Free trade for a safer world - Part 2

A libertarian case for international stability

By Sahil Shah, Co-founder of the Global Stability Network.

This is the second in a two-part series examining the role of economic deterrence in stabilising great power relations.

Part 1 outlined the current global geopolitical context and the limitations of the efficacy of military deterrence.

Part 2, below, outlines the potential role of economic deterrence in achieving strategic stability.

Part 1 outlined the current global geopolitical context and the limitations of the efficacy of military deterrence. This part outlines the potential role that economic deterrence can play in strategic stability.

Photo by Dominik Lückmann on Unsplash

A strategic doctrine prioritising instead economic deterrence between Great Powers could be more promising. Historical evidence shows that regime/leadership change is more frequently triggered by economic shock or failure rather than military conflict (figure 1). Tools of economic deterrence include sanctions, quotas, tariffs, export/import bans, and capital controls. Their constructive contribution to strategic stability depends upon the particular circumstances and how states use the threat or implementation, conditions set out below and detailed in the paper:

• Their use needs to be perceived as legitimate and explicitly in the mutual interests of strategic stability rather than strategic dominance, which is more likely in the context of a set of mutually agreed norms and conditions upon which actions will be taken and reversed

• The intentions and explanation must be clearly communicated to all leaderships and broader populations

• States need to be able to inflict significant economic damage on aggressors

• There needs to be a credible commitment to implementation that is understood by the target leadership

• Economic damage must have a material impact on leadership vital interests

Economic deterrence combined with well-designed communications to foreign publics en masse can influence leaders’ behaviour by threatening to drive a wedge between leaders and their public if they deviate from pre-agreed norms. Damaging economic actions can also increase the likelihood of civil unrest, and potentially trigger regime change, whilst reducing the quality of life for the leader.

States practicing economic deterrence need to have the ability to inflict damage on aggressors, so they both must be tightly coupled. Economic interdependence and free trade is therefore a prerequisite for practicing effective economic deterrence. A libertarian economic policy can therefore have the ancillary benefit of achieving strategic stability as a foreign policy objective through economic deterrence. This may present a promising path forward to reset Great Power relations.

Furthermore, economic coupling and integration also bring a range of additional benefits, including reduced consumer prices, improvements in standards of living, and improved international relations. This can also aid international coordination in many crucial global areas such as climate change, pandemic prevention and AI regulation. There is a strong political case, supported by evidence, to choose cooperative approaches that involve cooperative economic relations over confrontational ones, improving domestic living standards, international security and contributing to action on global problems.

Economic Deterrence

Economic Deterrence exhibits a series of promising features that are often under-estimated.

What is Economic Deterrence?

Economic deterrence involves the explicit signalling of a willingness to use a mixture of economic incentives to persuade other states to remain within the boundaries of ‘acceptable behaviour’. It will be more effective if those boundaries are based upon mutually-agreed values and criteria, and when they are applied without prejudice or exception. It can have either or both macro and micro components. Micro components involve directly targeted sanctions on leaders and their inner circles, such as freezing their foreign-held assets. Macro components target sectors or whole economies, and are intended to undermine domestic support for leaders so that they shift their foreign policy/conflict stance. Macro components could include capital flow regulation, trade embargoes and other broad category trade restrictions. Additional actions that could form part of economic deterrence could include subsidies, quotas, tariffs, non-tariff trade barriers and more. It is worth stating at the outset that making use of these measures will not have positive economic effects, indeed they will invariably harm the country imposing them as well as the target. Also, as we will discuss later, it is necessary to start from a position of economic interconnectedness for economic measures to have a credible deterrent effect.

Economic deterrence includes a promise to take clear economic actions, such as decoupling or sanctions, in response to aggressive military actions. Although the elements of economic deterrence are not new in statecraft, they are yet to be widely adopted in combination with consistent and clear communication.

Crucially, economic deterrence relies upon the psychological impact of the cost function to nation states and leaderships to modulate behaviours. For macro level economic deterrence, this requires leaders to understand their vulnerability to macroeconomic shocks, and that if economic measures are taken, it would cause a recession in their country that would have a significant likelihood of their ability to maintain power.

The prerequisites for success

We propose that economic deterrence needs to fulfil a number of criteria to be successful

1. Their use needs to be perceived as legitimate, particularly by those with influence over the strength of the target administration. We would propose that this is more likely if it is explicitly in the mutual interests of strategic stability rather than strategic dominance, which is more likely in the context of a set of mutually agreed norms and conditions upon which actions will be taken and reversed.

Economic deterrence begins at the diplomatic table. Both the BRICS and other global south nations question the legitimacy of the Western led ‘rules based international order (RBIO)’, that they perceive to have been created and protected in the interests of the West to their disadvantage. A lack of mutually-agreed norms makes it challenging to set mutually-agreed red lines upon which punitive actions can be taken. Leaderships will find it harder to justify to their citizens actions that go against norms they have explicitly subscribed to and that make sense to their citizens and domestic influencers. Such norms need to be responsive to the changing international climate to retain legitimacy.

