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Geo-economics in a Multipolar World: Rules of Engagement for the Small, Open Economy

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Image credit: Ukrainian Presidential Press Service

POLICY PERSPECTIVE

by Dan Ciuriak
May 2022

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Table of Contents


Introduction

Canada finds itself in a new world order shaped by geopolitical great-power rivalry in an emergent multipolar context. This new world order emerged with the relative decline of U.S. power and the technological conditions that have unleashed geo-economic competition to dominate the new general-purpose technologies based on big data, machine learning (ML) and artificial intelligence (AI). 

As a small, open economy that is vulnerable to the weaponization of interdependence, Canada is decidedly not a geo-economic player. Its preferred operating environment is a rules-based multilateral system in which the large and small economies follow the same rules. The emergence of a system in which power plays a much larger role means that Canada will have to behave much more strategically. This paper looks at why and how this new world has come about and how Canada will have to adjust, drawing on the lessons of its past entanglements in geopolitical/geo-economic power plays.

Two specific events symbolized the passing of the rules-based multilateral system developed under U.S. tutelage in the post-Second World War era. First was the shutdown of the World Trade Organization’s (WTO) Appellate Body on January 10, 2019, which effectively shut down the rule of law in international economic relations. WTO members were still free, of course, to voluntarily observe the old rules, but multilateral enforcement sanctioned by the system’s supreme court no longer prevailed. Second, hot on the heels of the U.S. exit from Afghanistan on August 30, 2021, came the Russian invasion of Ukraine on February 24, 2022, which, in the absence of a United Nations response – due to nuclear blackmail from Russia – effectively ended even the pretence of rule of law in international political relations.

The principal geo-economic confrontation remains the trade and technology war between the United States and China, but a new high-intensity front has opened up between the EU 27 and the United States versus Russia, with economic sanctions and counter-sanctions over the invasion of Ukraine. In the background, there remains a low-intensity front between the United States and the EU 27 regarding the division of the economic spoils of the data-driven economy.

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How We Got Here

This zeitenwende in global affairs did not happen overnight; it was long in the making. Several notable developments created the basis for these tectonic shifts.

First, there was the economic rise of the BRICS (Brazil, Russia, India, China and South Africa) in the first decade of the 21st century, which created a new counterpoint to U.S. power. This was presaged by Vladimir Putin in his 2007 speech at the Munich Summit where he noted: “… the GDP of the BRIC countries – Brazil, Russia, India and China – surpasses the cumulative GDP of the EU. And according to experts this gap will only increase in the future. There is no reason to doubt that the economic potential of the new centres of global economic growth will inevitably be converted into political influence and will strengthen multipolarity”. Notably, the BRICS (with South Africa now included) all abstained from condemning Russia’s invasion of Ukraine.

Second, China’s entry into both the knowledge-based economy (some 30 years behind the United States) and the data-driven economy (contemporaneously with the United States) in the second decade of the 21st century enabled China to compete head-to-head in the technological arms race to dominate the big data/ML/AI nexus and capture the enormous economic rents that these technologies generate. While the geo-economic tensions built up gradually over the 2010s,1 America’s “Sputnik moment” came with the realization in early 2018 that China’s Huawei had attained a dominant position in the fifth-generation (5G) telecommunications technologies.2 This triggered the Trump administration’s full-blown offensive to cripple China’s technological advance, using a suite of unilateral instruments that had not been previously used in the WTO era.3

Third, the United States squandered the enormous advantages it enjoyed when it achieved its unipolar moment through economic mismanagement (in particular the subprime crisis) and wanton use and abuse of its military power in endless wars, while neglecting its crumbling economic infrastructure and its domestic cohesion.4 This undermined its soft power – or as The Economist delicately put it, “having bent and broken [the rules of the international rules-based order] for 20 years, America has strained their credibility, as well as its own.”5 The lack of discipline also left it effectively bankrupt with massive external and fiscal deficits, which in turn made it a demandeur in international relations (viz. its position in the NAFTA renegotiation of clawing back benefits from Canada and Mexico). This undercut its ability to underwrite new economic orders – and even to sustain the old one, as evidenced by its walking away from various multilateral institutions under the Trump administration (and its rather tepid, indeed almost nominal, return under the Biden administration).

Fourth, the splintering of the West with Brexit and the growing internal divisions in the United States, brought into stark relief by the Jan. 6 storming of the Capitol, weakened its cohesion.  With the blinding clarity of 20/20 hindsight, both events were in good measure a product of Russia’s influence campaign in buying Londongrad, co-opting Donald Trump and the Republican Party, and more generally sowing divisiveness in Western societies through manipulation of social media. For example, significant correlations were observed between the support for the Canadian truckers’ convoy and the Jan. 6 Stop the Steal movement in the United States, which in turn is linked to the Russian-compromised circles around Trump. In the latter regard, Canada was not immune. It was strikingly observed that right-wing attacks on Canada’s Prime Minister Justin Trudeau literally fell off a cliff when the Russian disinformation machine shifted entirely to target Ukraine following the invasion.

As we lay out our scene in 2022, the principal geopolitical front is between the EU 27 and Russia, with a secondary front facing China that the United States is seeking to put in place with its Indo-Pacific framework.

