Weaponization of Trade

Weaponization of trade refers to the strategic use of trade policies, tariffs, sanctions, and economic tools by a country to further its geopolitical or national security goals, rather than just pursuing economic benefits. Read here to learn more.

This practice has gained prominence in recent years as global trade becomes increasingly entangled with political tensions and power struggles.

External Affairs Minister S. Jaishankar’s recent statement highlights growing concerns about globalization’s unintended consequences, including job losses and dissatisfaction with living standards across various countries.

He pointed out that the benefits of globalization have been uneven, leading to negative impacts in some sectors, particularly where economies have become heavily dependent on imports, often from China.

This has led to “trade weaponization” – a scenario where trade practices are used as tools of strategic influence or coercion.

Weaponization of Trade

• Use of Tariffs and Trade Barriers: Tariffs or trade restrictions are imposed not just to protect domestic industries but to punish or pressure other nations. For example, the U.S.-China trade war saw both nations imposing tariffs on each other’s goods as a means of gaining leverage in broader geopolitical and economic disputes.
• Economic Sanctions: Economic sanctions are a common tool in weaponized trade. Countries impose sanctions to isolate a target nation economically. The U.S. has frequently used sanctions against countries like Iran and North Korea, cutting off access to financial markets, oil exports, and key trade partners.
• Export Controls: Countries can restrict the export of strategically important goods, like technology or rare earth minerals, to weaken a rival nation’s economic or military capabilities. For example, the U.S. has limited the export of advanced semiconductors and technology to China to slow down China’s progress in areas like artificial intelligence (AI) and telecommunications.
• Supply Chain Disruptions: Another dimension involves intentionally disrupting supply chains to create economic pressure. For instance, during the Russia-Ukraine war, Russia was accused of using its control over natural gas supplies to Europe as a geopolitical weapon, restricting flows to exert pressure on European nations.
• Manipulation of Global Trade Institutions: Trade weaponization can also involve manipulating institutions like the World Trade Organization (WTO) to create trade rules that disadvantage rivals or challenge rivals’ policies.

Major Examples of Trade Weaponization

• China’s Trade Practices: China has been accused of weaponizing trade through practices such as controlling the export of rare earth elements (critical in tech products like smartphones and electric vehicles). In 2010, China reduced rare earth exports, affecting Japan and other tech-dependent countries, using this as leverage in a territorial dispute.
• U.S.-China Trade War: The U.S.-China trade war under the Trump administration is a classic example of trade weaponization. The U.S. imposed tariffs on Chinese goods to address trade imbalances and intellectual property theft, while China retaliated with its tariffs on U.S. imports. Beyond economic damage, these measures had far-reaching geopolitical implications.
• Russia’s Energy Weaponization: Russia’s use of its natural gas supplies as a geopolitical tool, particularly toward Europe, is another key example. In response to sanctions and support for Ukraine, Russia limited natural gas supplies to European nations in 2022, which led to energy shortages and raised energy prices across the continent.
• Sanctions on Iran: U.S. sanctions on Iran’s oil exports aimed to cripple its economy and bring Iran back to the negotiating table over its nuclear program. By cutting Iran’s access to international markets and its ability to export oil, the U.S. exerted pressure, though at the expense of disrupting global oil supplies.

Consequences of Trade Weaponizing

• Economic Uncertainty: Weaponized trade creates volatility in global markets, disrupting supply chains and trade flows. This leads to price hikes, especially for essential goods like energy and technology components.
• Erosion of Global Trade Norms: The rise in trade weaponization risks undermining multilateral trade institutions like the WTO, which rely on the principle of free and fair trade.
• Geo-Economic Divisions: Countries may turn to form economic blocs or alliances, creating a divided global trading system with rival camps. This can exacerbate geopolitical tensions and lead to decoupling between economies like the U.S. and China.
• National Security Concerns: Nations increasingly view economic dependencies as vulnerabilities. For instance, many countries are looking to reduce reliance on China for critical supplies, such as pharmaceuticals or technology components, to safeguard national security.

India on weaponization of trade

• Impact of Globalization: Globalization over the last 25 years has accelerated trade liberalization, but the benefits have not been equally distributed. Many countries, including India, have faced job losses in industries unable to compete with cheaper imports, particularly from countries like China.
• Rise in Protectionism: Countries like India and Western economies have started adopting protectionist measures to safeguard their domestic industries. This trend has intensified as imports from China dominate crucial sectors such as manufacturing, electronics, and pharmaceuticals, leading to a strategic rethinking of trade policies.
• Weaponization of Trade: Jaishankar’s assertion that “trade has not only been globalized but also weaponized” refers to the way countries, particularly major powers, use trade as a tool of political or economic pressure. This is evident in the trade tensions between China and many Western economies, as well as India’s recent moves to reduce dependency on Chinese imports by fostering domestic manufacturing under initiatives like “Make in India” and implementing higher tariffs on certain goods.

