Economic statecraft

M I C H A E L M ASTA N D U N O

Chapter contents
Introduction 222
Economic statecraft: instruments and objectives 224
Economic sanctions: not always successful, but still useful 227
Economic incentives: an under-appreciated instrument of statecraft? 235
Economic interdependence: source of political harmony or conflict? 238
Conclusion 239

Reader's guide
This chapter focuses on the relation between economic instruments of statecraft
and broader foreign policy goals and strategies of states. I n general, it is difficult for
economic sanctions to achieve major foreign policy objectives, despite their popu­
larity as a foreign policy strategy. The end of the Cold Wa r led to an increase in the
use of sanctions, but not necessarily in their reJative effectiveness. However, even
if sanctions do not always succeed, governments still find them useful as part of a
brof'!nr->r foreign policy stratei;y lo :.ignal their Intentions, �t!r HJ 1rnport<.1nt messages,
and complement military action or diplomacy.
The chapter also argues that the positive use of economic Incentives has con­
siderable promise as an Instrument of statecraft, and deserves more systematic
attention in the study of foreign pol icy. It concludes with the endurfng question
of whether economic interdependence leads to harmony. as liberals expect, or
conflict a.mong states, as realists expect, and finds that it depends on the future
expectations of policy makers, the nature of the military balance, and the form that
economic interdependence takes.

Introduction
Statecraft can be defined as the use of instruments at the disposal of central pol itical authori­
ties to serve foreign policy pu rposes. The instruments of statecraft fall co mmonly into three
main catego ries: diplomatic, military, and economic. This chapter focuses on economic
statecraft-the use of economic tools and relationships to achieve foreign policy objectives.
Economic statecraft may be negative, involving the threat or use of sanctions or other forms
of economic coercion or punish ment, or it may be positive, involving the use of economic
relationships as incentives or rewards. In addition, the use of economic statecraft may be
 C H A PTER 1 2 E CO N O M I C S TAT E C R A F T 223

unilateral, involving efforts by one government, or multilateral, involving attempts by m ulti­

ple governments to coordinate their economic resources or policies to i nfluence the behav­
iour of a target country or government.
Economic statecraft has a long history, dating back at least to the Peloponnesian Wars of
ancient Greece. Foreign policy students should note that economic statecraft was used with
increasing frequency during the twentieth century, as cou ntries in the international system
became more interdependent and a global economy formed. By drawing countries and their
citizens i nto tighter economic networks across borders, the liberal world economy has pro­
vided an accommodating structural environment, opening more opportun ities for govern­
ments to employ economic statecraft, both positively and negatively.
The best-known empirical study of economic sanctions analysed 1 74 instances of their use
between 1 91 4 and 2000 (H ufbauer et al. 2007}. It is not surprising that powerful states-those
with strong economies and many economic instruments at their disposal-are more likely than
weaker states to initiate economic statecraft as a key foreign policy measure. The USA has
been the most prolific practitioner of economic sanctions si nce the Second World War, and
Russia (formerly the Soviet Union) and the countries of Western Europe have frequently resort­
ed to sanctions as well. Having only twice organized multi lateral economic sanctions during
the Cold War, agai nst South Africa and Rhodesia, after the Cold War the UN Security Council
became more active, authorizing sanctions in at least ten i nstances and against a variety of tar­
gets including Iraq, Somalia, Libya, Serbia, Haiti, Rwanda, and I ran (Cortright and Lopez 2000}.
Because economic instruments are used so promi nently in foreign policy, it is important
to understand how and why govern ments use them, and the extent to which they are effec­
tive. Indeed, economic sanctions often fail to achieve the most ambitious political objectives
(e.g. forcing a govern ment to end a mi litary occupation or driving a dictator from power)
that governments seek through their use. This has led some scholars to conclude that eco­
nomic measures are not effective instruments of statecraft (Pape 1 997}. Others high light that
economic statecraft can serve multiple and varied objectives (Baldwin 1 985}. The key point
is that even if sanctions do not solve major foreign policy problems, a variety of economic
instruments may sti ll be useful to govern ments for signalling intentions, complementi ng
diplomacy, building a political consensus, or even paving the way for the use of military force.
Economic statecraft is part of the wider array of foreign policy instruments that states have at
their disposal; more often than not, economic measu res are used in conju nction with di plo­
matic and military ones as part of any government's overall approach to addressing foreign
policy problems and opportunities.
The next section of this chapter provides an analytical framework by discussing the wide
variety of economic instruments that states employ in the interest of foreign policy, and the
range of objectives they seek to accomplish with their use. The third section then exami nes
international economic sanctions, focusing on the reasons behind their use and the circu m­
stances under which they are likely to be effective. It provides a broad review of the twentieth­
and early twenty-first-century experience, including the renewed interest in and frequency
of sanctions used since the end of the Cold War. The i nterplay of economic sanctions, diplo­
macy, and military force, so crucial to understanding the broad schema of foreign policy, is
then explored, and the section ends with a discussion of how global ization, democratization,
and the end of the Cold War have affected the i ncidence and effectiveness of sanctions.
224 M I C H A E L M A S TA N D U N O

The fou rth section discusses the issue of positive economic statecraft. U nder what condi­
tions can the promotion of trade, aid, or investment induce other states to change their for­
eign pol icy behaviour? Positive economic statecraft has received relatively little attention in
the pol itical science literature. The logic of positive econ omic statecraft is explained, several
recent cases are explored, and the potential effectiveness of negative and positive economic
measu res is assessed com paratively. The discussion also moves from the level of the state to
the systemic level in exam ining the l i n k between economic interdependence, peace, and war.
Will the deepen ing economic integration among countries of the world lead to international
stability, as l iberal logic suggests, or be a source of conflict? A brief concluding section sum­
marizes the main argu ments of the chapter.

Economic statecraft: instruments and objectives

Govern ments seeking to employ economic statecraft as part of their foreign policy h ave a
variety of possible instruments at their disposal (see Box 1 2.2). Among the most com mon
are trade restrictions. Countries that rely heavily on exports or im ports-either generally or
upon particular commodities-are potentially vul nerable to economlc influence attempts
against them. In 1 973, OPEC (Organization of the Petroleum Exporting Countries) used the
'oi l weapon' against the U SA and other Western countries by restricting thei r access to this
vital natural resource in an effort to influence Western pol icies i n the Arab-Israeli war. The
U N sanctions directed against I raq following the 1 990-1 991 Persian Gulf War were i ntended
to prevent I raq from earning hard currency by selling its oil on world markets. For over fifty
years the USA maint,1inPd-initially with the support of other governrncnb, I.Jut for the rnosL
part unilaterally-a comprehensive trade embargo against Cuba designed to undermine the
authority of that country's communist regime. In 201 5, the leaders of the two countries, Barack
Obama and Raul Castro, met and announced that Cuba and the U nited States would finally
restore diplomatic relations. Although the US government also made it easier for American
citizens to visit Cuba, as of 201 5 the trade embargo remained in place.
Financial sanctions have become increasingly popular and are often used alongside trade
restrictions to enhance the pressure on a target government. Specific measures include cut­
ting off economic or mil itary aid, or-as in the attem pt by the USA to pressure Chile between
1 970 and 1 973- blocki ng a country's access to multilateral lending institutions such as the
World Bank or the I nter-American Development Bank. The freezing of assets belonging to a
target government or its leaders, which are held in banks under the legal jurisdiction of the
sanctioning govern ment, is another tactic. The USA froze I ran ian assets held in US banks in
1 979-1 980 in an effo rt to compel Iran to release American hostages. Simi larly, after 1 1 Sep­
tember 2001 , the USA and its partners froze the assets of suspected terrorist grou ps, and gov­
ernments that assisted them, as part of the larger effort to combat the spread of international
terrorism. After Russia annexed Crimea from U kraine in 201 4, the EU and US responded with
financial sanctions, fi rst targeting Russia's top officials and business executives and later Rus­
sia's banking system as a whole.
Many countries, especially devel oping ones, rely heavily on di rect foreign investments­
such as the building of factories, the construction of oil and gas pipelines, or the creation
of commun icati ons i nfrastructures-to further their economic growth and development.
 C H A P T E R 1 2 E C O N O M I C S TAT E C R A FT 225

