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The Decoupling Dialectic

This publication is available in French, Spanish and Italian in Grand Continent, a journal published by Groupe d’études géopolitiques.

We live in an age of anxieties about globalization. This is not a novel condition. In 1909, the Anglo-American journalist Norman Angell first made a name for himself as a prophet of modern economic interdependence. His book Europe’s Optical Illusion famously drove home the fundamental economic irrationality of modern war. Angell did not claim that war was impossible. In fact, he was very alive to its recurring possibility. But he was confident that international financial links would place so much at risk if a war did break out that belligerent spirits in all nations would be restrained. The tremendous collective force of the moneyed interests of the bankers, merchants, industrialists, investors and rentiers of Europe would keep the peace. 

Angell thought that this security guarantee through systemic fragility had been tested and proven to work. The 1905 Tangier Crisis was prevented from escalating into a Franco-German war by fears of financial panic. Any wartime infringement on modern society’s economic foundations would undermine the integrity of capitalism. The calculations of war and coercive statecraft were inimical to the stability of the world economy. Angell’s early twentieth-century vision, crystallized during at the apex of the first great era of globalization, remains the most evocative in a long line of theorists of doux commerce that runs from Montesquieu through Kant, from Constant to Cobden, and from Jean Jaurès to Thomas Friedman in our own day. 

Today, this belief in the pacifying powers of interdependence has once again come under sustained assault. As a year that called into question an entire model of globalization, 2022 can be compared to 1914. Russia’s invasion of Ukraine shattered the Davos model of globalization in a fashion similar to how the outbreak of war in 1914 destroyed the imperial prosperity of the fin-de-siècle period. In August 2022, Emmanuel Macron characterized the caesura as “a major tipping point or great upheaval” and declared the “end of the era of abundance, the end of insouciance”. In October, EU foreign policy chef Josep Borrell identified the strategic shift in more precise terms: “You – the United States – take care of our security. You – China and Russia – provided the basis of our prosperity. This is a world that is no longer there.”

The rude awakening from our own neoliberal Belle Époque has undermined that era’s dogmas. For three decades after the end of the Cold War, EU leaders believed that war had been banished from their continent. Whatever troublesome regimes remained could be engaged and transformed through commercial rapprochement. This was the strategy of Wandel durch Handel, a now much-maligned phrase coined by SPD politician Egon Bahr in 1963, as West Germany was slowly groping its way towards Ostpolitik. German dominance in the EEC and EU made this approach a guiding principle behind détente in the 1970s and behind European neighborhood policy in the post-Cold War era. Yet Putin’s invasion has, in the eyes of European elites, discredited this paradigm as profoundly as Kaiser Wilhelm punctured Belle Époque optimism.

Should we have seen this coming? To observers who never took international political and economic stability for granted, the relative calm of the 1990s and 2000s was always a chimera. A wave of major upheavals in the 2010s did not come as a surprise to them. The global financial crash and Russo-Georgian War were followed by the prolonged and divisive Eurozone debt crisis. The Brexit referendum showed that European integration was not irreversible. In Europe’s near abroad, the Arab Spring was brutally crushed, and bloody wars in Syria, Libya, and Afghanistan ravaged Middle Eastern and African societies, producing large numbers of refugees seeking a haven from instability in Europe. In politics, the right-nationalist resurgence of the 2010s produced a genuine crisis of confidence in the ability of liberalism to secure mass legitimacy in an age of inequality, change, and diversity. The Covid-19 pandemic caused a major anxiety about the reliability of our supply chains. Stockpiling of essential materials is now seen, rightly, as a prerequisite for weathering future shocks.

But for too long it appeared that these crises could be mastered with existing means. By 2021 it seemed that most of these problems had been temporarily stabilized. Central banks had calmed markets. Refugees were now largely cordoned off from Europe through a series of odious EU deals with Erdogan, Libyan militias, and the former Janjaweed of Sudan. Assad had won in Syria and Western troops departed from Afghanistan. Right-nationalists such as Trump and Le Pen had been defeated at the polls. It was this momentary calm that Putin’s invasion of Ukraine disrupted decisively. The storm was still raging, and it was assuming new forms. A major conventional war on the eastern frontier of Europe drove home to European policymakers that the improvised solutions of the 2010s–technocratic interventions, compromises with nearby dictators to keep problems at bay, and a focus on export competitiveness–would no longer work. 

There has thus been a radical reappraisal of assumptions among European elites. Trade and interdependence are now seen as dangerous; self-sufficiency and resilience are the new creeds. Like the Great War, the Russo-Ukrainian War has forced Europe to think about a more activist “project-state”–as the historian Charles Maier characterizes the transformative institutions created by the wars and revolutions of the early twentieth century. The EU that emerged from the Maastricht and Lisbon Treaties in the 1990s and 2000s was committed to free trade, minimal government, balanced budgets, small armed forces, and regulatory harmonization and integration. The current “geopolitical Commission” under Ursula von der Leyen has endorsed and legitimated, in the space of just a few years, carbon tariffs, Union-wide price control mechanisms, sweeping economic sanctions and asset seizures, industrial policy, larger deficits, and continental rearmament under the aegis of NATO. 

