Economic Warfare

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Economic Warfare

Economic warfare is state interference in international economic relations for the purpose of improving the relative economic, military, or political position of a country. While the concept has a precise analytical content, it tends to have emotional overtones, especially under some of its many synonyms: economic aggression, penetration, infiltration, exploitation, assault, drive, offensive, imperialism, attack, aggression campaign, invasion, incursion, and many others.

The concept can best be understood against a background of what economists consider “normal” international economic relations. The world as visualized by the classical economists was one in which the individuals and enterprises of many nations strive to maximize utility and profits, using lowest-cost resources, wherever found. As a result each nation tends to specialize in the production of items in which its economic units have a comparative advantage, and private interests seeking profits buy in the cheapest markets and sell in the dearest. This search for the gains from trade is conducted within a framework of convertible currencies, with automatic mechanisms determining the principal economic variables—prices of goods and factors, and incomes—and carrying the burden of adjustment in the relatively free flow of goods and services across national borders. The role of the government is minimal and is primarily to assist the optimizing behavior of individual economic units.

This model is an abstract construction only. Historically, however, there have been approximations to it, particularly in the nineteenth century. Some permanent departures from the model have received widespread recognition and are not regarded as economic warfare. State interference with trade in order to foster high-cost but potentially competitive industries has long been accepted. Discrimination through various forms of exchange controls, multiple rates, tariffs, quotas, and bilateral balancing of trade has become ordinary policy with, in some cases, an economic justification. In most of these instances the government has acted primarily in support of domestic industry to achieve purely domestic economic and political goals.

State interference on behalf of the state itself is what distinguishes economic warfare from other types of international economic policies. It is the conscious attempt to enhance the relative economic, military, and political position of a country through its foreign economic relations. The action must be purposeful; otherwise a nation merely pursuing the benefits of trade for its citizens would be considered engaging in economic warfare if the action should in fact improve its relative position. It is the position of the country in the hierarchy of power, its position in relation to other countries, rather than any absolute accretion to its power, that is relevant. This can be accomplished by a country which gains more than other countries gain, gains while others lose, ol loses while other countries lose more.

Economic warfare serves the purposes of the state, be they economic, political, or military, or some combination of the three. All of these purposes may be served simultaneously by the same action, or in some cases a course of action may serve one of them at the expense of another or the other two. The precise balance among purposes is determined by the total goals of the state. The state, in effect, has a utility function, and economic warfare is an effort to raise the value of one or more economic or noneconomic variables.

Military aspects

The military aspect of economic warfare has two basic dimensions. One involves the use of economic warfare as an adjunct to military operations. The other involves its use to strengthen the peacetime military establishment and prepare for war. In both, however, the aim is substantially the same. In peace, in preparation for war, or in war a nation wishes to acquire the maximum net resources available for military use and to deny the enemy or potential enemy any resources which may contribute to his war-making capability.

In peacetime or in preparing for military operations, the use of force may well be inappropriate, since it may jeopardize future plans. Economic warfare, however, may accomplish some of the same purposes as force. Resources may be acquired by improving the terms of trade of the country with respect to the rest of the world or with respect to a single nation or group of nations. A country may, through trade, acquire such influence over another country that the latter will be willing to form a military alliance rather than forgo the trade, or at least be willing to be neutral in a potential conflict. Furthermore, the victim may be induced to join in acts of economic warfare against still other countries. Economic relations may assume such importance and be subject to such manipulation that the trading partner will lose some or all of its sovereignty. Many techniques can and have been bent to these ends, such as the use of trade to disrupt markets, changing sources of supply or refusing to supply goods in an unpredictable manner, and manipulation of foreign exchange and gold holdings. So long as these actions are undertaken to acquire resources or to deprive a potential enemy of resources, economic warfare is being used in direct support of military operations.

In wartime, economic warfare is a natural and important adjunct to military actions. Again, the principal purpose is to prevent resources from falling into the hands of the enemy and to acquire as many resources as possible. These actions operate largely through nonbelligerents and will be used even though a military blockade may be neither feasible nor desirable. In some cases, action may be directed at weakening the enemy’s economy, such as the counterfeiting of enemy currency during World War ii.