Regarding the EU 27-Russia dyad, Russia’s intentions have hardly been hidden – they were merely disregarded as serious until the invasion of Ukraine. As Slavoj Žižek writes:

Russian Foreign Minister Sergei Lavrov has gone so far as to suggest that the only comprehensive solution would be to demilitarize all of Europe, with Russia with its army maintaining peace through occasional humanitarian interventions. Similar ideas abound in the Russian press. As the political commentator Dmitry Evstafiev explains in a recent interview with a Croatian publication: “A new Russia is born which lets you know clearly that it doesn’t perceive you, Europe, as a partner. Russia has three partners: USA, China, and India. You are for us a trophy which shall be divided between us and Americans. You didn’t yet get this, although we are coming close to this.

Europe has woken up to this threat, with Germany in particular committing to rearmament – a commitment to purchase 35 F-35s and 15 additional Eurofighters for electronic warfare. Germany also committed to longer term development of the Franco-German-Spanish Future Combat Air System (FCAS), which is slated to come into use in 2040, and a boost to its defence budget to 100 billion euros.

The U.S.-China front was initially formed with the Obama administration’s 2009 pivot to Asia, which was militarized through the 2010 Air-Sea Battle Doctrine for sustaining the U.S.’s ability to project power in the Western Pacific.6 China interpreted this as a U.S. strategy to contain it.7 This ended a period of rapprochement that started with former president Richard Nixon’s 1972 visit to Beijing and was firmed up by Deng Xiaoping’s visit to the United States in 1979, which started the period of China’s opening up.8 The tenor of the relationship deteriorated rapidly under the Trump administration, which formulated a new Indo-Pacific framing for its engagement with Asia. The U.S.’s Indo-Pacific strategy is foundering, to say the least. The release of the Biden administration’s supposedly robust new framework came on a Friday afternoon (“take out the garbage” day in West Wing idiom9) while the force of the Quad (Australia, India, Japan and the United States) has been undermined by India’s tacit support for Russia’s invasion of Ukraine. The AUKUS caucus is risible as a counter to China’s position in East Asia – quite apart from the rift it caused with continental Europe. The anglosphere nature of this grouping has more than unfortunate connotations for much of the rest of the world.

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Geo-economics: The Weaponization of Trade, Investment and Finance

Geopolitics is an intuitively appealing way to think about a multipolar world in which great powers vie for influence and control over a political map of the world. Swedish political scientist Rudolf Kjellén coined the term in 1899 at the height of the age of European imperialism. It came back into vogue during the Cold War as a way to conceptualize the rivalry between the United States and the Soviet Union and how that organized the world into communist and capitalist blocs – NATO vs. the Warsaw Pact. Not surprisingly, after something of a hiatus during the unipolar moment that followed the dissolution of the Soviet Union, the emergence of a new Great Game has brought back geopolitics with a vengeance.

Geo-economics is a handmaiden to geopolitics – it is the exercise of economic power for economic or political purposes.

In the post-Cold War era, with geostrategic rivalry suppressed during the U.S. unipolar moment, geo-economics, to the extent it was practised, was principally about economics. Trade is win-win. Accordingly, the “logic of conflict expressed in the language of commerce”10 was about something that is not win-win; namely, economic rents.

In the context of the mature globalized industrial economy of the postwar era, some economic rents remained in play because of tariff barriers, providing an inducement for regional trade agreements to capture those rents for the parties within the agreements. Recall in this regard the concept of Fortress North America to describe the 1994 NAFTA as a response to the EU’s single-market exercise of 1992, which many feared to be building Fortress Europe.11 Regional powers structured regional agreements for the same reasons – MERCOSUR in South America, ASEAN in Southeast Asia, SARC in the Indian subcontinent and the CIS in the former Soviet Union. 

As the knowledge-based economy developed in the post-1980 era, rents primarily accrued to intellectual property (IP) and trade agreements were used to extend and intensify protection for IP, starting with the U.S.-Canada Free Trade Agreement of 1989. As the knowledge-based economy segued into the data-driven economy in the post-2010 period and data became the new oil, the key battleground issue became the nexus of big-data/ML/AI. Trade agreements started to include measures prohibiting data localization and ensuring the free flow of data.

As the unipolar moment gave way to the new multipolar structure, geo-economics became an instrument for geopolitical rivalry. For example, the U.S. described the Trans-Pacific Partnership (TPP) as an instrument to ensure that the U.S., and not China, would write the rules of commerce in the 21st century for Asia. Meanwhile the inter-bloc rivalry over IP rents resulted in increasing friction between the EU and the United States that proved insuperable; GMOs, geographic indications and data privacy were major reasons why the attempt at a Transatlantic Trade and Investment Partnership (TTIP) failed.12, 13 Geopolitical frictions between India and China were a factor in India first pulling out of the Regional Comprehensive Economic Partnership (RCEP) negotiations and then banning a swath of Chinese apps in the digital economy. And, of course, the U.S. rivalry with China moved Section 301 sanctions front and centre in the geo-economic toolkit, while the Russian invasion of Ukraine triggered the broadest array of sanctions ever applied, including denying Russian state-owned banks access to the SWIFT inter-bank clearing system.

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Canada’s Geo-economic Hand and How It Plays It

I suggest four criteria to measure economic power14, when this is understood to mean the ability to use economic tools to exert influence across a variety of domains:

  • Size of domestic market;
  • Provision of an international currency;
  • Ability to deny access to critical technology;
  • Convening power: the organization of international clubs and institutions.

Canada possesses none of these. It is not a geo-economic player. The idea that Canada is back is illusory. In the Second World War, Canada was a power both in terms of its military contribution to the war and its industrial supply for the war effort. In the early 2000s, Canada was a player in the emerging digital economy with major companies like Nortel and RIM, and many others. That is now history.