Response to China’s Trade Dominance

India has been taking several steps to address its dependency on Chinese imports, such as:

• Atmanirbhar Bharat (Self-Reliant India) initiative to boost domestic production.
• Trade restrictions and tariffs on specific Chinese products, especially after geopolitical tensions like the India-China border conflict.
• Strengthening regional partnerships with countries in the Indo-Pacific to diversify trade sources and reduce reliance on China.
• Institutional Cooperation: Involving forums like Indo-Pacific Economic Framework for Prosperity (IPEF); Mineral Security Partnerships, etc.
• Supply Chain Resilience: Through diversification of trade basket, promoting innovation and digitization, etc.
• Counter Strategies: Like China Plus One (a business strategy that prevents investing in China only); Friend Shoring (enhancing trade between economic and political allies), etc.

Strategies for Countries to Combat the Weaponization of Trade

• Strengthening Multilateral Institutions:
  • World Trade Organization (WTO) reforms: Countries can push for reforms in the WTO to ensure that it remains an effective platform for resolving trade disputes and preventing unilateral trade actions. This includes modernizing dispute resolution mechanisms and creating new rules for emerging issues like digital trade.
  • Regional Trade Agreements (RTAs): Nations can diversify their trade portfolios by entering into RTAs, which reduce dependence on any single trade partner. Agreements like the Regional Comprehensive Economic Partnership (RCEP) or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) can provide alternative markets.
• Diversification of Trade Partners:
  • Reducing Reliance on a Single Market: Countries can reduce their exposure to economic coercion by diversifying trade relations. For example, the European Union has actively sought to diversify its energy imports to reduce reliance on Russia.
  • Encouraging Domestic Production and Resilience: Strengthening domestic industries, investing in “Make in India” or similar initiatives, and developing self-sufficiency in critical sectors such as semiconductors, pharmaceuticals, and energy can reduce vulnerability to trade weaponization.
• Developing Strategic Alliances:
  • Building alliances with like-minded countries: Nations can form coalitions with countries that share similar values regarding free trade and multilateralism. This can enhance collective bargaining power and resilience against coercive trade practices.
  • Coordinated Responses: In cases of economic coercion, countries can respond collectively, as seen in the G7’s unified response to various geopolitical trade challenges, where they have aimed for collective sanctions against aggressive trade weaponization.
• Enhancing Legal and Institutional Frameworks:
  • Strengthening Trade Law: Countries need to enhance their legal frameworks to protect against unfair trade practices and to ensure that businesses have recourse against economic coercion.
  • Bilateral and Multilateral Dispute Resolution Mechanisms: Countries should actively use international platforms for dispute resolution like the International Court of Justice (ICJ) and arbitration panels.
• Investment in Technology and Innovation:
  • Developing Domestic Technological Capabilities: Technological innovation is key to minimizing the impact of trade sanctions, especially in sectors like energy, AI, and high-tech manufacturing.
  • Cybersecurity in Trade: Countries must also address cyber vulnerabilities in their supply chains, which can be exploited as part of trade weaponization.
• Resilience through Supply Chain Realignment:
  • Building Resilient Supply Chains: Nations can foster resilience by reshoring or nearshoring production to reduce dependence on geopolitically unstable regions. For example, Japan incentivized its companies to diversify supply chains outside China.
  • Strategic Reserves: Creating reserves for critical materials (e.g., rare earth metals, food, energy) can act as a buffer during trade disruptions.
• Balancing National Security and Economic Interests:
  • Balancing Trade and National Security: Governments need to balance the protection of national security with openness to global trade. For instance, regulations on foreign direct investment (FDI) in sensitive sectors (like telecommunications or defence) must be transparent to avoid misuse of economic sanctions.

Way Forward

• Global Cooperation on Trade Norms: Nations need to work together to establish clearer and more enforceable rules on trade weaponization. This includes discussions on sanctions, export controls, and investment barriers.
• Creating Strategic Economic Security Councils: Nations could create bodies similar to the National Economic Security and Investment Act (NESIA) in the U.S. to evaluate trade dependencies and vulnerabilities regularly and recommend policy changes.
• Leveraging Technology in Trade Policy: As digital trade becomes more prevalent, countries must set international rules on data flow, cybersecurity, and digital payments to reduce potential weaponization.
• Public-Private Partnerships: Governments should work with the private sector to create frameworks for economic resilience. Public-private cooperation can strengthen cybersecurity in trade infrastructure and develop contingency plans for global supply chain disruptions.

Conclusion

The weaponization of trade represents a shift in how countries use economic tools to pursue geopolitical aims.

As trade continues to intersect with issues of national security, technology, and political influence, this trend is likely to persist, raising concerns about the future of global economic cooperation.

Countries are increasingly recognizing that trade policies can no longer be viewed in isolation from broader strategic concerns.

Related articles:

• Global trade disruptions
• Dual-use goods and technologies
• Is China buying the world?

-Article by Swathi Satish