Thus, investment restrictions are a potentially fo rm idable econo m ic sanction. Restrictions

o n energy exploration an d production investments have been used freq uently by Western
co untries against o i l - rich, but technologically d ependent. target states in the M i ddle East and
North Africa such as I ran, I raq , and Li bya. Duri ng the 1 980s, Western govern ments and p ri ­
vate lobbyi ng groups pressured m u lti nati onal corporations to forego a variety of i nvestments
i n South Africa as a means of pressu ring the wh ite m inority govern ment to i n itiate reforms
and share power with the black majority populatio n.
Finally, monetary sanctions, most com m only the buyi ng and sel l i n g of large q uantities of a
target state1s currency i n order to manipu late its exchange rate, can be used to force a govern ­
ment ta change its political behaviour by th reate n i ng it with the p rospect of a finan cial crisis.
In 1 956, the US Treasury sold large quantities of British pounds to fo rce down the val u e of
that cu rrency and prod the British govern ment to reth i n k its policy i n the Suez crisis. France
em ployed a si m i lar tactic agamst the U SA in the 1 960s by sell i ng d o llars i n exchange for go ld
i n order to pressure the USA to accept reforms of the inte rnational m onetary system. During
the 1 930s, the govern ment of i m perial Japan pro l iferated alternative, or 'puppet', currenci es
i n different parts of China with the i ntent of discred iting China1s existi ng currency and there­
by weaken i n g Ch i n a's h o l d on its own territory (Kirshner 1 995). Duri ng the 2000s, analysts
debated th e possibility that C h in a, h old i ng m o re than a tri l l io n dollars i n US debt i nstru m ents,
might one day try to coerce the USA pol itically by th reaten i n g to dispose of its holdi ngs and
thereby d rive down the value of the dollar (D rezner 2009).
As the above d iscussion suggests, governm ents use eco n o m i c sancti ons to sati sfy a range of
foreign pol icy objectives (see Box 1 2.3 ), One category i nvo Ives attempts to alter the domestic
politics of a target cou ntry. The USA, th rough legislation such as the Jackson-Van ik Amen d ­
m ent of 1 974 (-see Box 1 2_ 1 ), has l o n g used the th reat o f economic sanctions against govern ­
ments that it has j udged to mai ntai n i n adequate h u man rights practices with regard to th e i r
own popu lation s. Duri n g t h e early 1 990s, Russia i m posed san cti o ns agai nst Latvia, Estonia,
and Tu rkmenistan to gai n greater protection for eth n i c Russian m i noriti es l iving withi n th ose

BOX 1 2. 1 Ttiejacfison-Vanil< 1\'mencfment

TheJackson-Vanik Amendment was part of the US Trade Act of 1 974, named for its co-sponsors, Senator
Henry Jackson and Congress man Charles Vanik. The Amendment stipulates that the USA may grant most
favoured nation tradmg Status to certain (mainly communist) countries only if the US resident certifies
that those cou ntries allow the right of free emigration to their citizens. The Jackson-Vanik Amendment is
an example of economic statecraft. It promises an economic reward-a normal trading relationship with
the powerful U SA-if countries improve their emigration practices, and threatens an economic penalty­
the denial or removal of most favoured nation status-if countries do not.
The original intent of this legislation was to convince the Soviet Union, during the part of the Cold War
known as detente, to allow more of its Jewish citizens to emigrate to the West. TheJackson-Vanik Amend­
ment was controversial. viewed by the Soviet Union as an infringement on their sovereignty, and by its
American supporters as a necessary measure to justify normal trade with a represslve communist regime.
The People's Republic of China Wq.S subject to the provisions of Jackson-Vanik until 2001 . When it Joined
the World Trade Organization (WTO) in that year, the USA removed it from coverage under the Amend­
ment. In 201 2, when it became dear that Russia would join the WTO, the USA offered Russia a permanent
trade relationship and stated that the provisions of Jackson-Vanik no longer applied to Russia.
226 M I C H A E L M A STA N D U N O

BOX 1 2 . 2 Ttie tools of economic statecraft-illustrative tecl1niques

Comprehensive trade embargo

Selective trade embargo
Freezing of financial assets and imposition of travel restrictions
Restrictions on foreign direct investment
Dumping of another currency to depress its exchange rate
Restrictions on foreign aid
Increases in economic aid
Preferential trade arrangements
Support for the value of another currency
Encouragement of foreign direct or portfolio investment

BOX 1 2 . 3 Ttie objectives of economic statecraft-general categories

Influence another country's domestic policies

Influence another country's foreign policies
Weaken or strengthen ano1ber country's ec.onomic or n,11 tary capabilities
Undermine the government or political system of another country

countries. Russ i a co nti n ues today to use its control over natural resources, especially o i l and
gas, to coerce its neighbo u rs, such as Geo rgia, Moldova, and U kraine, to adopt polici es more
acco mmodati ng to Russia (see Chapter 23). S i m i larly, West European govern ments P.mploycd
sanctions against Algeria, M alawi , and Togo to p romote or p rotect democratization, wh ile
U N sanctions agai nst Rwanda i n 1 994 were i ntended to prompt govern i ng authorities to end
genocide and civi l war.
Seco nd, countries often use sanctions to infl uence the foreign policy behaviour of a target
govern ment. Italy i nvaded Eth iopia i n 1 935, the Soviet U n io n invaded Afghanistan i n 1 979,
and I raq i nvaded Kuwait i n 1 990. In each case, a collection of countries reacted by devising
economic sanctions agai nst the aggressor in the hope of forcing an end to the confl ict and
ideally the withdrawal of troops. UN and US sanctions against Li bya and I ran d uring the 1 990s
were i ntended to d iscourage those cou ntries from supporti ng i nternational terrorism. The
USA sanctio ned I nd ia and Pakistan in 1 993 and agai n in 1 998 to protest agai nst their respec­
tive nuclear weapon s programmes and to deter th em from u ndertaking n uclear prol iferation.
The U SA recently relaxed its restrictions on I ndia as part of a broader fo reign policy effort to
i m p rove relations between the two countries.
Som e sanctions are i ntended to i nfluence the domestic or i nternational behaviou r of a
target state; others are em ployed specifically to affect its econo m i c or m i l itary capabilities.
NATO's trade embargo against the Sovi et U n ion and Warsaw Pact cou ntries th roughout the
Cold War was pri marily i ntended to slow the growth of their m i litary capabi l ities by denying
th em access to the latest civi l ian and m i litary technologies of the West. The UN san ctions
agai nst Saddam H ussein's I raq during the 1 990s were si m i l arly a means of economic con ­
tai n ment. B y restricting the regi m e's access to o il revenues, the U N coalition ho ped to l i mit
 C H A P T E R 1 2 E C O N O M I C STAT E C R A FT 227

