Economic decoupling is a threat to world peace

Conflict between the world’s major powers is intensifying, and policymakers are actively disengaging their economies from those of their adversaries in an attempt to gain an advantage. While this tactic brings short-term gains, its long-term effect could be World War 3.

Economic sanctions such as trade embargoes have been used since antiquity. They remain popular today, though the jury is still out regarding how effective they are compared to other methods, such as diplomacy or military confrontation.

By their very nature, economic sanctions are temporary, as they are usually accompanied by a list of demands which – if met – will result in a swift lifting of the sanctions and a resumption of uninhibited commerce. For example, the US placed sanctions on Turkey after Ankara purchased the Russian S400 defense system. By acceding to the US’ demands, Turkey can get relief from the sanctions.

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Of late, a more permanent alternative to economic sanctions has been gaining popularity among policy circles, known as “economic decoupling.” This is a process by which a country that is in conflict with another seeks to scale back its economic interactions with that country in a manner that cannot be quickly reversed. It includes significant decreases in mutual trade, investment, and migration flows.

Suppose economic sanctions are like a person sleeping in a separate bed from their spouse after an argument. In that case, economic decoupling is like a divorce. It follows a similar logic: one of the two countries regards itself as fundamentally incompatible and wants to look for new partners.

Economic decoupling sometimes occurs when the two countries trade commodities related to national security, such as food or energy. The country initiating the decoupling feels that its foreign policy independence first requires greater economic freedom. The EU is currently exploring economic decoupling from Russia due to the perception that excessive dependence on Russian energy has undermined the EU’s interests.

An Emirati trader passes under the stocks display screen at the Dubai Financial Market in Dubai, United Arab Emirates (AP).

While the marriage analogy is a useful starting point, there is a fundamental difference between an incompatible pair of individuals and an incompatible pair of countries. In the former case, after agreeing to go their separate ways, two people can make arrangements to avoid dealing with one another and live independent lives. In contrast, countries – especially ones in close geographical proximity – cannot do this, and no matter how hard they try, they will still have to deal with the other side on critical issues.

In light of this, the philosophers of the Enlightenment era, such as Adam Smith and Immanuel Kant, saw deepening economic relations as a path to peace for two reasons.

First, if both sides engage in a mutually profitable trade, war costs much more as war disrupts commerce. Consequently, trade makes countries less likely to declare war. Second, trade is a mutually beneficial exercise that involves human interaction, and so it warms people to their trading partners. It’s hard to hate the barista who serves you coffee every day, even if you barely know them because you have a history of positive interactions.

The EU – which started as a trade pact – is a wonderful demonstration of how these mechanisms work, taking a continent from centuries of violent conflict to 75 years of peace. However, peace in Europe, the Middle East, South Asia, and East Asia is threatened by economic decoupling.

For example, China and Japan fought a particularly vicious war during the 20th century. At present, they disagree on many things, but fortunately, China is Japan’s most important trading partner, and Japan is China’s second most important trading partner. This means that many Chinese and Japanese people regularly interact positively and peacefully, generating mutual affection and inhibiting the emergence of the sort of antipathy you need for war. Moreover, if a war did break out, the economic cost of foregone trade for both sides would be huge.

Thankfully, neither side is looking to decouple from the other economically. However, many countries – including the US – are actively trying to decouple from China. If successful, this will make it easier for people in those countries to hate Chinese people and vice versa and make the cost of war considerably lower for all sides. We should not be surprised, therefore, if the result is war.

Humans are intrinsically nomadic, and so we are easily seduced by the idea of managing our conflicts with others by permanently cutting ties and wandering off to a different hunting ground. This general impulse doesn’t work at the international level because we live in the same small space. Economic relations help us override our intrinsic desire to butt heads, and the great powers must remember this when they seek the short-term catharsis offered by economic decoupling.

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