Canada is a small, open economy that is vulnerable to the weaponization of interdependence. Poor economic policy choices mean Canada’s economy does not operate in the high economic rent zone. Several indicators attest to this: the share of intangible assets (IP and data) that capture the economic rents in the knowledge-based and data-driven economy in Canada lags far behind that of the United States; in the fast-paced world of innovation, the number of Canadian unicorns, which is a key indicator of innovation dynamism, also lags considerably; and Canada’s per capita income has fallen relative to the United States. 

How should Canada play its hand?

Trade

Canada remains a trading nation and must embrace the risks entailed in a global trade strategy for the sake of its continued prosperity. At the same time, it must build defences to limit its exposure to the weaponization of interdependence. Trade diversification thus remains a top priority. The more markets towards which Canadian business can easily pivot, the better in the modern environment.15

Since Canada has recently concluded agreements with its major North American, European and Pacific Rim partners, the renewed efforts must be in the global south.

Canada has started negotiations with the Association of Southeast Asian Nations (ASEAN) and independently with Indonesia. This is a sound strategy, not least because by becoming an ASEAN+1 partner, Canada could pursue accession to the RCEP, which is the largest free trade area in the world, one with accommodating rules of origin for value chain participation and one that includes China. RCEP is important to China in a way that Canada alone will never be. ASEAN is the key for Canada’s East Asian trade strategy.

India has been a difficult trade partner under the Narendra Modi administration but is set to introduce a new foreign trade policy in 2022 (now set back to September). Its recently signed trade agreement with Australia is a possible sign that this new policy will be more open. Canada has unexploited trade potential in the Indian market and an FTA would lead to palpable trade and economic benefits for Canada. Canada’s moribund trade negotiations have been revived and should be vigorously pursued.

Africa remains a heavily under-traded region for Canada and one that has been largely neglected in Canada’s trade diplomacy. Over the past two decades, the absolute value of growth of exports by the major economies to Africa grew on the order of US$250 billion, even in the absence of major FTAs liberalizing African markets to third parties. Of this market growth, Canada captured only a minuscule amount. This is a dynamic region that is on a path of market integration through the African Continental Free Trade Agreement (ACFTA), improving infrastructure and significant opportunities to overcome barriers to growth through leapfrogging technological adoption (especially in mobile digital applications such as fintech).16 All the major economies have articulated Africa trade and economic engagement strategies; Canada should do the same.

Finally, as the prosecution of the war in the economic dimension shows, geo-economics is moving online. Russia’s invasion of Ukraine has been described as the first full-blown social media war. It is also the first full-blown cyber-war, with state and non-state actors attacking the combatants’ information infrastructures and exposing hacked data through informal entities such as Distributed Denial of Secrets, and the first “splinternet” war. The new digital economy agreements (DEAs) will have to be elaborated in light of this experience. Canada needs to be fully involved in the framing of rules for this age; there is no better place to start than by joining the Digital Economic Partnership Agreement (DEPA), which was launched by Chile, New Zealand and Singapore as a stalking horse for a wider plurilateral DEA.

In short, the rise in geo-economic risks does not lead to a conclusion that Canada should pull up the figurative drawbridge and pursue self-sufficiency, alone or on a continental basis; rather, it leads to the conclusion that Canada should pursue a robust regional trade diversification strategy. Note that such diversification also works to address the newfound concerns about security of supply that were raised by the experience of me-first policies by friendly powers during the pandemic.

This does not mean that Canada should abandon the WTO and multilateral rules. Canada should continue to work to preserve this system, including by supporting workarounds such as the alternative dispute resolution system developed as a (hopefully temporary) substitute to the WTO Appellate Body and engaging in the WTO e-commerce negotiations. However, the changed geopolitical and technological conditions mean that Canada cannot count on it to the extent it did previously. The WTO was not designed for geo-economics and so must be complemented – but not abandoned.

Tit for Tat

Geo-economics is a repeat game. A sophisticated tit-for-tat strategy that embodies the basic rules for co-operation – kindness, provocability, forgiveness, contrition and simplicity – in response to bad geo-economic behaviour is generally the right policy.17

This holds both for friends (e.g., retaliation against U.S. Section 232 tariffs) and adversaries (e.g., sanctions on Russia for its invasion) alike.

This holds even if, in a trade context, the retaliation is self-harming and in other contexts, even if the sanctions are merely punitive and do not immediately elicit the desired change in behaviour. This is likely the case with the sanctions on Russia for its invasion. In a repeat game, it is important to take away some of the expected rewards of bad behaviour, since sustained co-operation depends on whether the long-term losses inflicted by the tit-for-tat retaliation exceed the short-term gains from the defection.

Canada does not have to articulate this policy; it is enough that Canada behaves in accordance with these principles such that independent analysts can divine the pattern and allow third parties to draw their own conclusions as to Canada’s likely behaviour.

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Weigh Entanglement in Geopolitical/Geo-economic Power Plays Carefully

The emergence of great-power rivalry in the geopolitical sphere greatly increases the likelihood of power contests playing out in economic space (i.e., through geo-economic power plays). Tit for tat is a purely defensive strategy aimed at inducing co-operation; it offers the player no hope of winning in the sense of achieving a better outcome through opportunistic defection.

The question of entanglement for Canada arises from its formal or informal alliance structures. While inevitably the specific circumstances will dictate the course of action, scholarship and some recent examples help inform the decision on when to and when not to engage.