Saddam Hussein's capacity to rebuild Iraq's military at home and threaten force against its
neighbo u rs abroad.
In some cases, sanctions are intended less to affect the behaviour or capabilities of a regime,
and more to bring about regime change-the undermining of the very existence of the regi me
itself. The UN sanctions against Rhodesia and South Africa were intended primarily to isolate
and force the political capitulation of the white m i nority regi mes ruling those cou ntries. The
US sanctions agai nst Cuba, begin ning in 1 960, were a central part of the effort to oust Fidel
Castro and his communist regi me from power. The long-standing Arab boycott of Israel was
intended to hasten the demise of the Jewish state ( Losman 1 979). US sanctions agai nst North
Korea during the 2000s were i ntended in part to hasten the collapse of that country's com­
munist government.
The discussion thus far has focused on the negative or coercive uses of economic sanctions. It
is important to bear in mind that economic statecraft can also be positive. Sanctioning govern­
ments have 'carrots' as well as 'sticks' at their disposal.Just as trade denial can be used to change
behaviour, weaken capabilities, or induce regi me change, so trade promotion-the promise or
actuality of expanded trade-can be a means to influence a government's domestic or foreign
policies or to strengthen its capabilities. Governments can promise to increase aid, encou rage
foreign investment, or support a country's currency in exchange for desirable changes in that
country1s behaviour: One of the most celebrated cases of positive, and successful. economic
statecraft was the Marshall Plan of 1 948-1 953. By transferring significant resources from the
USA to Western Europe, the US government managed to strengthen the economic capacity
and political stability of its Cold War allies, and drew them more closely into the alliance against
the Soviet Union. More recently, the EU has mastered the art of positive statecraft, using the
promise of economic rewards in the broader context of EU enlargement to lock i n desirable
changes in the domestic and foreign policfes of its central European neighbours. China, as it
has grown richer, has offered financial incentives to countries in Africa and South America in
order to secure both foreign policy cooperation and access to energy resources (Alves 201 3).

Economic sanctions: not always successful, but still useful

The brutality of modern warfare, experienced by the great powers of Europe during the First
World War, led international diplomats to search for alternatives to war as a means to settle
international disputes and contain aggression. It is not su rprising that, in light of the emer­
gence of a liberal world economy, the framers of the League of Nations turned to an eco­
nomic instrument, specifically economic sanctions, as a possible substitute for war (Doxey
1 996). The League Covenant called on member states to use economic sanctions as their
primary response to aggression by one League member against another, and to use military
force only as a last resort. When Italy invaded Eth iopia in 1 935, league members did come
together to impose sanctions against Italy. But the sanctions failed to halt or reverse Italy's
aggression, and League members were not prepared to take the next step and go to war. This
sanctions episode ended with the humiliation of the League, which subsequently collapsed
at the beginning of the Second World War.
The UN Charter, crafted near the end of the Second World War, simi larly held out an
important role for economic sanctions as a collective response to i nternational aggression
228 M I C H A E L M ASTAN D U N O

and conflict. Once agai n, the hope of govern ments that sanctions might resolve fundamental
international conflicts was not rewarded. The post-war record of well-publicized sanctions
attempts m irrored the u n happy experience of the League sanctions against Italy. The fol low­
ing are among the most celebrated cases of sanction fai lures 1 a cumulative record that may
lead scho lars reflecti ng on the post-war experience to co nclude that economic sanctions
were for the most part an ineffective instru ment of statecraft.
During the 1 950s, the USA and its NATO allies hoped that comprehensive economic sanc­
tions wou ld retard the economic growth and u ndermin e the pol itical autho rity of the com­
mun ist regi mes of the Soviet Union and Eastern Europe. However, commun ist eco nomic
growth progressed and political legitimacy endured despite the sanctions, and by the early
1 960s American attem pts to maintain the sanctions created considerable political friction
within the Western all iance. A Western economic embargo against the People's Republic of
China-lau nched with the hope of un derm i n i ng the nascent com munist regi me-had simi­
larly failed by the end of the 1 950s and, worse, created political co ntroversy with i n NATO
(Mastanduno 1 992). The Soviet Un ion's own sanction attem pts met a simi lar fate. In 1 948, for
example, Stal i n used economic denial in an effort to force the renegade com munist leader
Tito of Yugoslavia into compliance with Soviet preferences for its other client states. Yet, Tito
defied Stali n , in creased h i s domestic popularity, and took Yugoslavia on a more independent
path.
The attem pt by Arab states to use an economic boycott to strangle th e state of Israel in
its i nfancy clearly fai led, although it had some Sl,lccess in altering the foreign policy behav­
iour of the West. The U n ited Nations im posed comprehensive economic sanctions agaf nst
Rhodesia after its Un ilateral Declaration of I ndependence in 1 965. I nitially, the Rhodesian
rPgime and economy withstood the sanctions; the m i nority guvemment did not collapse
until 1 979, when it capitulated to mil itary force brought to hear by the bl;i,k resii:;tance move­
ment. The UN arms em bargo against South Africa, beginning in 1 963, did not prevent that
country from becoming the most form idable mil itary power in southern Africa. US sanctions
against the Soviet Union fol lowing its invasion of Afghanistan neither forced Soviet leaders
to reconsider nor prevented them from undertaking a decade-long, ultimately unsuccessful,
attem pt to pacify that country. Fi nally, in perhaps the greatest case of sanctions fai lure, Cu ba's
Fidel Castro managed to defy US sanctions for over four decades, and his regi me outlasted
the Kenn edy. Johnson, Nixon, Ford, Carter, Reagan , Bush, Cl inton, and Bush administrations.

Why is it difficult for sanctions to succeed?

The logic of economic sancti ons as a foreign policy tool is relatively straightforward. The
i m position of econom i c pain on the target cou ntry is intended to compel political change.
Economic pain may force the target government di rectly to reconsider its behaviour. Alter­
natively, it may create political divisions with i n the government which lead to pol icy change,
or it may prompt the suffering target population to apply pressure for policy · change or even
change in the government itself. The greater the economic pressure, the more likely it is that
these political effects will be felt.
The first challenge that sanctioners m ust confront is the difficu lty of maxi mizing economic
pai n. States facing economic sanctions can sometimes turn, even at considerable political and
econ omic cost. to alternative economic partners. Cuba was trad itionally h ighly dependent
 C H A P T E R 1 2 E C O N O M I C STAT E C R A F T 229