Embargo

A special case of economic warfare is the full or partial embargo in anticipation of possible war, such as that maintained by the United States, with some western European support, against the Soviet Union, eastern Europe, and Communist China during the 1950s and 1960s. A country may fear the possibility of war with another country and decide that no trade should take place which might enhance the war-making potential of the prospective enemy. If and when war does come, the enemy will not be as well off as he would have been if there had been no embargo. This type of economic warfare has frequently been employed preceding military operations.

Embargoes generally confer short-run benefits on the perpetrator, but if war does not come, the longrun benefits may accrue to the embargoed nation. Because of modern technology most economies have such flexibility that there are few goods for which a substitute cannot be found, even if at a somewhat higher cost. When confronted with an embargo, a nation begins to develop substitutes, perhaps using resources formerly exported to bear most of the cost of the development. If the embargo period is long, the country will have made the necessary substitution, so that the complete embargo of wartime does not impose any further burden. This kind of economic warfare can backfire if the potential enemy is forced prematurely, at a time when it can perhaps better afford it, to prepare itself for war by developing self-sufficiency. In this case, the initiator has at most imposed some added costs on the enemy, but at the expense of facing an enemy not only more adequately prepared but also now insulated against this particular kind of economic warfare. Of course, a small country which has no alternate sources of supply or alternate markets can be reduced to impotence by an embargo by a large economic power.

Since World War ii the United States has been the principal proponent of the embargo and the communist countries the principal victims. The United States first initiated a strategic embargo against the Soviet Union and eastern Europe when Czechoslovakia became a communist country in 1949. By “strategic” is meant that not all exports to those countries were eliminated, but only those considered important from the point of view of their war-making capability. During the Korean hostilities the embargo was strengthened and a complete embargo was applied against China. The United States tried to persuade most of its allies to initiate similar embargoes, but usually somewhat weaker ones were imposed.

There were many difficulties in applying the strategic concept, which has no precise economic meaning, since all economic goods are in reality substitutes for one another. After the Korean hostilities ended, most strategic controls were gradually relaxed almost to the vanishing point, except in the case of Communist China. When Cuba entered the Soviet sphere of influence, the United States applied an embargo, nominally strategic but in fact punitive. It was almost a complete embargo, excluding some foodstuffs and medicines. It is unlikely that the strategic embargoes have significantly benefited the United States. Although they may have created temporary bottlenecks and planning problems in the Soviet Union, they tend to make the communist world more self-sufficient and have increased intra-Soviet area trade. In the case of Cuba it has helped to drive that country into the Soviet economic sphere.

Economic aspects

Although it directly supports the military establishment, economic warfare, even when serving military purposes, is directed at the economy. If a country is at war or proposes to go to war, economic warfare serves a military goal. If a country is not at war and does not necessarily intend to engage in military hostilities, then economic warfare may be serving an economic function. All of the measures usable in wartime are also usable in peacetime. Some of them, however, are not generally employed because of their intimate association with active hostilities (e.g., preclusive buying).

For economic purposes, the actions constituting economic warfare generally fall into five categories: (1) guaranteeing sources of supply, (2) guaranteeing markets, (3) improving the terms of trade, (4) denial, and (5) economic take-over. The first three of these do not necessarily imply economic warfare; they may be normal commercial transactions undertaken in pursuit of private profits. They may, however, also be undertaken for the specific purpose of increasing the economic power of a country more rapidly than that of other countries. A wide variety of techniques are available for attaining these ends, ranging from those which are also usable in wartime to those apparently less predatory, such as gradually becoming a large trading partner and then threatening to with-draw trade, the building up of debts in other countries, and the extension of credit.

Political aspects

All of the above acts of economic warfare may also be used to further the third important purpose of economic warfare—the pursuit of political advantage. This purpose, always important, has gradually assumed greater and greater significance as nations have become increasingly cautious about the use of force to achieve aims which transcend the economic benefits that may be conferred by economic warfare. The search for political power may take three forms. It may be quite general. A country may simply desire respectability and status. Many countries on the way up, in process of political and economic development or in the consolidation of revolutionary gains, may want, initially at least, only to be recognized and noted as a member of the family of nations. Other countries, on the way back from a disastrous national experience, such as a lost war, may desire readmittance and a return to their former place.