First, on the effect and efficacy of the main tool of economic warfare – sanctions – Richard Hanania summarizes the literature as follows:

Sanctions have massive humanitarian costs and are not only ineffective but likely counterproductive. On these points, there is overwhelming agreement in the academic literature. Such policies can reduce the economic performance of the targeted state, degrade public health, and cause tens of thousands of deaths per year under the most crushing sanctions regimes. Moreover, they almost always fail to achieve their goals, particularly when the aim is regime change or significant behavioral changes pertaining to what states consider their fundamental interests. Sanctions can even backfire, making mass killing and repression more likely, while decreasing the probability of democratization.

Nicholas Mulder, in his very timely review of the history of sanctions, confirms all of this and underscores that while the pen that implements sanctions may seem less bloody than the sword, economic war is war, with often devastating consequences for civilian populations.18 Moreover, the risk of sanctions being destabilizing is likely much greater in a multipolar great-power context than it has been in the recent heyday of sanctions during the U.S. unipolar moment. Participation in geo-economic power plays is thus inherently dangerous in the new context, which calls for a review of Canada’s rules of engagement. The next section takes up this question.

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Revising the Rules of Engagement

In this section, I consider several instances of how Canada has played the game to draw out lessons for how it should play the game going forward. The key focus is on the distinction between offence and defence. Exactly how bright this line is may, of course, be difficult to say ex ante, but we can start with some relatively easy cases and work towards the messy middle.

The U.S. Trade and Technology War Against China – the Meng Affair

As a preliminary observation, the U.S. trade and technology war against China illustrates all the points made above about economic warfare. U.S. economic sanctions were:

  • Ineffective because they did not stop China’s technological rise;
  • Counterproductive because the reduction in Chinese computer chip production and Chinese firms’ strategic hoarding contributed to the chip shortages that disrupted production around the world, including in the auto sector; and
  • Destabilizing, as they undoubtedly played a significant part in China’s decision to enter the no-limits friendship pact with Russia that helped enable the invasion of Ukraine. While the U.S. course of action did not cause civilian casualties in China, it arguably contributed to those in Ukraine.

Canada chose to play a role in this war with Meng Wanzhou’s arrest for extradition. An executive with the Chinese firm Huawei, Meng was arrested in December 2018, a month after then-U.S. attorney general Jeff Sessions announced his China initiative. This initiative, which was criticized for targeting a racial group and turned out to be a fiasco, included a reference to seeking extradition of Chinese nationals. Canada obliged the United States and arrested Meng. The presiding Canadian judge found the charges unusual:

On the facts, isn’t it unusual that one will see a fraud case with no actual harm many years later? And one in which the alleged victim, a large institution, appears to have had numerous people within the institution who had all the facts that are now said to be misrepresented?

The case was both sensational and political. Charges against corporate executives are normally laid for personal crimes such as embezzlement or accepting bribes; when companies allegedly break laws, the charges are brought against the company. The sensational and norm-breaking nature of the case was written about by Jeffery Sachs19 and the political nature by Margaret Lewis. Patrick Wintour summarized how the entire episode resulted in lose-lose-lose for all parties.

This case is a quintessential example of how not to play the game. Canada went on the offence in an economic war, breaking established norms of behaviour. It did not enjoy the protection of an overweening hegemon and had no multilateral backing on an extraordinarily weak and politically compromised case. There was no interest for Canada; meanwhile, the engagement put significant Canadian economic interests at risk and, as it turned out, put the lives of its citizen’s in harm's way.

Libya

In Libya’s case, Canada led the NATO intervention. Below are two contrasting accounts of this. The first is from the British Parliament (which, for better or worse, fails to mention Canada’s leadership of the NATO intervention):

In March 2011, the United Kingdom and France, with the support of the United States, led the international community to support an intervention in Libya to protect civilians from attacks by forces loyal to Muammar Gaddafi. This policy was not informed by accurate intelligence. In particular, the Government failed to identify that the threat to civilians was overstated and that the rebels included a significant Islamist element. By the summer of 2011, the limited intervention to protect civilians had drifted into an opportunist policy of regime change. That policy was not underpinned by a strategy to support and shape post-Gaddafi Libya. The result was political and economic collapse, inter-militia and inter-tribal warfare, humanitarian and migrant crises, widespread human rights violations, the spread of Gaddafi regime weapons across the region and the growth of ISIL in North Africa (emphasis added).

The second is from Canadian military circles:

Publicly framed within Canada as a humanitarian mission, the Libya intervention certainly reflected concern for humanitarian issues on the part of the Canadian government. However, many issues beyond the desire to protect human rights certainly factored into the government’s decision to participate, from the opportunity for a Canadian to command the mission, to the chance to highlight the capabilities of the Canadian Forces (CF), particularly of its fighter aircraft, which were slated to be replaced in an expensive and controversial process. Perhaps the most important factors were Canada’s obligations and ambitions as a NATO member and ally of the United States (U.S.). The importance of alliances and multilateralism to Canadian defence has long been recognized as Canada has consistently chosen – at least since the end of the Second World War – to contribute to coalition interventions alongside its American and other allies. The Libya mission certainly served as an opportunity for Canada to demonstrate its value and relevance as an ally and coalition member (emphasis added).

The fact that the intervention was premised on no regime change20 and drifted into opportunistic regime change is more than material since this involved the military intervention going beyond protection of civilians in Benghazi, which logically was a legitimate defensive objective (if actually real), to an illegitimate offensive objective of destroying Sirte, Muammar Gadhafi’s stronghold.21

Similarly, Canada went beyond the UN-mandated economic sanctions to directly target the Gadhafi regime; these measures were lifted when the regime fell.22 Canada went on the offence in the regime-change exercise as well.