on the large neighbouring US economy; the Cold War context gave the Castro regime the
opportunity to switch its political allegiance, selling Its sugar to the Soviet Union i nstead and
buying (technologically Inferior) plant and equipment from Eastern Bloc countries. Facing
Western sanctions during the 1 950s, China tied its economy more closely to that of the Soviet
Union. By the 1 960s, the Soviet U nion was able to sidestep American sanctions by trading
instead with America's own allies in Western Europe and Japan who were no longer prepared
to follow the American lead. Yugoslavia defied the Soviet sanctions by turn ing its trade to
and accepting economic aid from the non-communist West. The Arab boycott forced Israel
to look outside its i mmediate neighbourhood, primarily to the USA and Western Europe,
for goods and markets. Sanctions imposed by the USA and the EU on Sudan in the 2000s, in
response to the Sudanese government's role in the mass killings in Darfur, were frustrated by
the participation of Chinese, Indian, and Malaysian companies in the Sudanese oil industry.
Target states have options even if virtually all other states are cooperating in sanctions.
Dunng the 1 990s, Iraq managed, at a high cost, to s muggle goods through Jordan and to find
an array of illicit middlemen to move its oil onto world markets. South Africa found private
buyers in various states willing to violate the UN arms embargo. Throughout the Cold War
the Soviet Union ran a systematic programme of stealing Western technology or purchasing
it from Western companies willing to risk the penalties that their own governments would
impose on them if their activities were exposed.
Some states respond to sanctions as an externally imposed protectionist barrier that forces
the domestic economy to produce, at h igher cost, what had previously been i m ported. At
the time UN sanctions were i mposed, the Rhodesian economy produced about 600 different
manufactured goods. By 1 97 1 , it produced about 3800 goods (Losman 1 979). In effect, the
sanctions forced the diversification of the domestic economy.
The second chall enge for sanctioners is that even the imposition of considerable economic
pain does not necessarily translate into the desired political changes. Sanctions, in fact, often
have the opposite effect of that intended. Instead of leading to political disarray at home and
the disintegration of the target government, the imposition of sanctions can result in politi­
cal integration withi n the target country. This is sometimes referred to as the rally round the
flag effect sanctions create a sense of solidarity within the target country as citizens and
their leaders draw closer together in response to what is perceived-or depicted by oppor­
tunistic leaders-as an external th reat or attack on the country. Throughout his long tenure
Fidel Castro was masterful at blami ng the mostly self-imposed problems of the centralized
Cuban economy on 'Yankee i mperialism'. He depicted food shortages as the result of US
sanctions rather than as an inevitable drawback of the inefficient and overregulated state of
the Cuban agriculture sector. I n Rhodesia, the white minority government and its supporters
drew closer together in defiance of i nternational sanctions and in the interest of protecting
their privileged status. Immediately after the US and EU imposed sanctions against Russia in
201 4, President Vladimir Puti n's approval ratings at home shot up some twenty percentage
points, despite the fact that the sanctions, coupled with fa lling oil prices, i mposed consider­
able pain on Russia's economy.
This integrative effect of sanctions is similar to what has been documented as a common
psychological response to military attack. Instead of breaking the morale of publics under
siege, strategic bombing during the Second World War seemed to strengthen the resolve and
defiance of the various European populations in the fa ce of enemy attack. The USA found the
230 M I C H A E L M A S TA N D U N O

North Vietnamese to b e similarly defiant in the face of the systemic and destructive bombing
campaign that the US Air Force carried out in the Vietnam War.
Third, the imposition of sanctions can be costly to the sanctioner as well as the target, mak­
ing it difficult to sustai n political support over time within a coalition of sanctioning states.
DPspite taking a confrontational stance towards the Soviet Union, in 1 981 President Reagan
Hfted the U S grain embargo in response to political pressure from US farmers closed out of the
lucrative S0v1et market. The 'front-line' states of Zambia, Botswana, and Zaire, despite their
political sup port of internati onal sanctions and their intense political opposition to apartheid,
found themselves reluctantly trading with Rhodesia because cutting off that source of trade
would have been prohibitively costly economically. International sanctions imposed against
Iraq in 1 991 began to fall apart around 2000 because France, Russia, and other coalition states
were n o longer willing to forego the economic benefits of participation in the Iraqi energy
sector. Many analysts believe that China would prove reluctant to use its monetary power
against the USA because by hurting the US economy it would simultaneously hurts its own,
owing to the deep Interdependence between the two large economies.
Fourth, sanctions can create political and public relations problems for the senders when
their effects fall disproportionately on i nnocent victims. The very effectiveness of economic
sanctions in imposing economic pain on the populations of Iraq and Haiti during the 1 990s
helped to create humanitarian crises in those two countries and to turn world public opinion
against the sanctioning states. The sight of children without food or the elderly without access
to needed medical supplies or care deflected international attention away from the evils of
Saddam Hussein's regime and focused it instead on the immorality of sanctions as 'weapons
of human destruction' (Mueller and Mueller 1 999).
In recPnt years this l;l';t problem has led gowrnments to rely more heavily on smart sanc­
tions, i.e. sanctions that limit damage to the general population in favour of more precise
targeting on the assets of the rullng elite. The idea is to move away from comprehensive trade
sanctions that depress the overall economy, and focus upon measures that di rectly affect a
dictatorial regime and its wealthy supporters. Financial sanctions, such as the freezing of bank
assets, and travel sanctions, such as refusing to allow the targeted elite access to i nternational
destinations, are among the types of smart sanctions employed since the end of the Cold War
against elites in Libya, Iraq, North Korea, and Russia. Targeted sanctions against the assets of
Colonel Gaddafi's close supporters appear to have mattered in Libya's 2003 decision to aban­
don its weapons of mass destruction programme and to bring suspected terrorists to trial
(Cortright and Lopez 2002). In 2007, the UN Security Council sanctioned Iran for its refusal to
suspend its uranium enrichment programme. A key element of the sanctions was the freez­
ing of bank assets of members of, and firms owned by, Iran's Revolutionary Guards. Smart
sanctions, like smart weapons, are designed to create the desired political outcome while
minimizing collateral damage against innocent victims within the target country.

Why governments still find sanctions useful

The discussion thus far raises a puzzle. If sanctions are apt to fail and may even have costly
and negative unintended consequences, why do governments continue to rely 0n them? The
simple answer is that governments find sanctions to be a useful instrument of statecraft-even
 C H A P T E R 1 2 ECO N O M I C STATECRAFT 231

