blockade have not proven possible, whether or not they would have been desirable, while the ability of Russians to sell gas elsewhere keeps the effectiveness of existing sanctions in check.

It is thus possible to believe both that the sanctions are having some effect—“weakening” Russia, as U.S. Secretary of Defense Lloyd Austin recently put it—and that they will be insufficient, given their leakiness, at stopping Russian aggression. Only the surprising success of Ukraine on the battlefield seems to be doing that.

Will sanctions—and especially the threat of further sanctions—nevertheless contain Russia in some measure? Confronted with the apparent failure of the world without walls, some defenders of neoliberalism argue that the integration of authoritarian states into a Western-led economic order has at least contained their sphere of action. The argument is that liberal democracies have more leverage over potential bad actors when they are part of the global economy rather than outside it. That leverage would come from a fear of being cut off, especially through multilateral sanctions.

Our analysis shifts, however, if we focus not on a generic global interdependence but on the asymmetric political vulnerability of liberal democracies to disruptions to that interdependence. This alternative framing does not simply observe that each nation stands to lose from disruptions to the economic order, nor rest content with calculating how much may have been lost by an economically irrational act—for example, how much Russia’s GDP growth has fallen since the invasion of Ukraine, or how many more years of growth will be required, hypothetically, to return to its preinvasion baseline. Instead of these abstract estimates of a future that may never come, we must ask which governments are likely to fall first from the disruption.

Ironically, the responsiveness of liberal democracies to popular will makes them more vulnerable to economic pain—including from deliberate decoupling as part of a geopolitical strategy—than their authoritarian rivals, which can press on with disastrous policies up to the brink of revolution. In a geoeconomic conflict, an authoritarian leader can afford to risk more in terms of his people’s welfare than a democratically elected one, at least short of widespread military mobilization on both sides (as in a world war scenario). This rather straightforward observation should have been the starting point of any foreign policy analysis of the likely effects of global economic integration. It was sidelined, however, by the presupposition that economic integration would undermine authoritarianism, so there was no need to consider whether it could inadvertently empower our adversaries. But reversing Clausewitz’s motto—noting that politics is sometimes war carried on by other means—allows us to hear the rumblings of those great Russian generals, Janvier and Fevrier, who once defeated Napoleon on their own soil, already riding toward western Europe in the form of an energy crisis upending electoral politics.

The asymmetric political vulnerability of liberal democracies to global economic shocks looks starker once we consider the current composition of world commerce. Much-discussed “decoupling” is particularly hard when you are dependent on international trade for the basic components of global supply chains, whether mechanical, pharmaceutical, or electronic (as in the case of China) or for essentials such as food and energy (as in the case of Russia). The reciprocal flows of blockbuster films, professional services, and financial “products”—often really forms of repackaged debt—seem easier to do without as the walls come back up. Under neoliberalism, the global division of labor in production put necessities—both raw materials such as energy and foodstuffs and the inputs to manufacturing—disproportionately in the hands of authoritarian states, whereas reciprocal flows of high-end services matter much less in any short-term crisis. What does this suggest about sanctions and their efficacy?

Decoupling and Sanctions

These reflections on Russia are, of course, not only about Russia, or even Ukraine. It is obvious that more than the fate of Ukraine is being determined in Ukraine. The elephant in the room—in every room, at present—is China.

We are now ever closer to incompatible “red lines” in the South China Sea. It has not escaped the notice of even the New York Times that Taiwan’s semiconductor production is worryingly essential to the global economy, more so even than Russian gas or Ukrainian grain. The U.S. Department of Defense uses a large volume of chips annually to keep American military equipment in working order. The most essential of those chips come from Taiwan’s “silicon shield.” As Eric Schmidt, chair of the U.S. National Security Commission on Artificial Intelligence, put it at the start of a 750-page report in 2021: “given that the vast majority of cutting-edge chips are produced at a single plant separated by just 110 miles of water from our principal strategic competitor, we must reevaluate the meaning of supply chain resilience and security.”

The dramatic effort at “decoupling” in the semiconductor industry announced by the Biden administration last month, which one commentator has argued is akin to a silent declaration of world war, is better seen as a desperate effort to prevent world war. Because this is a dangerous time, it is imperative not to mince words or hide the ball. Taiwanese chips are essential—at least for the next few years, and until new supplies can be developed—to the global economy, as well as to American defense (and thus to the defense of all its allies). Taiwan is also claimed, with some ambiguity, by an increasingly assertive China, which is now aligned with Russia ideologically and to some extent militarily. This is the “world without walls” that the geopolitics of neoliberalism has delivered.

How we get out of it is not clear. Alas, it is clear that sanctions as an ex post mechanism for maintaining international law will prove ineffective in the case of a scramble for the Taiwanese semiconductor industry, now concentrated in a single plant outside Taipei. Perhaps the trick with decoupling is to never have coupled at all.


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