Worse, while Canada’s geo-economic intervention was justified under the Special Economic Measures Act, which enables the government to respond to a “call for economic sanctions by an international organization of states, or where there has been a grave breach of international peace and security that has resulted or is likely to result in an international crisis,” the Canadian analysis suggests it was motivated at least in part by a realpolitik desire to show “value and relevance” as a geopolitical partner, sentiments that are routinely aired in Canada’s discourse on its international role. This appears to be a deliberate misuse of the enabling legislation. In short, Canada’s geo-economic measures were arguably ultra vires in addition to being ultra mores (if one might be permitted the poetic licence).

For the record, the Canadian government celebrated Canada’s role in this debacle with medals and a fly-past, redolent of Putin handing out medals to the Russian units occupying and responsible for the atrocities in Bucha. Canada has shown no contrition for the consequences of its actions – which include revival of the slave trade on Libyan territory – as required by the tit-for-tat strategy that I advocate. Not a good look for Canada.23

Yemen

Yemen’s case is also illustrative. In 2014, Yemen had a violent transition in government from then-president Abd Rabbo Mansour Hadi, who fled to Saudi Arabia, to Abdul Malik al-Houthi. A Saudi-led coalition, backed by the United States, launched a war on Yemen in March 2015 with the aim of restoring Hadi to power. The coalition includes Egypt, Morocco, Jordan, Sudan, the United Arab Emirates (UAE), Kuwait, Qatar and Bahrain; they are supplemented by mercenary forces. The coalition also receives logistical support from Djibouti, Eritrea and Somalia, as well as intelligence and logistical support for the coalition bombing campaign from the United States. Yemen is backed by Iran and Hezbollah.

To give a sense of the force ratio, the main actors in the coalition, Saudi Arabia and the UAE, have a GDP of US$1.54 trillion and Yemen has a GDP of US$0.028 trillion. The ratio is about 55:1. The Saudi-led coalition carried out more than 24,800 air raids on Yemen since 2015; it reports 450 missile and 850 drone attacks from Yemen. However, where Yemen has no air defences, Saudi Arabia and the UAE deploy sophisticated anti-missile defence systems which reportedly intercept 90 per cent of missile attacks. The effective attack ratio is about 190:1. The human toll ratio from direct military action is also similar. Annelle Sheline notes that over 9,000 Yemeni civilians have been killed in coalition air raids and 10,000 more wounded in attacks on civilian targets compared to 59 Saudi civilians killed by Houthi transborder attacks. The ratio is about 160:1 but the actual ratio is much higher when considering civilians killed in airstrikes on targets of unclear purpose, civilians killed in strikes on military targets and civilians killed by shelling and other ground action.24 This is ongoing.

However, the death toll from military action is only a fraction of the death toll from the destruction of Yemen’s economic infrastructure – medical facilities (including hospitals run by Médecins sans frontières), water sanitation plants, telecommunications and industry – by coalition bombing and shelling. Moreover, Yemen is under an economic embargo – the geo-economic part of the war. The resulting death toll from starvation, lack of access to medical care and spread of disease (including an outbreak of cholera) is on the order of 225,000. It can safely be concluded that there have been no indirect deaths in Saudi Arabia or the UAE as their critical infrastructure has not been destroyed and isn’t subject to economic embargo or sanctions. The human toll ratio from economic war is thus infinite.

As the duration of the war shows, the economic war has been as ineffective as it has been deadly. There is no question of the economic war being an instance of tit for tat as Yemen’s actions have not imposed any economic costs on the rest of the world. The economic sanctions and embargo,  not to mention the attacks on Yemen’s economic infrastructure, are all offensive acts and not tit-for-tat responses. By the logic advanced in this paper, all of this is clearly wrong. To give a sense of just how badly broken the system is, the UN economic sanctions apply to Yemen, not to the coalition. Canada participates in enforcing these sanctions25 and thus bears its share of the blame for the gratuitous deaths inflicted on Yemen by the geo-economic aspects of this war. Canada imposes no sanctions on the coalition and indeed acts as an arms supplier for the Saudi-led coalition.

Examining Canada’s policy through a geo-economic, tit-for-tat lens, there were/are no external impacts on Canada from the Yemeni internal conflict. There were/are no grounds for a tit-for-tat response by Canada. This contrasts sharply with the situation in Ukraine. There, the Russian invasion has triggered enormous external economic impacts on the world.  These negative impacts on Canada support tit-for-tat economic responses.

As an editorial digression, even a cursory trespass into the history of Yemen impresses one of the immense complexities of this ur-alt region.26 Canada does not even maintain an embassy in Yemen – diplomatic representation is through Canada’s embassy in Riyadh. It is difficult to see how Canada could have an independent view on Yemen’s internal affairs sufficiently grounded in reality to allow it to participate in the regime-change operation now underway. At the same time, Canada’s participation is a contributing factor to the world’s worst humanitarian crisis. How Canada managed to manoeuvre itself into this position is unfathomable and points to a need for a profound review of its policy-making – and certainly of its understanding of geo-economics.