if sanctions by themselves cannot accomplish the most ambitious foreign policy objectives.
Sanctions often accomplish some objectives, even if not the most ambitious. They may also
complement the other instruments of 5tatecraft that states draw upon in their foreign policies,
helping d iplomacy or military force to work more effectively. Indeed, in some clrcumstances,
sanctions are the best, or least undesirable, choice for a govern ment facing an unattractive set
of foreign policy options.
Three points need to be considered regardi ng the usefulness of sanctions. First, critics of
sanctions often draw their negative conclusions about the questionable effectiveness of sanc­
tions by focusing only on the most public and difficult objectives that a sanctions attempt
might hope to accomplish. If the Soviets were not driven out of Afghanistan, or the Rho­
desian government was not toppled, then sanctions are presumed to have failed. However,
foreign policy is more complex, and influence attem pts by governments often have multi­
ple objectives (Baldwi n 1 985). Sanctions may satisfy some, if not all, of a state's goals. In the
Rhodesian case, sanctions failed to achieve the ideal outcome-the rapid capitulation of the
Smith regime. But the principal sanctioning state, Britain, had additional objectives (Rowe
1 999-2000). Some members of the British Commonwealth were clamouring for a military
response to Rhodesia's independence declaration. Britain wished to avoid that outcome and
to hold the Commonwealth together. As a tangible sign that Britain took Rhodesia's defiance
seriously, the sanctions were a suffictentiy forceful response to satisfy other Commonwealth
states and simultaneously deflect pressure for a costly war.
Similarly, one could argue that Western sanctions against the Soviet Union failed to under­
mine the Soviet economy or topple the communist regime. Yet, by focusing on the denial of
advanced technology, the sanctions almost certainly made it more costly and d ifficult for the
Soviet Union to keep up in a technologically intensive arms race with the West. The sanctions
also served the i m portant political objective of isolating the Soviet Union and signalling that
it was a 'second-class citizen' in the international com munity-a message that clearly irritated
Soviet leaders from Khrushchev to Gorbachev. Sanctions against white minority regimes in
South Africa and Rhodesia, particularly when initiated by 'friendly' Western states, played
a similar role i n exacerbating the international isolation of these states. The UN sanctions
maintained against Iraq during the 1 990s neither undermined Saddam H ussein's regime nor
brought desirable changes in his behaviour, but they did help to degrade I raq's economic and,
especially, military capabilities, rendering Iraq a far less formidable military adversary when
the USA attacked again in 2003. Even the US sanctions against Cu ba, general ly acknowledged
to be a failure. may have had some value in signalling to other states in the region that defi­
ance of the USA would be very costly economically, even if one could survive it politically.
Second, governments frequently use sanctions as part of a broader foreign policy strate­
gy involving other i n struments of statecraft to achieve their objectives. Economic sanctions,
for example, might pave the way fo r the eventual use of m i litary farce. The US experi­
ence with I raq during 1 990-1 991 demonstrates this point well. When I raq invaded Kuwait
in 1 990, many states in the international com m unity found Saddam H ussein's behaviour
objectionable, yet were not prepared to go to war with I raq over it. War could only be a
last resort after other options had been exhausted. By painstakingly assembling an i nterna­
tional coalition for sanctions, the USA demonstrated that it was willing to explore options
short of m i litary force. Even though the sanctions did not 'work' by themselves, they played
232 M I C H A E L M A STAN D U N O

a vital role i n enabling U S officials to build a credible coal ition for the eventual use of
military force.
The interplay of sanctions, force, and diplomacy is evident in other cases as well. I n South
Africa and Rhodesia, u n popular governments were eventually brought down not by sanc­
tions but by domestic resistance movements. But Lhose domestic forces were themselves
aided by economic sanctions. Sanctions were a credible indicator that the international com­
mun ity was on the side of the resistance movements and against the perpetuation of the
white minority regimes. A critical turning point in the South African case came in 1 986, when
two long-standing geopolitical allies of the apartheid regi me, B ritain and the USA, turned
from opposing to supporting an international sanctions effort.
Third, the utility of sanctions is best judged in the context of alternative courses of action
available to decision makers. Decision makers often ask not 'Will sanctions work?' but 'What
better options do we have?' In some situations, decision makers find sanctions to be the
relatively most attractive option, even if the chances of success are small. The Soviet invasion
of Afghanistan in 1 979 left the USA without any obviously attractive options in response.
Doing nothing might actually have been a risky choice. It might have signalled to the Soviet
Union that the USA, recently defeated in Vietnam, and sim1..1ltaneously facing the collapse of
its ally and a humiliati ng hostage crisis in Afghanistan's neighbour, Iran, might be paralysed
politically and unprepared to defend its regional interests. This could tempt the Soviets to
try to take advantage of US weakness in I ran, a miscalculation that could in turn lead the
two superpowers to stu mble into a regional war. On the other hand, the USA did not want
to risk war itself by responding too aggressively to the Soviet invasion. An intervention by
US forces agai nst the Soviet occupiers in Afghanistan could similarly lead to the Third World
War. US officials needed a response which i nd icated that they took the Soviet action seriously
and disapproved of it, were not prepared to go to war over it, but were prepared to defend
their vital interests in the region i n the event that the Soviets moved mil itarily from Afghani­
stan into Iran. Economic sanctions-even if they could not actually oust the Soviets from
Afghanistan-helped to serve these purposes. They conveyed to the Soviet leaders that the
USA would no longer cond uct business as usual. The grain embargo (which ultimately hurt
the USA more than the Soviet Union economically because the Soviets could eventually find
other suppliers) sent this message, as did the US refusal to participate in the 1 980 Moscow
Olympics. The sanctions were complemented by public diplomacy; in what became known
as the Carter Doctrine, US President Carter stated publicly that the USA would be prepared
to use whatever means were necessary to protect its allies and defend its vital interests in the
Persian G ulf.
Since the 1 990s, Western leaders have proved unwilling to go to war to term inate Iran's
nuclear programme. They have relied instead on the 'second best' alternative of economic
sanctions. Sanctions have not succeeded in forcing Iran to abandon its nuclear ambitions.
However, sanctions have damaged I ran's economy, and played a key role in convincing Iran's
leaders to strike a deal in 201 5 in which they agreed to constraints on I ran's ability to enrich
u ranlum, and to more intrusive international inspections, in exchange for the gradual lifting
of sanctions.
The most authoritative quantitative study of economic sanctions concludes that, with
a broad definition of success, sanctions attempts during the 1 990s were successful about
33 per cent of the time (Hufbauer et al. 2007). Sanctions tend to be most successful when the
 C H A PT E R 1 2 EC O N O M I C STAT E C RAFT 233

objectives are relatively modest, when the target is relatively smal l and weak, and when the
sender avoids high costs to itself.

How did the end of the Cold War matter?

I noted earl ier that economic sanctions have been used with increasing freq uency in the
twenty-five years since the end of the Cold War. Sanctions have become a weapon of choice
for Western govern ments and the UN Secu rity Council. But are there reasons to beli eve that
economic sanctions will be any more effective than they were d u ring the Cold War? The
international structural changes at the end of the Cold War, along with developments in the
world economy (globalization) and i n world politics (democratization), have created a new
international environment for sanctions attempts (Jentleson 2000). Each of these develop­
ments is consequential for sanctions but, when they are taken together, there is no reason to
expect that sanctions will be systematically any more effective in the future than they have
been in the past.
The end of the Cold War predictably brought forth a surge of sanctions optimism. The Cold
War had created a stale mate in the international comm unity. Western allies might agree to
sanction thei r Eastern adversaries, o r vice versa, but there were very few issues on which all
the great powers might agree to place their collective pol itical influence. The collapse of the
East-West divide reopened the possibility of great power collaboration that had been envi­
sioned at the fo unding of the U nited Nations. Optimism escalated after I raq's 1 990 invasion of
Kuwait; all the great powers, including Iraq's trad itional benefactor, Russia, lined up together
in support of multilateral economic sanctions.
The subsequent post-Cold War experience has been more sobering. The major powers
have agreed to im pose sanctions col lectively for a variety of reasons against a variety of tar­
gets, including Serbia, Rwanda, Somalia, Libya, and Cambodia. However, there is no con­
cert of major powers policing the world by lining up consistently on the same side of salient
international conflicts. The collective sanctions against Iraq, maintained for almost a dec­
ade, began to unravel during the late 1 990s. The USA and Britain proved eager to maintain
a com prehensive embargo, but Russia and France were anxious to resume a more normal
trad ing relationship. Similarly, fo r m uch of the post-Cold War period the USA has consist­
ently favoured stricter economic sanctions against North Korea. Japan, China, and South
Korea initially opted for fo rms of engagement, although by 2009 provocative behaviour by
North Korea had swungJapan and South Korea closer to the US position. However, China has
remained reluctant to im pose serious economic restrictions on North Korea. America and
Europe took the lead in sanctioning Syria for its support fo r international terrorism and its
brutal crackdown on parts of its own population who took up arms in defiance of President
Bashar al-Assad's authority. However, in 201 2 Russia and China vetoed (for the third time) a
British-in itiated UN Security Council resolution cal ling for economic sanctions agai nst al­
Assad's regime. In short, the end of the Cold War means that there is greater potential for
great power cooperation o n sanctions, but no guarantee that agreement will be forthcoming
either on overall fo reign policy strategy (containment versus engagement) or on the willing­
ness to bear the economic costs that sanctions entail.
G lobal ization-the process by which more and more countries are integrating more
mean ingfully into the liberal world economy-has important cross-cutting impl ications for
234 M I C H A E L M A STA N D U N O