For a continent as diverse, interconnected, and commercially oriented as 21st-century Europe, this is a dramatic paradigm shift. Only a few years ago the hope was that Brussels would be globally influential first and foremost as a “regulatory superpower” and a defender of human rights. Today the EU’s international orientation has acquired greater clarity. The Union has become more combative. There are some valuable aspects in these developments, but also risks.

On the positive side, Europe’s break with the policy taboos of neoliberalism is to be applauded. So is its growing sense of urgency and unity amidst the Ukraine crisis. Excessive reliance on market forces, a very orthodox and self-harming attitude to public finance and a general distrust of state intervention did tremendous damage to the EU’s political unity and economic recovery in the 2010s. After a decade of division during the Eurozone debt crisis, EU member states are now borrowing to recover from the pandemic, cooperating on green policy, and sharing resources with Ukraine. They perceive themselves as belonging to a community of fate. It is hard to deny the reality of this advance.

But this self-strengthening interventionism and unity has come at the cost of two things: influence in Eurasia and strategic autonomy. The new European project-state has been achieved by a growing emphasis on national security and economic coercion that will probably increase tensions with Asian, African, and Middle Eastern states rather than reduce them. Progressive social and economic policy breakthroughs have proven possible, but only because conflict (vis-à-vis Russia) and security fears (vis-à-vis China and Iran) have rallied European energies against a set of common enemies. However strongly we react to these threats, they are powerful sovereign states that will not go away. For Europe, the growing securitization of the world economy through sanctions, tariffs and export controls represents an especially thorny problem because of its great openness and reliance on external trade. Compared to the relatively self-sufficient US economy, decoupling is especially painful for Europe. Without a concerted dirigiste approach as well as welfare policy to bear the social costs of reorienting valuable export industries and converting supply chains, it cannot hope to succeed even minimally.

As a strongly commercially oriented appendix of Eurasia, Europe therefore has a long-term interest in managing relations with its own near abroad with dexterity and discretion. While some tools in the new armory such as industrial policy, stockpiling and carbon tariffs will help towards that end, others are offensive economic weapons like sanctions and export controls, which will entrench permanent animosity and mutual distrust with authoritarian states while doing little to remove them as geopolitical threats. 

The idea that economic isolation alone can work as a means of a containment is disproven by cases like the Korean Peninsula. Crushing sanctions against Pyongyang have not only not stopped Kim Jong-un’s regime from advancing its nuclear capacities, but also encouraged ever bolder and riskier provocations. Decades of Western sanctions against Iran have likewise not stemmed its presence throughout the Greater Middle East or alleviated domestic repression. Nor has their original raison d’être–Iran’s nuclear program–ceased to exist. The fact that another nuclear crisis looms if Tehran produces enough enriched uranium goes to show how sanctions-based strategies will be of limited use in confronting the risks of the 21st century. Whatever the outcome of the Russo-Ukrainian War will be, and whatever shape the Russian political order will take in the future, the broader geo-strategic conundrum of how to manage Russia will likewise not go away–even if Europe effects a full decoupling.

Just how precarious the foundations of the EU’s newfound geopolitical confidence and unity are becomes clear when we face how much the Russo-Ukrainian War has made Europe more, not less, reliant on the economic and military power of the United States. In weapons deliveries to Ukraine, the EU’s roughly $8.6 billion in deliveries up to late November 2022 lag well behind the American provision of more than $23 billion in materiel. Given the size of American military production, this is to be expected. But one result of transferring stocks of weapons and ammunition to Ukraine is to leave denuded European militaries with few other suppliers in the short term than the American and British defense industries. The ambition of building an independent European defense industry will thus have to be postponed. In all likelihood the Russo-Ukrainian War will undercut rather than improve the attainment of strategic autonomy. 

The problem of dependence on the US is even larger in the realm of economic sanctions. Europe has eagerly followed the US in imposing sanctions against Russia. It has also largely aligned with US export controls on semiconductor technology to China and seems to have lost interest in providing sanctions relief to Iran in return for nuclear restrictions, largely due to Iran’s military support for Russia and domestic political repression. One result of these sanctions and export control policies has been to drive Moscow, Beijing, and Tehran closer together. As the West decouples from these countries, they will become ever more reliant on each other for strategic and military technology. Sanctions will therefore contribute to and strengthen the authoritarian axis that some have warned about for a while.