Sarajevo and Kosovo

The breakup of Yugoslavia in 1991-1999 provides an example of the “messy middle” of cases, which are likely to represent the majority of instances where geo-economic tools may be invoked in support of or in lieu of diplomatic/military responses to crises.27

The siege of Sarajevo during the Bosnian War was the longest siege of a capital city in modern history, lasting 1,425 days. It was ended in some 10 days when NATO intervened against the Bosnian Serb forces surrounding the city. The current analogue to Sarajevo is the similar-sized Mariupol – except that what happened to Sarajevo over four years was telescoped into two months – and by all accounts the amount of damage is considerably worse.

Following the Bosnian War, an attempt was made to tally the costs, in part to ensure that such an event would not happen again: “They [the international community] had an important role because they allowed all this to happen. They cannot wash their hands of it now”.  The shelling or bombing of a city should be considered a per se war crime. Hence, it was right for any coalition of third parties – and this obviously includes NATO – to intervene to break the siege and stop the shelling of Sarajevo, using whatever force was necessary against the military personnel and assets actively doing the shelling. Mariupol has not been relieved through military intervention – and given that the military response would involve direct engagement with Russian forces, this would be considered destabilizing. The international response has thus been limited to economic sanctions and the supply of arms to Ukraine. Canada did not engage in the Sarajevo episode; it did join the international economic sanctions on Russia, although these were not specifically because of Mariupol. This would be the correct action under the principles articulated in this paper.

Canada did engage in the Kosovo crisis a few years later in 1998, implementing economic sanctions. This was a case where NATO went on offence and bombed Belgrade. Every bomb dropped on Belgrade should also be considered a per se war crime – this includes the bombing of China’s embassy in Belgrade. It is not clear what impact Canada’s economic sanctions had on Serbia but they were tainted by association with the offensive military actions against Belgrade. Canada should have withdrawn its support for the NATO intervention once it moved beyond defence to offence.

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Concluding Thoughts

This paper has argued that the re-emergence of great-power rivalry in the political and technological domains has undermined the rules-based economic order and unleashed strategic or geo-economic behaviour. Analytically, this means that the familiar trade theoretical construct of multilateral globalization is replaced by the game theoretical constructs of conflict and co-operation

Under the former, at least in theory if not consistently in practice, transparency, predictability, rule of law and seamless interoperability across borders for multinational companies and value chain participants promise to lift all boats (win-win outcomes). Benefits are apportioned fairly through competitive pricing and payments to factors of production in line with marginal productivity. And the system tends to a stable equilibrium.28

Under the latter, benefits (in particular economic rents) are apportioned according to bargaining or coercive power. Deception and secrecy are strategic tools. Information wars are fought to dominate the narratives. Globally, efficient outcomes are sacrificed for disproportionate gains by the powerful.29 Threat replaces predictability (e.g., the Trump administration’s weaponization of uncertainty). And, as might makes right, possession becomes 100 per cent of the law, all fig leaves aside.30

The world of geopolitics and geo-economics is a world of realpolitik – nasty, brutish and, for those who have the misfortune to experience it, often life-shortening. Realpolitik leaves the taste of ash in one’s mouth when truly experienced. Realism tries to explain and actively encourages acceptance of the unacceptable because “that’s the way the world works.” It is not actually the way the world works; it is just one way in which the world can work, and decidedly not the preferable way. Co-operative outcomes are also possible.

A sophisticated tit-for-tat strategy that, in implementation, strictly observes the distinction between offence and defence would promote the possibility of co-operative outcomes. Every country has legitimate defensive interests. None has legitimate offensive interests in other countries – this includes sphere-of-influence prerogatives to determine the composition of another country’s government. Every country, individually and through the community of the United Nations, has the right and indeed the obligation to defend a population under attack. This principle is enshrined in UN Article 51, and it is the principle that we need to focus on, not the legal trappings of the UN system which self-evidently has failed. No country has the right to transform intervention from the right to protect to the right to bomb or the right to effect regime change through coercion of one sort or another. The road to hell is paved with intentions. Canadian policy-makers need to be aware of that. These principles apply to geo-economic interventions as well as geopolitical interventions, especially when the former go beyond mere rent-seeking for economic gain to constituting economic warfare in support of the latter.

The recommendations that flow from this analysis are straightforward:

  • As a small open economy lacking the major geo-economic tools, Canada should seek to constrain the use of geo-economic power to the extent possible by supporting the rules-based multilateral system;
  • When impacted directly, Canada should play strict tit for tat, in as sophisticated a manner as it can develop;
  • Presumptively, Canada is to play defence – with no hesitation to joining in collective actions that are defensive;
  • This also implies never playing offence, including to curry favour with others;
  • For greater certainty, economic sanctions are offensive weapons and should only be used where it is clear they do no harm and where in fact they are legitimized because of harms experienced by Canada or where they represent asymmetric tit-for-tat responses where political/military responses are not feasible.

Ultimately, Canada finds itself in a new Great Game. And in a game, to quote the song, you have to know when to hold them, know when to fold them and know when to walk away. 

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End Notes

1 Dan Ciuriak and Maria Ptashkina. 2021. “Technology Rents and the New Great Game.” In The China-U.S. Trade War and South Asian Economies, Rahul Nath Choudhury, ed. Oxfordshire, UK: Taylor & Francis/Routledge. https://www.routledge.com/The-China-U.S.-Trade-War-and-South-Asian-Economies/Choudhury/p/book/9780367513818. Also available at SSRN: https://papers.ssrn.com/abstract=3663385.