economic sanctions. O n the one hand, globalization makes the 'Rhodesian sol ution' of d iver­
sifying far more difficult to carry out. Domestic economic i nsulation and d omestic substitu­
tion for im ports and exports are a less viable response to sanctions i n a globalized economy.
As countries become increasingly dependent on the world economy, they become potentially
more vulnerable to international sanctions attem pts by other actors in the system. This is cer­
tainly true for Russia, which, after it annexed Crimea, was far more vulnerable to the im pact
of international trade and financial sanctions than it had been some twenty years earlier. Very
few countries choose to 'hide' from the contemporary world economy, and those that do (e.g.
North Korea) pay an extraordinary price in terms of economic prosperity and development.
On the other hand, globalization also increases the possibility that a target country can seek
out alternative markets and suppliers, undermining the effectiveness of sanctions. Globaliza­
tion has increased the volume and com plexity of international economic transactions, and
makes it harder for any coalition of countries, unless it is a universal coalition, to control all the
possible external partners that might benefit from evad ing or ignoring multilateral sanctions
agai nst a particular target.
These cross-cutting effects of globalization help us to understand the seemingly para­
doxical im pact of sanctions against I raq and Haiti during the 1 990s. I n these two cases, the
domestic economy was severely damaged by sanctions and the general population suffered
significantly. However, elites managed to emerge relatively unscathed and in some cases were
economically even better off as a result of sanctions. The reason may be that in these sanc­
tions targets, as i n most countries, el ites were better positioned than members of the general
population to take advantage of the international networks and connections offered by glo­
bal ization. The overall economy suffered the vulnerability impact of globalization, but elites
took advantage of the opportunity offered by alternative markets and suppl iers. I n other
words, globalization increases the likelihood that comprehensive sanctions can transform
i11to foreign policy weapons of hurnan destruction thal do 11ul m�u:.'��ar ily lead to meaning­
ful political change. This makes the development and implementation of precisely targeted
smart sanctions all the more imperative.
During the 1 990s democratization spread from Eastern Europe to Latin America to East
Asia and even parts of Africa. The logic of economic sanctions suggests that democratization
should, in general, increase the likelihood that the pain of economic sanctions wil l translate
i nto meaningful political change. Governments i n democratic settings are more sensitive to
the pressures and demands of their constituents. All things being equal, democratic targets
will be more vulnerable to sanctions attem pts than autocratic ones. But there is one impor­
tant caveat-the 'rally round the flag effect' mentioned earlier. A common response to exter­
nally imposed sanctions is the assertion of nationalism, and there is no reason to expect that
nationalist responses will be weaker in democratic than in autocratic settings. Democratic
governments may be just as capable as their autocratic counterparts in framing sanctions
attempts as pitting 'us against them' in order to maintain their own political position and their
ability to withstand external pressure to change their behaviour.
Conversely, the lack of democratization means that autocratic governments are better
positioned to shift the burden of sanctions to a more repressed population that has lim­
ited political resources. Autocratic governments in the Soviet U nion during the Cold War,
in I raq after the Cold War, and in Cuba across both periods proved effective in shifting the
burden and minimizing the overall im pact of sanctions on their pol itical autonomy at home.
 CHAPTER 1 2 ECONOMIC STATECRAFT 235

By contrast, i n G uatemala in 1 993 and Paraguay i n 1 996, busi ness and professional classes
newly empowered by democratization processes and with much to lose i n the event of sanc­
tions pressured their respective governments to accom modate the demands of the i nterna­
tional communrty and turn back anti-democratic coup attem pts by government and mil itary
officials (Jentleson 2000: 1 57).

Economic incentives: an under-appreciated

instrument of statecraft?
Positive economic statecraft can be defined as the provision or promise of economic benefits
to induce changes i n the behaviour of a target state. It is i m portant to distingu ish between
two types. The fi rst involves the promise of a well -specified economic concession i n an effort
to alter specific foreign or domestic policies of the target government. I call this version tacti­
cal linkage; others refer to 'carrots' or 'specific positive l i nkage'. A second version, which I term
structural linkage and others refer to as 'general positive lin kage' or 'long-term engagement',
i nvolves an effo rt to use a steady stream of economic benefits to reco nfigure the balance of
political interests with i n a target country. Structural lin kage tends to be unconditional; the
benefits are not turned on and off according to changes i n target behaviour. The sancti o n i ng
state expects instead that sustained economic engagement will eventually produce a political
transformation and desirable changes in target behaviou r.
Tactical linkage and long-term engagement are each i nformed by a d ifferent logic. Tactical
lin kage operates at a more immediate level; the sanctioning state calculates that the provision
of a particular type of economic reward will be sufficient to convince pol icy makers in the
target to reconsi der their existi ng policies. For example, i mmediately after the Second World
War, the USA offered sizeable reconstruction loans to Britain, France, and the Soviet Union­
i n exchange for political concessions. The British and French were generally willing to accom­
modate US demands that they l i beralize their domestic and foreign economic policies; the
Soviets were not. I n 1 973, European states and japan offered economic i n ducements in the
form of aid and trade concessions to Arab states du ring the OPEC crisis i n a largely successful
attempt to ensure that they would receive access to oil suppl ies at predictable prices. I n 1 982,
the USA offered to i ncrease sales of coal to its West European allies to d iscourage them from
a gas pipeline deaJ with the Soviet U n ion. This i nfluence attempt fai led.
Long-term engagement, however, works at a deeper level, and its logic was most clearly
articulated in the classic work of Albert Hirschman (Hirschman 1 980 (1 945]). The sanction­
i ng government provides an ongoing stream of economic benefits that gradually transform
domestic political i nterests i n the target state. Over time, 'i nternationalist' coalitions that
favour i nterdependence with the sanctioning state will form and strengthen, and will exert
i nfluence over the pol icy of the weaker state in a direction preferred by the sanctioning state.
Hirschman demonstrated how Nazi Germany used an array of eco nomic inducements to
i nculcate economic dependence, and eventually political acquiescence, on the part of its
weaker central European neigh bours during the inter-war period.
Political scientists have traditionally devoted relatively little attention to positive economic
statecraft. There are, for example, no databases of i nstances of economic inducement, with
assessments of success and failure, along the li nes of those that H ufbauer et al. (2007) and
236 M ICH AEL M ASTA N D U NO