Yet it is far from inevitable that Russia, China and Iran should be aligned. The three countries have historic disagreements and are only somewhat complementary to each other: Russia and Iran are particularly odd partners because their economic structures are so similar. Each of these Eurasian countries present problems for the West in general and for Europe in particular, but these issues are focused in very different realms and should be accordingly categorized and engaged as such, not lumped together on a single pile. The Russian question is primarily about the protection of post-1991 territorial frontiers in Eastern Europe; more generally, it concerns the future of post-Soviet republics in the EU and NATO and the possibility of some kind of stable security arrangement on Europe’s eastern flank. China’s challenge is primarily technological and economic in nature. Iran, by contrast, is neither a direct security threat to Europe nor anything close to an economic rival but rather a nuclear proliferator and human rights violator.

The point of such categorization is that the 21st-century antagonists of European foreign policy require distinctive, flexible approaches. Dealing with them may not admit of one-size-fits-all strategies of containment or decoupling–as appealing as this might be for moral reasons in the current climate of public opinion. Instead of promoting authoritarian alignment, a more autonomous European foreign policy and geo-economic strategy could focus on securing the EU’s Afro-Eurasian frontier region by a variety of positive and negative instruments, from subsidies to partnerships and from trade to diplomatic engagement. Instead of creating common ground among opponents, smart diplomacy would seize on the tensions that exist between the Russian, Chinese and Iranian regimes and deal with them separately. 

Within the trans-Atlantic elite, the view that Europe is not shouldering its share of burdens is widespread. In fact, Europe already bears the costs of confrontation with Russia, China, and Iran in a variety of ways. From Syria to Ukraine to Libya to Yemen, it is more directly exposed to state failure and wars in which these states are involved. Europe is the main destination for the millions of refugees who flee Eurasian conflict and underdevelopment in search of a better life. Finally, as an economic bloc Europe is much more strongly dependent on external trade than the United States. This means that any confrontational policy comes with much higher economic costs for the EU economy. Due to the success of its own decades-long Wandel durch Handel approach, Brussels is today not well suited to imposing sanctions on others. The blowback effect through trade is much stronger than for the United States, which can use sanctions with abandon. In terms of economic prosperity that is foregone through sanctions, the annual cost of economic restrictions to NATO members was estimated in 2020 at $34 billion–a figure that has increased further since the extension of sanctions against Russia. This sum is very unevenly distributed, with Germany and Eastern European countries bearing the brunt of the cost. It will take years if not decades to reorganize trade and industry sufficiently to attain a measure of sanctions resilience.

In the meantime, strategic autonomy in the economic sphere will be non-existent. Compliance with Washington will be the only option at the disposal of European states. This may seem like a sensible choice in the current war, but it is hardly a safe bet in every geopolitical crisis that may come. Europe are forced to follow, rather than set the pace in, the use of economic coercion. Despite their relative mildness compared to direct military conflict, economic statecraft is subject to the same escalatory dynamics. Once begun, Europe will thus be captive to a tendency towards geo-economic bloc formation that it will no longer be able to control. This will inevitably entail increased political, economic, social costs and military risks since our continent is much more vulnerable to side effects of containment and decoupling than its trans-Atlantic counterparts.

It is beyond dispute that policymakers before 2022 were in the grip of certain illusions. Eye-opening moments can be illuminating, but their clarity rarely lasts. It is easy to allow new dogmas to set in, dogmas that quickly come to constrain the imaginative thinking and flexibility needed for effective international politics. One current danger is that Western policymakers are rushing from the illusion of peaceful interdependence into a new illusion: that decoupling will increase stability.

This is a fallacy of false opposites. Just because interdependence entails risks, it does not follow that decoupling creates a less risky environment. The strategic of economic disengagement presents at least three problems: displacement of tensions; intensification of global inequality; and the weakening of deterrence.

Economic insulation does reduce the tensions of international politics, but often displaces them into other realms: competition in military armament, territorial claims, and the propagation of cultural and ideological values will continue. While some risks inherent in economic exchange may be avoided, the general reduction in interaction between societies entailed by decoupling is likely to spur new misunderstandings. It also leaves much more room for nationalist fear-mongering and security panics. How will major powers know anything about what the other is doing when their civil societies and citizens no longer interact except in the highly distorted sphere of global media? Reducing economic contact deprives international politics of a vital antenna for registering problems and responding to them.

Moreover, the capacity to decouple is not equally distributed in the global political and economic system. We have already seen that large industrialized economies can absorb the shock of the pandemic, war and sanctions relatively well by using their wealth to procure resources elsewhere. But Europe’s success at stocking up on liquefied natural gas has come at the expense of developing economies like Pakistan and Bangladesh. Similarly, China’s policy of food security through the building up of massive grain stockpiles has the effect of causing shortages in low-income countries. In each of these cases, the cost of adjustment to geo-economic competition is borne by states that are smaller, poorer, and less developed. 