Optimising incentives requires both the use of the carrot and the stick. Clear ex ante communication of thresholds for the lifting of economically punitive measures introduces deterrence by punishment in conjunction with deterrence by denial, creating stronger incentives to adhere to the mutually agreed norms. Clear communication of reversal criteria also makes it less likely the action will be seen as unfair, thus making it less likely that existing domestic support for the current regime rises as a result of the punitive measures.

2. The conditions must be clearly communicated to all leaderships and broader populations

A common critique of sanctions is that they impact on innocent civilians whilst being skirted by leaderships and elites. Sanctions, when poorly implemented, are both ineffective as a deterrent whilst also increasing feelings of enmity and hostility towards the state imposing them. Worse, they can facilitate corruption, black markets, and market domination by groups that could be close to the leadership. The Iranian Revolutionary Guards Corp has developed extensive commercial interests across most sectors of the Iranian economy, not least because they have a competitive advantage over the civil sector thanks to their international black market networks. Meanwhile, Iranian public attitudes to the United States administration remain poor as a result of sanctions.

The goal here, clearly, is to create a wedge between the leadership and the public in a target state, so the public believe that the economic cost imposed is clearly triggered by the illegitimate actions of their leadership. Best practices from effective communications could be adopted here, along with outlining clear actions that citizens could take to show their dissatisfaction with their governments. However, if this is not done in advance, it could be perceived as manipulative, and the sanctions punitive and vindictive. Communicating clearly in advance to the general public on the red lines and the criteria for which these restrictions would be lifted, based upon mutually-agreed norms, can help create domestic pressure upon a leadership to U turn these policies.

3. States need to be able to inflict significant economic damage on aggressors – economic interconnectedness is a prerequisite for this

Nuclear deterrence relies upon the maxim of mutually assured deterrence, and for a strong deterrent effect, economic deterrence similarly relies upon states having the capacity to impose high costs on aggressors for deviations in behaviours. Therefore a key prerequisite for economic deterrence is economic integration. The higher the level of integration the greater the damage from decoupling and sanctions. A shared understanding of the economic issues that drive leadership concerns is also necessary for effective deterrence, along with coordination with other countries who collectively would be able to impose greater levels of economic damage. Consistency in approach and implementation, along with credible stories of mutual benefit from strategic stability pursued in the interests of all, is paramount to avoid claims of favouritism which may damage the psychological elements that are part of this approach.

4. There needs to be a credible commitment to implementation

To be effective a potential aggressor needs to receive the signals, understand them, and believe in the intention to carry them out. This requires clarity of signalling and credibility of intent. But this needs to be balanced by positive messaging that invites a constructive relationship, particularly as effective economic deterrence requires integrated economies relying upon cooperation to achieve shared and fair regulation.

5. Economic damage must have a material impact on leadership concerns

The effectiveness of economic deterrence rests on whether economic damage has a material impact on leadership concerns, either directly or at a macro level by creating negative macroeconomic tailwinds, such as inflation, GDP reductions, and rising costs of living. Assuming key decision-makers care about their own survival and retention of power, the macro pathway is effective if economic hardship credibly weakens their power or even threatens civil unrest and regime change. The direct, micro pathway comes through personal or smart sanctions that affect the leadership’s ability to maintain their standard of living or power base.

Sharp economic downturns can trigger social unrest and political upheaval, strengthening opposition, weakening the state and potentially leading to regime change. When economies struggle, unemployment rises, incomes dwindle, and inequality widens because the most vulnerable are most impacted, fueling social tensions and eroding public trust in governing institutions. This can lead citizens to question their leaders’ competence, fuelling discontent that can destabilise regimes. Moreover, economic downturns constrain a government's ability to address social problems due to funding limitations. This can escalate dissatisfaction and provide fertile ground for opposition movements to gain traction. A government's perceived inability to manage crises effectively erodes its legitimacy, creating opportunities for alternative political forces in the country.

Extensive research underscores the potent influence of economic factors on regime stability. For instance, an analysis of regime changes across 175 countries between 1870 and 2000, demonstrates that economic downturns significantly increased the probability of authoritarian regimes collapsing in particular. This vulnerability stems from the inherent fragility of authoritarian systems, which often lack the legitimacy and adaptability to withstand widespread public discontent during times of economic hardship. Similarly, Gassebner et al. (2014) examined data from 167 countries between 1974 and 2012, finding a strong correlation between declining economic growth rates and the risk of civil war across regime type. Economic stagnation, or worse, contraction, can intensify competition for scarce resources, fueling social unrest and potentially igniting conflict that can topple regimes. Furthermore, economic inequality has emerged as a powerful predictor of regime change. When wealth and power become concentrated in the hands of a privileged few, social divisions deepen, political polarisation intensifies, and state capacity weakens, creating conditions ripe for instability and regime change.

Figure 1 (Gassebner et al 2014) illustrates this by examining the influence of economic factors on 20 historical instances of regime change. The chart reveals that economic recession, wealth gaps, and corruption are recurring themes in these events, often playing a decisive role in undermining regime stability.