Jentleson (2000) have compiled for negative economic sanctions. Economic sticks have com ­
manded more attention than economic carrots. This was especially true during the Cold War,
when the two dominant powers and their respective alliances were largely self-sufficient and
economically independent of each other. Since there was so little economic cooperation, the
study of superpower and inter-bloc economic interaction emphasized economic warfare, or
negative sanctions.
The end of the Cold War has brought a char,ged global situation and a revival of scholarly
interest in positive economic statecraft. The major powers of the world are now economi ­
cally interdependent, as they were during the late ni neteenth century. An understanding of
great power politics once again requires an understanding of economic relationshi ps and
of the links between economics and foreign policy. During the Cold War, US-Soviet reJa­
tions focused on arms control and the management of political and ideological competition.
Today, and particularly in the context of the great financial crisis that began in 2008, the focus
i n foreign relations among the USA, the EU, China. Japan, and Russia is as much on Issues of
economic reform, trade policy, and currency competition as on the traditional 'high politics'
of military competition and alliance cooperation. As economic relations take centre stage i n
foreign policy1 the traditional lines between high politics and low politics become blurred. I t is
not surprising that scholars have begun to rediscover the agenda of positive economic state­
craft. For example, a recent book argues that US foreign policy objectives would be better
served by ern ploying carrots rather than sticks, even i n relations with seemingly intractable
states such as Iran and North Korea (Nincic 201 1 ).
The Cold War endgame, and In particular Germany's reunification, highlighted the key role
of economic i nducements. Beginning 1n 1 969, West Germany used economic statecraft to
bu ild the polrtlcal foundation for rernnciliation with one of its mo�L distrustful neighbours,
Poland. When West Germany finally seized the opportunity to reunify in 1 989, a reassured
Pola1 ,J uit.l not stand in the way (Davis 2000). Simllarly, West German leaders used a steady
stream of economic i nducements over two decades to inculcate Soviet dependence on Ger­
man commerce and credits and to signal Germany's benign foreign policy intentions. Soviet
leader Gorbachev counted on Germany, more so than any other Western state, to provide
much-needed economic support. The German government responded i n 1 989-1 990 with
food aid and sizeable economic credits. The clinchers, which paved the way for Russian
acquiescence to un ification on Germany's terms, included a five billion Geutschmark credit,
a willingness to allow Russia to buy goods from the Eastern zone of Germany with roubles
rather than hard cu rrency, and a commitment to provide financial support for the post-u nifi­
cation resettlement of the Red Army in Russia (Newn ham 2002).
Since the end of the Cold War, economic engagement has proved to pe a key foreign policy
strategy in relations both among major powers and between stronger and weaker states.
The USA and the EU have used economic incentives, with mixed success, in an effort to inte­
grate Russia and Central and Eastern Europe in to a Western-centred world political economy.
European states view economic engagement as the appropriate strategy to adopt with regard
to a potentially revisionist I ran; the USA prefers economic containment. China has sought to
deepen econom ic interdependence with Taiwan as a means to reduce incentives for Taiwan­
ese i ndependence. Most prominently, the USA has adopted economic engagement as the
focal point of its strategy towards a rlsing potential challenger, Chi na. US officials recognize
that China's integration into the world economy will increase its economic and potential
 C H A P T E R 1 2 E C O N O M I C S TAT E C R A FT 237

sox 1 2 .4 Ttie practitioners speal<: economic statecraft ancl Ctiina

Economic statecraft has played a key role in the evolution of US foreign policy towards China over the
last two decades. In 2005, then Deputy Secretary of State Robert Zoellick gave a widely cited speech in
New York in which he called on China to become a 'responsible stakeholder' in international relations
(Zoellick 2005). China, Zoellick argued, benefitted substantially from positive economic statecraft, in
particular its participation in the liberal world economy and its preferential access to the large US market
for its exports. In exchange for those economic benefits, China should reorient its foreign policy in a more
'responsible' direction-in effect, in a direction more compatible with US priorities and interests. Zoellick
urged that China cooperate more fully with the US over Iran, North Korea, and nuclear proliferation,
become more accountable to its own people, and make its plans for military modernization more
transparent. I n short, 'China has a responsibility to strengthen the international system that has enabled
its success'. Although Chinese officials scrambled to find a precise translation of 'responsible stakeholder'.
Zoellick's intent was clear-a rising China should reciprocate for the economic benefits it gathered from
the US-centred world order by assisting the United States in managing that order.
Ten years after Zoellick's speech, the United States seemed to be reconsidering its approach to China.
Former Deputy National Security Advisor Robert Blackwill headed a task force at the influential Council
on Foreign Relations that concluded China had not evolved into a responsible stakeholder and, in
response, the United States should adopt 'a new grand strategy toward China that centers on balancing
the rise of Chinese power rather than continuing to assist its ascendancy' (Blackwill and Tellis 201 5: 4).
To complement this shift in strategy, Blackwill's task force called for greater emphasis on negative as op­
posed to positive economic statecraft, i ncluding the strengthening of US trade arrangements in Asia that
exclude China and stricter controls over technology exports that could strengthen China's economic and
military modernization.

mil itary power. But they also expect-or hope-that the very process of i ntegration wil l soften
Chinese i ntentions and encourage China to be a more accommodating, rather than a more
revisionist, ris ing power. In l ight of the rapid growth of Chi nese economic and even mi l itary
capabi l ities, a good part of the future of international politics hinges on the outcome of th is
h i gh-stakes experi ment in economic statecraft (see Box 1 2.4).

Positive and negative economic statecraft

The revival of i nterest i n economic i nducements naturally raises the issue of the relationship
between positive and negative means of economic statecraft. We can conceive of positive
and n egative measu res as su bstitutes or com plements. As substitutes, we can identify both
strengths and drawbacks of relyi ng on positive economic statecraft.
There are good reasons to expect positive measures to be more effective than negative
ones. Th reats tend to i nspire resistance and resentment in the target government; a typi­
cal response to the promise of rewards is hope and expectation. Negative sanctions often
produce the 'ral ly round the flag' effect. Positive sanctions do not, and have the potential to
undermine the target govern ment by creati ng transnational coal itions between groups i n the
sanctioning and target cou ntries at the societal level. Positive sanctions have a tendency to
encou rage the target govern ment to cooperate with the sanctioning govern ment on other
issues; negative sanctions create a general reluctance to cooperate. With negative san ctions,
m u lti lateral cooperatio n is a necessity and there are strong i ncentives for thi rd parties to
238 M I C H A E L M A S TA N D U N O