2 As cited in Paul Blustein. Schism: China, America and the Fracturing of the Global Trading System. Waterloo, ON: Centre for International Governance Innovation. September 10, 2019 pg. 247, a leaked U.S. National Security Council memo stated: “Whoever leads in technology and market share for 5G deployment will have a tremendous advantage towards commanding the heights of the information domain … everything from automated cars and aircraft to advanced logistics and manufacturing to true [AI] enhanced network combat.” The memo asserted that the United States was losing this race and failure would mean that: “China will win politically, economically, militarily.”

3 Corrs Chambers Westgarth. 2019. “Trade wars: understanding the weapons.” Brief. February 13. https://www.corrs.com.au/insights/trade-wars-understanding-the-weapons#.

4 Francis P Sempa. 2022. “Our Elites Need to Recognize that America’s ‘Unipolar Moment’ is Over.” Real Clear Defense. March 24.  RealClearDefense; Zakaria, Fareed. 2019. “The Self-Destruction of American Power: Washington Squandered the Unipolar Moment.” Foreign Affairs, July/August. https://www.foreignaffairs.com/articles/2019-06-11/self-destruction-american-power; Haass, Richard N. 2014. “Put America’s House in Order: Washington Should Reorder Priorities in Favour of Domestic Reforms and a More Discriminatory Foreign Policy.” American Review, issue 15. February-April. American Review.

5 For a sense of how this played in Russia, Sergey Karaganov, the honorary chair of the Moscow-based think tank, The Council for Foreign and Defense Policy, described Russia as sinking to the level of the West with its invasion of Ukraine: “The West committed several aggressions. We are now on the same moral level, we are equal, we are doing more or less like you. I regret that we lost our moral superiority”.

6 John Ford. “The Pivot to Asia was Obama’s Biggest Mistake.” The Diplomat. January 21, 2017.; Andrew F. Krepinevich. 2010. “Why AirSea Battle?” Center for Strategic and Budgetary Assessments.

7 Robert D Blackwill and Ashley J. Tellis. 2015. “Revising U.S. Grand Strategy Toward China.” Council Special Report No. 72, March. Council on Foreign Relations.

8 Jian Chen. 2019. “From Mao to Deng: China’s Changing Relations with the United States.” The Cold War International History Project Working Paper 92.

9 The Indo-Pacific Economic Framework for Prosperity (mercifully shortened to IPEF for acronym purposes) had an international launch on 23 May 2022 in Tokyo. It had four elements:

  • Connected economy: on trade, the United States committed to "engage comprehensively" with its partners; "pursue" high-standard rules of the road in the digital economy; "seize opportunities" and "address concerns" in the digital economy; and "seek" strong labor and environment standards and corporate accountability provisions.
  • Resilient Economy: the United States indicated it would "seek" first-of-their-kind supply chain commitments that better anticipate and prevent disruptions in supply chains, including by establishing an early warning system, mapping critical mineral supply chains, improving traceability in key sectors, and coordinating on diversification efforts.
  • Clean Economy: the United States indicated it will "seek" first-of-their-kind commitments on clean energy, decarbonization, and infrastructure including on renewable energy, carbon removal, energy efficiency standards, and new measures to combat methane emissions.
  • Fair Economy: the United States indicated it will "seek" commitments to enact and enforce existing multilateral obligations.

This is a framework devoid of actual commitments and seemingly devoid of any underwriting.

10 Edward N. Luttwak. 1990. “From Geopolitics to Geo-Economics: Logic of Conflict, Grammar of Commerce.” The National Interest, 20, Summer: 17–23.

11 Alan K. Henrikson. 1993. “A North American Community: ‘From the Yukon to the Yucatan’.” In The Diplomatic Record 1991–1992, 1st Edition. Oxfordshire, UK: Routledge.

12 Vinod K. Aggarwal and Simon J. Evenett. 2017. “Resisting Behind the Border Talks in TTIP: The Cases of GMOs and Data Privacy.” Business and Politics, 1–28. doi:10.1017/bap.2017.17.

13 The TTIP talks were not suspended because of a breakdown over specific issues but rather because of the U.K.’s impending exit from the EU following the Brexit referendum, which would change what was on the table, and the 2016 U.S. election campaign, in which the main candidates were voicing anti-trade sentiments. Given the distance between the parties at the time, continuation of talks made no sense. With the election of Trump, the suspension remained in place. The Biden administration left the Trump trade policy framework in place while it focused on its domestic agenda.

14 Dan Ciuriak. 2004. "The Laws of Geoeconomic Gravity Fulfilled? China's Move towards Centre Stage," Asian Affairs: An American Review, 31(1), Spring 2004. An earlier version was given at the Annual Meeting of the American Association of Chinese Scholars, Indianapolis, October 26-28, 2003; the conference version is available at SSRN: http://ssrn.com/abstract=1801427

15 There is a closely related sphere of economic policy that is subject to geo-economic disruption, namely innovation. The concerns here are less related to the changed geopolitical context, which is the key driver of the present discussion, as opposed to structural features of the modern economy. See Ciuriak and Goff for a detailed discussion of the innovation dimension of Canada’s response to the changing geopolitical/geo-economic context.

16 See, for example, “African Leapfrog Index: Getting Lions to Leapfrog,” Tufts University, https://sites.tufts.edu/digitalplanet/african-leapfrog-index/.

