Geo-economic policies have become an increasingly important feature of international politics – and not just since the war in Ukraine. The EU has proposed an economic anti-coercion tool to deter third-party geo-economic coercion. Reviewing the academic literature on coercion and the effectiveness of economic sanctions, this policy brief analyses the risks and benefits as well as the challenges related to the EU’s proposed deterrence policy.
> To be credible, EU anti-coercion policy requires some level of delegation. Germany should ensure that the parameters within which the Commission can act are set in a way that balances the need for credibility with the need to limit unwarranted escalation risk.
> As a member state with significant extra-EU economic interests, Germany benefits from EU geo-economic deterrence. As it stands, it will also bear a disproportionate share of the costs in case deterrence fails and retaliation is triggered.
> Germany should therefore propose the creation of an Economic Deterrence Fund to ensure a more equitable distribution of the costs of retaliation policies. This should go some way towards aligning member state interests.
(See also: Designing Geo-Economic Policy for Europe)
The shift from a multilateral, rules-based international economic order to one where bilateral political and economic power plays a more prominent role poses risks to German and European economic interests. EU and especially German interests may become the target of third-party geo-economic policies, if only indirectly and in the guise of secondary sanctions.[1]
The EU is currently debating the creation of an economic ‘anti-coercion’ tool. Germany as the most trade-dependent among the larger EU countries stands to gain if the EU manages to successfully harness its economic deterrence potential. But Germany will also incur disproportional costs in case deterrence fails and retaliation becomes necessary.
Proposed EU Geo-Economic Deterrence Policy
The EU has proposed the creation of a so-called ‘anti-coercion instrument.’ [2] The instrument is meant to deter coercion of the EU and individual member states by enabling the Commission to take swift, proportionate, targeted and temporary economic measures to force the coercing party to withdraw its measures. The tool’s primary function is to deter and only secondarily to retaliate. The proposal foresees the Commission to design retaliatory measures in a way that is both low-cost and effective from the point of view of the EU as well as individual member states. The triggers that provoke retaliation are meant to be sufficiently broad to also cover informal coercion, like for example consumer boycotts. Importantly, the new tool is to fall under the EU’s Common Commercial Policy. This means that deterrence policies would be largely delegated to the Commission. It would require a qualified majority in the Council of the EU to prevent the Commission from taking action in response to third-party coercion.
Harnessing the EU’s geo-economic power to defend against third-party coercion is a sensible proposal in view of the increased ‘weaponization of economic interdependence.’ Deterrence can help reduce individual members’ vulnerability to coercion by mobilizing the full economic weight of the EU. At present, the effectiveness and credibility of Europe’s geo-economic deterrence policy is hampered by the need for consensus (unanimity, in fact), which makes the formulation and implementation of EU deterrence and retaliation policies vulnerable to third-party ‘pre-emption.’ Trade-dependent EU countries quickly become the target of economic threats by a third-party coercer keen to pre-empt EU retaliation. Germany is at particular risk of becoming the focus of such policies due its extensive extra-EU economic interests.
While delegation to the Commission would alleviate this risk, it would also significantly curtail the influence of member states over policies. The German government should therefore carefully assess the scope within which the Commission is authorized to formulate policy, including the definition of triggers, the scope and type of retaliatory measures, and escalation strategies, before delegating powers. Delegation under broad parameters would help make EU geo-economic deterrence both more effective and credible, allowing the Commission to wield the new deterrence instrument with great flexibility. But this could also lead to greater geo-economic conflict if the mandate is defined very broadly. This calls for sensible calibration.