break the embargo in order to gain above-normal profits. Positive sanctions d o not require
multilateral support, and alternative economic partners typically cannot gain by undercut­
ting the sanctions. Business interests in the sanctioning state tend to mobilize against negative
sanctions, but they are l i kely to support positive ones that coincide with their natural interest
i n expanding economic interaction.
However, positive economic measures have potential drawbacks as well. Governments
that indicate a willingness to 'pay'for good fo reign policy behaviour may find themselves sub­
ject to contin ual demands for payment. After North Korea precipitated a potential n uclear
crisis, the USA offered it economic concessions i n 1 994 to forego its nuclear ambitions. About
ten years later, the North Korean govern ment precipitated another n uclear crisis, and made
clear its expectation that once again economic concessions should be forthcoming. A second
and related problem concerns the political repercussions of 'trading with an enemy'. Even if
positive economic measures stand a relative chance of success, governments might be reluc­
tant to reward a government that they otherwise find to be politically or morally repugnant.
The USA faces this dilemma in relations with Iran. The normalization of bi lateral economic
relations has the potential to bring Iranian political concessions, but at the cost of diluting the
overall US effort to isolate politically a distasteful regime labelled as a charter member of the
'axis of evil'. It is not surprising that President Oba ma's diplomatic opening to Iran in 201 5 met
wlth considerable suspicion and opposition from more conservative parts of the US political
establishment.
Positive and negative measures can also be used as complementary instruments of statecraft.
Positive economic sanctions can set up the threat or use of negative sanctions by developing
the economic dependence of the target on the sanctioning country. Similarly, negative sanc­
tions can structure opportunities for the use of pnsitive mea!.urcs. Once negct.Llve sanclions have
been in place. lifting them is a change from the status quo for which sanctioning states can
derive some concession in return. The USA used this tactic in 1 980 to facilitate the return of
hostages from Iran, and Western states employed it against Serbia to persuade it to accept the
Dayton Accords of 1 995. President Oba ma's willingness to ease economic sanctions against I ran
is premised on the expectation that in exchange Iran will cooperate with the U nited States on a
range of issues, including military opposition to the Islamic State in Iraq and Syria.
The relatiomhip betwee n positive and negative economic statecraft is relatively unex­
plored territory for foreign pol icy analysis. Now that positive measures have been rediscov­
ered, the next step will be to study their effectiveness more systematically, both on their own
and in relation to the more familiar forms of economic sanctions.

Economic interdependence: source of political

harmony or conflict?
The previous section discussed the renewal of positive economic sanctions at the level of fo r­
eign policy analysis. It is important to consider the systemic implications as well. If economic
interdependence can be used to strengthen alliances and improve relations with adversaries,
does its presence lead more generally to peaceful relations among states?
Liberals argue that economic i nterdependence decreases incentives fo r conflict by tying
peoples more closely together and increasing the costs of economic d isruption to high or
 C H A PT E R 1 2 E C O N O M I C STAT E C R A FT 239

prohibitive levels. States eventually come to recognize that they can no longer afford war
because it jeopardizes the economic benefits of interdependence. Realists, in contrast, gen­
erally argue that economic interdependence is more l i kely to lead to state conflict. It height­
ens the potential for pol itical friction and exposes the vul nerabil ities of insecure states in an
anarchic setting.
It is not surprising that one can fi nd empirical support for either position. One study rein­
forces the liberal view by finding that since 1 850 the level of international trade has been
inversely related to the occurrence of major power wars (Mansfield 1 994). Others find a sig­
nificant correlation between increased interdependence and democracy, and a reduction i n
the likeli hood of military conflict. Realists counter with evidence that d uring the inter-war
years dependence on strategic mi neral imports created incentives for states to use aggressive
foreign policies, even if that meant disrupting economic interdependence. In her survey of
twenty studies of interdependence and conflict, Susan McMillan {1 997) reports that ten stud­
ies su pport the liberal position, four support the realist, and six come up with mixed results.
Rather than seek a paradigmatic winner, it may be more useful to search fo r interven ing
variables that help to explain the circu mstances under which economic interdependence
leads to war or peace. For example, high levels of interdependence can lead to either peace
or war depending on pol icy makers' future expectations. If pol icy makers are pess im istic that
they will gain future trade benefits, they may be willing to resort to war even if, as before
the First World War, levels of economic i nterdependence are high {Copeland 1 996). Alter­
natively, Peter Liberman argues that whether i nterdependence leads to peace depends on
the perception of the m i litary balance between offence and defence {Liberman 1 999-2000).
Interdependence leads to confl ict when major powers are both trade-dependent and facing
a security situation in which defence is generally stronger than offence. The need to pre­
pare for the possibility of a protracted conventional war raises the stakes and exposes the
vulnerabilities of trade-dependent states. Stephen Brooks suggests that the modern form of
i nterdependence is more likely than the n i neteenth-century version to lead to peacefu l state
relations because contemporary globalization is characterized not only by deep trade links
but also by transnational production networks (Brooks 2005). These studies raise the debate
over interdependence and war to a more sophisticated level, beyond the set-piece battles
between l iberal and realist positions.

Conclusion
This chapter has focused on economic instruments of statecraft and advances four mai n
arguments. First, despite their popularity as a foreign pol icy tool, it is d ifficult for economic
sanctions to achieve major foreign pol icy objectives. The end of the Cold War has led to an
increase in the use of sanctions, but not necessarily in their relative effectiveness. Second,
even if they do not always succeed, govern ments fi nd sanctions usefu l as a device to signal
their intentions, send im portant messages, and co mp lement mi litary action or d i plomacy.
Third, the positive use of economic i ncentives has considerable promise as an instrument
of statecraft and deserves more systematic attention from stude nts of the subject. Fi nal ly,
the enduring q uestion of whether economic i nterdependence leads to harmony or conflict
among states is best answered conditional ly. It depends on the future expectations of policy
240 M I C H A E L M A STA N D U N O

makers, o n the nature of the m i litary balance, and o n the form that economic interdepend­
ence takes.

Key points
• Economic statecraft is part of the wider array of foreign policy instruments that governments have
at their disposal, and is freq uently used in conjunction with diplomatic and military measures in
response to foreign policy problems and opportunities.
• Economic statecraft may be positive, involving the use of rewards or incentives, or negative,
involving threats or punishment.
• Economic sanctions usually fail to achieve ambitious foreign policy objectives, but they are still
useful to governments in signalling intentions, complementing diplomacy, building a political
consensus for the eventual use of military force, or withstanding pressure to resort to military force.
• Recent structural changes, such as the end of the Cold War, the rise of globalization, and the
spread of democracy worldwide, each have im portant implications for the practice of economic
statecraft.
Positive economic statecraft has become more important since the end of the Cold War. Scholars
should pay as much attention to positive economic statecraft as they do to economic sanctions.
Whether economic interdependence leads to peace, as liberals believe, or to political conflict, as
realists believe, depends on a number of intervening variables, including the future expectations
of policy makers, the nature of the military balance, and the form that economic interdependence
takes.

Questions
l . Under what circumstances are economic sanctions likely to be effective?
2. How do realists and liberals differ in their understanding of the relationship between economic
interdependence and peace?
3. If economic sanctions do not seem to work very well, why do governments resort to them so
freq uently?
4. What are 'smart sanctions', and why have they become so popular?
5. Why do some scholars believe that economic incentives are more likely to succeed than economic
threats?
6. Is economic statecraft best understood as a complement to the use of mi litary force, or a substitute
for the use of military force?
7. Identify and explain the significance of the 'rally round the flag' effect.
8. What im pact does globalization have on the effectiveness of economic statecraft?

Further read ing

Alves, A.C. (2013), 'Chinese Economic Statecraft: A Comparative Study of China's Oil-based Loans
in Angola and Brazil',Journa# of Current Chinese Affairs, 42: 99-1 30.
An analysis showing that China's positive economic statecraft works more effectively in host countries
that are centralized rather than decentralized economically.