What decoupling thus seems to hold in store for the Global South is harsher competition for scarce resources and a cascade of debt, balance-of-payments, and currency crises. Should we be surprised that these countries have not greeted Western sanctions against Russia and the prospect of future sanctions against China with enthusiasm? Agreeing to such policies further aggravates their already difficult position in the world economy. But to frame the global ramifications of decoupling in terms of negative side effects for the developing world is to miss how fundamentally and irreversibly global our condition is: regardless of economic insulation, the world remains deeply interlinked in every other realm. 

Even for the rich countries in North America, Europe, and Asia that undertake them, economic fortress strategies do not guarantee long-term security. Developing economies in crisis are at a high risk of becoming the site of wars, mass displacement, and state failure. The human cost of such preventable problems is large enough. But any strategy that knowingly increases these risks at a global scale is not the security-enhancing strategy it is made out to be. Europe above all should know better by now: the problems of Africa and Eurasia are our problems, and decoupling will not make them go away. Indeed, in a new era of competition over resources, it is likely to worsen them. 

The final issue with decoupling that deserves careful attention is its effect on economic deterrence. The most successful economic sanctions in history have been those that were threatened but never imposed. League of Nations sanctions twice avoided border war in the Balkans in 1921 and 1925. US and British collaboration on oil sanctions against Spain in July 1940 dissuaded Franco from joining Hitler and Mussolini in the Tripartite Pact of the Axis. Finally, Eisenhower’s threats to withdraw US support for the pound and the franc in 1956 convinced London and Paris to end their neo-colonial punitive expedition against Nasser’s Egypt. But to credibly threaten sanctions, there needs to be substantial economic exchange between countries. A world without substantial trade between major political blocs is also one in which sanctions have limited effect. 

But does deterrence matter? It may be countered that last year’s failure to stop the Russian invasion with sanctions threats shows that the aim of deterrence through sanctions is misguided to begin with. The deterrence fiasco that occurred between November 2021 and February 2022 is indeed a case that will reward in-depth analysis by policymakers. Preliminary accounts suggest that Putin knew the extent of the possible damage and yet still went ahead. This suggests that sanctions threats against major powers led by determined leaders may be even less successful than previously thought. Putin’s preparedness to sacrifice Russia’s future growth and present living standards for the sake of imperial aggrandizement may be shared by other leaders with strong revisionist ambitions. Yet this makes it all the more striking that at the moment, G7, NATO and EU states still count on economic sanctions as a cornerstone in the containment of China. A powerful sanctions “tripwire” currently remains central to Western hopes of avoiding a Chinese invasion of Taiwan. 

Why do governments continue to place their hopes on sanctions, when that tool just failed to restrain war on a major scale, resulting in the largest land conflict in Europe in 70 years? More than perhaps any other major economy, China owes its wealth and prosperity to integration into the world economy. It has always pursued this integration on its own terms. But the PRC remains strongly dependent on external demand and has struggled to boost domestic consumption as a share of its national economy. This means that its national welfare would suffer severely from comprehensive Western sanctions. But making Asian peace hinge on fear of material loss seems increasingly insufficient. A more comprehensive set of guarantees is needed which can increase political and diplomatic trust. 

One possibility is a proposal recently made by Raghuram Rajan for an internationally recognized category of sanctions-exempt goods and services. Vital necessities such as food, medicine, humanitarian goods and energy should be protected as much as possible from interference by governments. There will no doubt be resistance to this measure from sanctions designers. But if economic pressure is to survive as a legitimate tool of global norm enforcement, then carving out zones of protection from economic war may be essential to keeping the Global South and non-aligned world on board.

Resilience can benefit rich and poor countries alike, but the growing vogue for geo-economics is unlikely to have such globally beneficial effects. It is Norman Angell himself who provided a powerful warning against what might result from a world in which sanctions become the dominant form of settling disputes. Just a year after the Great War had broken out, he published The World’s Highway: Some Notes on America’s Relation to Sea Power and Non-Military Sanctions for the Law of Nations (1915). The book is still highly relevant in our own era of US-dominated global naval, financial and technological hegemony. After spelling out the promise of sanctions as an alternative to war, Angell considered the risks that sanctions would destabilize and indeed destroy the world system. “There might result,” he warned” between nations a sort of competition for national self-sufficingness which, ill directed, might end in buttressing that immoral nationalism that was one of the causes of the war.” 

Angell was exactly right. Economic interdependence by itself was incapable of guaranteeing peace. But reducing interdependence had its own risks, chief among which was the rise of a competitive zero-sum nationalism that would in due course cause its own conflicts. We should heed this warning and think seriously about whether a world of unrestrained economic statecraft does more to undermine than enhance our collective security. At a time of warfare on the eastern reaches of Europe amidst escalating global instability, getting the balance between resilience and interconnection right will be more important than ever.