Delegation would also limit the ability of individual member states to affect the distribution of the costs in case retaliation becomes necessary. Ensuring greater intra-EU equity in terms of the costs of EU retaliation measures through a jointly financed compensation mechanism (or Economic Deterrence Fund) would go some way towards addressing this issue. It would provide for a more equitable allocation of costs and give the more trade-dependent members some reassurance that geo-economic conflict is not fought out on their backs. While successful deterrence benefits all EU members, the economically more outward oriented members face considerably greater costs in case of deterrence failure. In case the EU gets drawn into a geo-economic tit-for-tat over China’s coercion of Lithuania, Germany would end up shouldering a large part of the cost, not least because Lithuania’s exports to China are very small in both absolute and relative terms. Finally, it would help align the interests of member states more closely by sharing the burden of retaliation ore equally.
What Is Geo-Economic Coercion?
Geo-economics refers to the use of economic instruments to pursue foreign policy goals. In a world, where great power competition between the United States and China takes place in the context of economic interdependence, geo-economic policies will play a more prominent and varied role than, for example, during the Cold War.[3] After the end of the Cold War, foreign economic policy was largely geared towards cooperation and the pursuit of what IR scholars call absolute economic gains. Today, intensifying US-Chinese geopolitical competition has spilled over into the economic realm, leading countries to pursue relative gains as well as pay greater attention to their economic-financial vulnerabilities more generally – especially vis-à-vis their geo-political adversaries.
The world’s most important economic powers are cognizant of the risks attached to the shift towards an economic order where rules matter less and power matters more. Unsurprisingly, they have begun to pro-actively manage their respective vulnerabilities. China is shifting towards ‘dual circulation’ (namely, a lesser dependence on the international economy), the EU is striving for ‘(open) strategic autonomy’, and the US is focused on addressing its geo-economic vulnerabilities by limiting supply chain risks. All three powers have also become more inclined to exploit other countries’ geo-economic vulnerabilities in pursuit of a variety of political objectives, such as punishing human rights abuses or military aggression.
Geo-economic policies can be positive and negative. Negative geo-economic policies involve the deliberate withdrawal (or threat of withdrawal) of customary trade and financial relations in pursuit of broader foreign policy goals. Positive policies offer (or promise to provide) a deepening of economic and financial relations. Although all geo-economic measures thus impose costs on, or offer benefits to the target,[4] not all seek to change the target’s behavior. Tighter export controls, for example, may not seek to change the target’s behavior, but may simply deny another country (or company) access to advanced technology consistent with the goal of slowing down technological development or weakening national security. This is a foreign policy goal that does not involve changing the target’s behavior. Geo-economic measures may be effective (they have an economic effect on the target) without being efficacious (in terms of realizing the political objective).
A last important distinction: ‘Coercion’ comes in two forms: compellence and deterrence. Compellence, which colloquially is often equated with coercion, seeks to force the other party to take some specified action. Deterrence consists of persuading another party to refrain from initiating a specified action. Deterrence comes in two forms: deterrence by denial (denying the coercer the opportunity or benefits of their own geo-economic attack) and deterrence by punishment (inflicting unacceptable costs on the coercer). The literature suggests that compellence is more difficult to pull off than deterrence, in part perhaps because targets are generally more reluctant to accept a loss than to forego a gain – thus they will resist changing their policy despite suffering significant economic losses, as Russia appears to be demonstrating at the moment.
Geo-Economic Coercion Can and Does Fail
The literature also suggests that geo-economic compellence, despite being widespread and costly, is not particularly successful in terms of changing a target state’s behavior.[5] Sanctions, for instance, are more likely to be successful if three conditions are met:
(1) they are aimed at friends rather than foes;
(2) the policy goal that is being pursued is relatively minor; and
(3) the target is highly economically dependent on the sender country.
It is not surprising that sanctions are more successful with respect to allies than adversaries, for “the higher compliance with sanctions by allies and trading partners reflects their willingness to yield on specific issues in deference to the overall relationship with the sender country. In addition, allies will not be as concerned as adversaries that concessions will undermine the government’s reputation and leave it weaker in future conflicts.” [6] This explains why geo-political adversaries are often highly resistant to geo-economic compellence.