17 There is a dense literature on the origins of co-operation. The issues are not yet settled even in the game theoretic literature and the transposition of lessons from theory to practice is always an art. However, the basic principles that underlie a sophisticated tit-for-tat strategy, which emerged from the early computer program tournaments of competing strategies organized by Robert Axelrod (1980), make intuitive sense and have held up as generally sound.  Amnon Rapoport, Darryl A. Seale, and Andrew M. Colman. 2016. “On the Conclusions Drawn from Axelrod’s Tournaments.” PLoS ONE, 10(7): e0134128. doi:10.1371/journal.pone.0134128.; Robert Axelrod. 1980. “More Effective Choice in the Prisoner’s Dilemma.” The Journal of Conflict Resolution, 24(3): 379–403.; Marko Jurišić, Dragutin Kermek, and Mladen Konecki. 2012. “A Review of Iterated Prisoner’s Dilemma Strategies.” Proceedings of the 35th International Convention on Information and Communication Technology, Electronics and Microelectronics. 1093–1097. http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=6240806.

18 Nicholas Mulder. The Economic Weapon: The Rise of Sanctions as a Tool of Modern War. New Haven, CT: Yale University Press. January 25, 2022.

19 Of particular note is Sachs’ recitation of the high-profile sanctions-breaking cases and corporate malfeasance cases brought by the United States against corporations, none of which involved the arrest of a CEO or CFO. In the case of the wrongdoing that contributed to the subprime crisis, $243 billion in fines were levied against U.S. corporations; no executive was arrested. 

20 “We agreed that it is not for any of the participants here today to choose the government of Libya: only the Libyan people can do that.” Chair’s statement, London Conference on Libya, March 29, 2011.

21 Note that a purely defensive intervention, even if made on bogus claims, which was likely the case in Libya, would not necessarily impose serious harm, since the intervening force would be constrained to twiddling its thumbs at great expense to the sponsoring countries.

22 “Canadian Sanctions Related to Libya,” https://www.international.gc.ca/world-monde/international_relations-relations_internationales/sanctions/libya-libye.aspx?lang=eng.

23 The same is generally true of others involved.  Former U.S. secretary of state Hillary Clinton infamously uttered the words, “We came, we saw, he died,” while laughing, to describe the execution of Libyan leader Muammar Gadhafi (https://www.youtube.com/watch?v=mlz3-OzcExI) and was still able to subsequently run for the presidency of the United States. Then-U.S. president Barack Obama called the Libya intervention a “shitshow” but pointed the finger at the Europeans.

24 Note that this figure covers only civilian deaths in airstrikes that were clearly identified as civilian targets, which were 28 per cent of all the recorded airstrikes. Only 32 per cent of the coalition airstrikes were clearly military targets. The figure of 9,000 substantially understates the actual toll in strikes of unclear targeting and civilians killed in strikes on military targets. While most of the Yemeni deaths pass unnoticed in the West, a few particularly egregious instances make the headlines. In April 2018, the coalition bombed a Yemeni wedding, killing the bride and 33 guests and wounding 45 others; in August 2018, a coalition strike hit a Yemeni school bus, killing 40 children; in October 2018, the New York Times ran an article on starving Yemeni children. Annelle Sheline notes that in these cases, the coalition reduced its bombing until the news cycle turned over.

25 “Canadian Sanctions Related to Yemen,” https://www.international.gc.ca/world-monde/international_relations-relations_internationales/sanctions/yemen.aspx?lang=eng.

26 Paul Dresch. 2000. A History of Modern Yemen. Cambridge: Cambridge University Press.; Lucas Winter. 2011. “Conflict in Yemen: Simple People, Complicated Circumstances.” Middle East Policy, XVIII(1), Spring.

27 For contrasting reviews of the international interventions in the Yugoslavian crisis see: David N. Gibbs. 2009. First do no harm: Humanitarian intervention and the destruction of Yugoslavia. Vanderbilt University Press.; Samantha Power. 2003. A Problem from Hell: America and the Age of Genocide. Flamingo Press.

28 Solomon W. Polachek and Carlos Seiglie. 2007. “Trade, Peace and Democracy: An Analysis of Dyadic Dispute.” Handbook of Defense Economics, 2: 1017–1073.

29 In passing, it might be noted that this dynamic has arguably been observed in the contest to capture economic rents accruing to IP through the excessive expansion of IP protection by the leading IP-generating states, even to the point where it damaged domestic business dynamism, because the rent appropriation globally more than compensated for the damage to the local economy. See Ciuriak (2017). The naked application of power to extract benefits was illustrated in the U.S. demands for rebalancing of benefits in the negotiation of the Canada-U.S.-Mexico Agreement (CUSMA), as it sought to create economic rents for its industrial and agricultural sectors, despite the globally negative results. See Ciuriak et al. (2020) for a discussion.

30 The illegal occupation of Diego Garcia by the U.K., which then leased it to the United States, evicting the inhabitants to accommodate a military base, is a glaring example. See Porter (2019) for a recent update on the status of the Chagos Islands and the fight by the evicted to get their island back. The British in the Falklands and the Russians in Crimea are other modern examples; both of these involve oil and gas assets and naval bases as bones of contention.

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About the Author

Dan Ciuriak is a senior fellow at CIGI, where he is exploring the interface between Canada’s domestic innovation and international trade and investment, including the development of better metrics to assess the impact of Canada’s trade agreements on innovation outcomes. Based in Ottawa, Dan is the director and principal of Ciuriak Consulting, Inc.

Dan is also a fellow in residence with the C. D. Howe Institute, a distinguished fellow with the Asia Pacific Foundation of Canada and an associate with BKP Economic Advisors GmbH of Munich, Germany. Previously, he had a 31-year career with Canada’s civil service, retiring as deputy chief economist at the Department of Foreign Affairs and International Trade (now Global Affairs Canada).

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