The political purpose may also be manifested in a highly specific fashion. A country may wish to conclude an alliance or to obtain the vote of another in some international organization. Or it may want another country to eliminate a particular political or military leader, to undertake some change in domestic or foreign policy, or the like. The change may be either internal or external, or both. In most cases, however, it concerns foreign policy, since it is in this field that the power position of the initiating country is most directly affected.

The ability to employ economic warfare for these political goals is an indication of the relative economic power of the country. It implies either an economy significantly larger than that of the intended victim or an economy which is planned and can be directed by the government to the attainment of specific goals. Such is the case, for example, with the Soviet economy. Successful economic warfare implies growing economic strength of the protagonist relative to the intended victim, and even when such actions do not add directly to the economic capabilities of the initiator, they usually worsen the economic position of the victim.

The ultimate degree of political, as well as economic, influence is the take-over of another country. Just as economic warfare may be directed at reducing the flexibility of another country’s economy to such an extent that the country can no longer make decisions with respect to its own resources, so economic warfare may also be used to pave the way for political amalgamation, to deprive a country of its national sovereignty. For some countries, e.g., Germany in the 1930s, the take-over has been the ultimate goal of economic warfare, and the other objects have been but stepping-stones to this end. This is true, however, only in the specific historic context in which a major power feels itself endowed with the truth and with the obligation to propagate it throughout the world. Throughout most of history, nations have been willing to set their sights much lower and have used economic warfare to attain much more limited objectives.

Strategies in economic warfare

Economic warfare is ordinarily a two-sided affair. When an intended victim of economic warfare discovers his position, he can be expected to retaliate. It is, of course, possible that he may go beyond economic warfare and may even initiate hostilities. Usually, however, the victim assumes one of three basic postures: (1) He may be passive and accept whatever solution the initiator of economic warfare proposes. This is a fairly rare phenomenon. (2) The victim fights back, attempts to defend himself, and only grudgingly gives in. The victim may choose to fight on the grounds already chosen—to break the embargo, to pay off accumulated debts by borrowing elsewhere or by selling accumulated balances at a discount, or to attempt to extricate himself from whatever other economic snares he is involved in. He may also fight back by using a different policy to inflict harm on his tormentor, so that the pressure will be relaxed. Thus, if country A holds large balances of the currency of country B and is using them to elevate its own position, country B may employ quotas or other discriminatory policies to raise the siege. (3) Both countries may engage in economic warfare against one another but with different purposes, and both may be successful. The country with a narrow political purpose may achieve it through economic warfare against the country which is achieving its specific economic purposes in the same conflict. The political gains of the former may more than offset its economic losses. The economic gains of the latter may more than offset its political losses. Thus, in economic warfare each side can consider itself the winner and, by the same reasoning, each side can lose.

In the conduct of economic warfare, there are only two basic approaches. They are the carrot and the stick, cajolery and coercion, persuading the intended victim or forcing him through economic means into the desired course of action. Each has its applications. They may be used separately, but not infrequently they are used together.

Coercion

The stick, or coercion, has been used most frequently. After a country achieves a position of economic influence in another, it may threaten to stop making purchases, to cut off supplies, or to refuse to pay obligations unless some concession—economic, political, or military—is made. In two most common situations the victim is maneuvered into a position in which a substantial proportion of his trade is with the initiator, or the latter manages to become deeply indebted to the victim. Whether these devices will work depends heavily on the economic position of the victim and the market for his products. If that market is relatively brisk, the victim may chance switching his sales to other markets rather than make a concession. A victim in a favorable internal economic and trade position may be able to withstand non-payment of a debt for some time if it is not too large, expecting that it will eventually be repaid regardless of whether he gives in. On the other hand, a slow market for its product, depressed world economic conditions, a very large debt, or a large percentage of trade in the hands of the other country may leave a victim with no alternative but to pay premium prices for his supplies, to sell at a lower price to the other country, or to let his political and military policies be influenced by his trading partner. Usually this form of economic warfare damages the general prestige and standing of the country employing it, a cost which the initiator should calculate in advance.