In terms of geo-economic coercion, the coercer seeks to take advantage of the target’s economic vulnerabilities by threatening to impose costs on the target in case of noncompliance with stated aims. Coercive threats in terms of both compellence and deterrence are only credible if the costs to the coercer are lower than the costs to the target. An economically relatively more vulnerable country does not typically seek to coerce a relatively less vulnerable country, or at least it cannot do so credibly. The relatively greater costs it would incur would make such coercive threats neither credible nor effective. Economic dependence makes a country more susceptible to coercion, but greater susceptibility does not automatically translate into successful coercion – if only because the political cost of complying with the demands of the sender country may far exceed the economic costs incurred. At least, this is the case in case of compellence.
Two examples serve to illustrate successful and unsuccessful coercion. Russia is quite willing to sustain the costs of international economic sanctions, as it appears to value the political gains related to the Ukraine war more highly. By contrast, Iran agreed to limitations to its nuclear program in the guise of Joint Comprehensive Plan of Action, following a sustained geo-economic pressure campaign that imposed significant economic costs on the Iranian economy. Coercive failure is variously attributed to signaling failures, cognitive biases, and misperception, as well as the misestimation of the (subjectively valued) costs of compliance versus the costs of non-compliance.[7] Ultimately, the success and failure of coercion simply depends on how badly the coercer wants to impose costs, and how badly the target is prepared to absorb them. [8] This is also why ‘escalation dominance’ (whether vertical or horizontal) makes coercive success more likely, but far from certain.
As George put it, the effectiveness of coercion “rests in the last analysis on psychological factors,” even if decisionmakers’ psychological disposition is affected by material costs and benefits.[9] In other words: “Weakly motivated aggressors are easy to deter; intensely motivated one (…) can be impossible to deter.”[10] By the same token, strongly motivated defenders can be impossible to compel. The costs of coercive measures are nonetheless real, and they are a function of the scope and intensity of economic ties as well as the ability of the target to deflect the coercive measures or limit their costs. To echo the distinction drawn above: Coercion may be effective (in terms of imposing costs on the target), but not efficacious (in terms of deterrence or compellence). The point is this: the EU and its members must be prepared for deterrence failure and the need to make good on economically costly retaliatory threats; it must also be prepared that subsequent compellence in terms of forcing the other party to withdraw its original measures might also fail.
Designing Optimal Coercion Policies
The EU will increasingly be faced with the challenge of designing effective and efficacious coercion policies. Jentleson and Whytock,[11]two academics, provide a heuristically helpful analytical framework to evaluate the chances of coercive success and failure. Two sets of factors affect the effectiveness and efficaciousness of coercion, one related the coercer’s strategy, the other related to the target’s vulnerability. Ideally, the EU’s deterrence policy should be capable of incorporating these elements into its design to achieve maximum effect.
As far the coercer’s strategy is concerned, it is important that the “costs of noncompliance it can impose on, and the benefits of compliance it can offer to, the target state are greater than the benefits of noncompliance and costs of compliance” (p. 51). The ability to create the proper carrots and sticks is in turn affected by three factors: (1) proportionality, (2) reciprocity, and (3) coercive credibility.
Key Elements of the Coercer’s Strategy
> Proportionality refers to the scope and nature of the objectives pursued, and the instruments used in their pursuit. Proportionality does not mean equivalence. Rather it means ‘not out of proportion,’ as disproportional threats are not credible, such as threatening a military invasion in response to higher tariffs.
> Coercive credibility relates to the coercer’s ability to make the target believe that the coercer will make good on its threat if the target does not comply.
> Reciprocity implies an explicit (or tacit) understanding of the link between the costs threatened by the coercer and costs incurred by the target. Reciprocity must also be clear and explicit about the link between coercive action and the target’s behavior.