The causal pathways through which this happens vary but often include either a military coup (Zimbabwe 2017) or mass civil unrest, which tends to correlate with the rate of inflation and unemployment.

In conclusion, there is a broad and robust evidence base for the impact of economic recession on leadership. In addition to this, economic performance tends to be amongst the most important, if not the most important when it comes to who voters choose in elections in democracies.

A libertarian case for international stability

A longstanding critique of a libertarian economic approach to international trade is its neglect of the impact of open markets on national security, giving rise to rhetoric on self-sufficiency, ‘de-risking’ and protectionism. However, a libertarian approach to free trade would create a high degree of economic interdependence between large economies in the global system, an important prerequisite for the capacity to achieve economic deterrent relationships. Although sanctions are seen as a clunky policy tool, the threat of sanctions can be used for psychological coercion rather than slapped on wholesale to inhibit military capacity or engage in economic warfare between blocs with different political ideologies. The threat of sanctions, then, can play a part in a foreign policy which essentially is libertarian.

The decline in popularity for libertarian economic policy as it is eclipsed by confrontational security concerns has unfortunately gripped large swathes of the right in Europe and the USA. This paper presents an option for libertarianism, free trade and economic integration to form the bedrock of a new security architecture, and highlights an evidence base for libertarians to use in the debate for freer trade and greater economic integration.

However, a paradigm shift, if it occurs, requires an orderly transition, and areas of further investigation include the role of the military in such a transition.

A roadmap

A shift from engagement based on confrontation and military deterrence towards economic deterrence requires a number of intermediary steps, including data gathering and analysis.

The first step would be analysing for each particular country dyad (or triad) whether economic deterrence could be effective.

This would include research that determines the current levels of economic integration, as well as what equilibrium this would converge to if trade barriers were removed. This would have to be supported by assessing the impact that future potential sanctions, trade barriers, trade quotas, capital restrictions and other forms of decoupling could have on both sets of economies. The impacts would be assessed across key macroeconomic variables, e.g. impacts on inflation, GDP, balance of payments, exchange rates as well as the speed that they would be felt. Analysing this in tandem with citizen opinion for how these economic effects would change support for government, e.g. via polling, as well as historical analysis could help indicate the likelihood that such a set of actions would set the wheels in motion for leadership/regime change.

The second step would be to increase awareness of the analysis, and ensure that each side of the relationship understands their regime's vulnerability to economic steps that the other side could take. Quantitative modelling undertaken by an independent third party may be needed to ensure the outputs are trusted by both sides. Open communication of the outcomes to the general public is important, so it can be clearly understood that a leadership is aware of the economic repercussions if they deviate from mutually agreed norms.

The next step would be mutually agreed conventions/norms as well as clarity as to which economic actions would be taken for which deviations. This level of transparency is important as far as the psychological elements of economic deterrence matter, especially the ability to create a wedge between a leadership and their population. The interplay between military and economic deterrence also needs to be established, and the answer for what role there is for military deterrence ought to be established at this point.

Another necessary element is political will and public appetite for a shift in how relationships are managed. Of course, understanding initial public support for such a change in approach is important but public information campaigns are also vital. A change in relations would have several benefits for the general public, beyond improved security outcomes. Greater economic integration and fewer trade barriers will likely reduce the cost of imports, and increase real living standards, especially pertinent during a cost of living crisis. Further integration could also enable further multilateral engagement on broader security elements such as global coordinated action to mitigate and adapt to climate change, to regulate emerging technologies such as AI, and pandemic surveillance and preparedness.

Although not included in the above, it is important to note the complexity of multidimensional relationships. A shift from militarist confrontation between adversaries to economic interdependence and deterrence could positively influence the relationships with third parties and avoid the trend towards confrontational bloc politics.

Recommendations & Conclusion

Economic deterrence holds promise as a tool to achieve strategic stability, but more research is needed to explore:

Improved understanding of the psychological makeup of political leaders: Research that explores leaders' perceived fears and concerns. Obtaining this from current leaders may be challenging but retired political leaders may be more open. This will guide the design of an effective deterrent.

The factors that lead to regime/leadership change: The evidence is limited regarding the impact of interstate conflict on regime/leadership change, and the direct causal relationship between economic downturns and regime instability. Further investigations here would prove fruitful in guiding deterrent design.

Improved macroeconomic models that show the economic impacts of decoupling/sanctions: Improved models, especially agent based models that incorporate substitutability and dynamic actions, would more accurately show the economic costs associated with decoupling/sanctions. This research would benefit from application to existing dyads, such as between the US/China.

Additional benefits of integration: Further recommendations include research on the benefits of economic coupling on global cooperation, including disaster risk reduction, climate action and economic development.

Beyond research, the final recommendations are to increase awareness for this as an option to be considered both for policymakers and for leaderships.

There is a strong case to be made for greater citizen engagement in developing more cooperative instead of confrontational approaches in the interests of strategic stability. Political awareness can kickstart the diplomatic steps needed to explore this as an option, in terms of research, international engagement and strategy.