Persuasion

The carrot, or persuasion, is a prestige builder. It consists of the use of foreign economic relations to favor another country and thereby win its good will and support. Favoritism is a delicate instrument and does not carry with it the sometimes unpleasant connotations of coercion; it may, however, be just as effective. The usual method is to give more favorable terms of trade—either lower export prices or higher import prices—than would be provided in the world market, or to loan or give resources to the other country. On the basis of these economic favors, a country may expect, in return, reciprocal favors in the form of political support, an alliance, or perhaps neutrality. The recipient, however, may not be swayed by the economic benefits, in which case the initiating country can only return to the status quo ante, leaving the recipient with some net economic gains.

It is possible and often likely that the two modes of economic warfare can be used in succession. For example, country A may pursue a policy of granting favors to country B, rewarding B for diverting an ever-increasing proportion of trade to A from its previous channels, making tied loans or grants which use capital equipment from country A only, and giving other forms of economic succor. Country B becomes used to these favors and comes to regard them as fundamental to its welfare. So important do these economic considerations become that the recipient is deluded into thinking that the concessions made to its benefactor are really in its own interest.

The method of persuasion, of course, works best when there is at least an ostensible similarity of outlook and interest between the two countries. In case the delusion breaks down, the initiator of economic warfare is in a position to employ the coercive method. While the recipient is being lulled by favors, the initiating country is gradually cornering a larger proportion of its trade, perhaps even approaching monopsony of some of the recipient’s exports or monopoly of some of his imports. From this vulnerable position it is but a short step, to being subject to massive coercion by the former benefactor. In its stupor, the recipient may not recognize what is happening until the initiator has maneuvered himself into a powerful and potentially damaging position. Then the latter, by withdrawing or threatening to withdraw, can often influence the policy of the victim.

It must be recognized that the use of persuasion may render the initiator vulnerable, particularly if the external economic relations of the two contending countries are of about the same size. If the trade is large for the recipient, it is also large for the initiator, and the recipient under some circumstances may subject the initiator to pressure through the same relations that the initiator is employing. If one country is substantially more powerful economically than the other, it can afford to pass up the debt repayment, can find other markets and new supplies. But the more comparable the countries are in economic power, or the more special economic considerations render them proximate, the greater is the likelihood that this form of economic warfare may backfire and hurt the country that initiated it.

Economic warfare and state trading

All the techniques of economic warfare, many of which have already been mentioned, may be classified as acts of buying or selling, borrowing or lending. The use of these techniques is consistent with either private or state trading. If private trading is the predominant form, however, then economic warfare can be waged only insofar as the government intervenes and acts, either positively or negatively, to influence the decisions of private traders.

A government-imposed quota or increased tariff in a country where private interests do the foreign buying may be an act of economic warfare if its intent is to improve the country’s relative power position. A loan, sale, or purchase of some product, bilateral balancing of trade, and many other measures may also constitute economic warfare. The ingredient common to all these techniques is government action. Private actions may in some cases have the same result as economic warfare, although they are not necessarily so intended. Only government action is intended to be in the national interest and only government action, directly or through private traders, can constitute economic warfare.

Perhaps the most singular characteristic of state trading is that the nation which practices it is necessarily and automatically engaged in economic warfare. Comprehensive state trading stands alone in its power as an instrument that utilizes economic means to improve a country’s relative economic, political, and military position. The concentration of all external transactions in the hands of the government implies that trade no longer is solely a means for increasing the income of the country. Economic decisions are automatically transmuted into economic–political–military decisions in which costs are balanced against benefits in all aspects of national life.

Robert Loring allen

[See alsoForeign Aid; International Trade Controls; Military power potential; Sanctions, international. Other relevant material may be found inForeign policy; War.]

BIBLIOGRAPHY

Allen, Robert L. 1960 Soviet Economic Warfare. Washington: Public Affairs Press.

Ellis, Howard S. (1939–1940)1941 Exchange Control in Central Europe. Harvard Economic Studies, Vol. 69. Cambridge, Mass.: Harvard Univ. Press.

Hirschman, Albert O. 1945 National Power and the Structure of Foreign Trade. Publications of the Bureau of Business and Economic Research, University of California. Berkeley and Los Angeles: Univ. of California Press.

Viner, Jacob 1923 Dumping: A Problem in International Trade. Univ. of Chicago Press.

Wu, Yuan-li 1952 Economic Warfare. Englewood Cliffs, N.J.: Prentice-Hall.

International Encyclopedia of the Social Sciences