For the target, the costs and benefits of compliance and non-compliance are also influenced by factors pertaining to the target state’s vulnerability to coercive measures, such as (1) domestic political support as a function of the costs and benefits of defiance compared to compliance; (2) economic costs of the coercive measures as a function of existing vulnerabilities; and (3) the role of elites as either ‘transmission belts’ or ‘circuit breakers’ of coercive policies.[12]
Designing Effective Coercive Geo-Economic Policies
How well-suited is the proposed EU anti-coercion instrument to optimal policy design? Designing deterrent measures that are proportional and reciprocal is a technical exercise, while credibility requires the ability to instill the belief in the target that the EU will make good on its retaliatory threat in case of third-party coercion. Delegating the formulation and implementation of deterrence policies to the Commission helps make them more effective and credible, compared to a policy that requires unanimity and extensive compromises at every turn – if agreement can be reached at all. Credibility also benefits from delegating the decision to retaliate to the Commission. The more leeway the Commission is given, the more credible and effective deterrence will be.
However, if formulation and implementation are delegated to the Commission, and if deterrence fails, the costs of retaliation policies may be spread unevenly among the EU members, in spite of the Commission’s commitment to designing policies that are low-cost to the EU and its members. Countries that rely more on extra-EU trade and finance will generally bear a disproportionate share of the associated costs. On the other hand, if deterrence policies require a high level of member state support, more trade-dependent countries may become the target of counterretaliation threats to dissuade from supporting EU retaliation and escalation. In other words, the greater the intra-EU consensus necessary to deter and retaliate, the less credible, deterrence will be. But the more ex-ante delegation exists, the less control individual member states will retain over policies, including the costs of retaliation. Automaticity and delegation enhance credibility, but they come at the cost of less control. This is an issue any deterrence policy needs to address.[13]Delegation is helpful to optimize policies in terms of proportionality, reciprocity, and credibility. But it also curtails the ability of member states to influence policies and escalation strategies. The Commission’s proposal clearly recognizes that unanimity is too high a hurdle.
Moreover, the less influence individual member states have over policy, the greater the risk that member states will be dragged into geo-economic standoffs against their will as well as of losing control over subsequent policies, including escalation. The Baltic states would not exactly have been thrilled if they had been forced to take retaliatory against secondary US sanctions targeting Nord Stream 2. Therefore, the economically more outward-oriented countries, such as Germany, have an interest in unambiguously defining what constitutes coercion and setting parameters with respect to retaliatory measures, including issues such as trade versus financial retaliation, retaliation and counterretaliation, horizontal vs vertical escalation. These parameters do not need to be made public, as this might allow third parties to game EU policy. But the German government needs to be able to set a limit to geo-economic escalation in case retaliation fails. The coercer, of course, must not know what it is, lets it weakens deterrence policies.
Adjusting Policies to Exploit Target’s Vulnerabilities
The optimal design of measures in terms of the target state’s vulnerabilities is also affected by the delegation/ consensus trade-off. Optimal EU retaliatory measures in terms of the target state’s politics, economics, and elites, is also likely to translate into an uneven allocation of costs. If, for example, the UK were part of the EU, financial retaliation would disproportionally fall on the UK due to London’s prominence as a financial center. Intra-EU conflict over what measures to take in view of differential costs may take optimal measures off the table, and may translate into sub-optimal, less effective deterrence policies that fail to mobilize the EU’s geo-economic potential. Add to this the possibility of the target engaging in counterretaliation by targeting the most economically dependent member states and the distribution of costs becomes even more uneven.
Delegation within pre-set parameters should therefore be flanked by a compensation mechanism (or Economic Deterrence Fund) financed by all states in proportion to their size. Such a mechanism is not meant to fully compensate countries subject to third-party economic coercion. Instead, it is meant to distribute the potential costs of retaliation measures more evenly in case deterrence fails and retaliatory measures are triggered. If Germany, for example, gets dragged into a geo-economic tit-for-tat with China over Lithuania, Lithuania’s financial contributions to the fund are never going to compensate Germany for its economic losses. But it would nevertheless obligate all members to share the costs more equitably. It would thereby help align the costs and benefits more closely, and limit ‘moral hazard.’ It will also make it less likely that the anti-coercion is ‘hijacked’ by protectionist interests, as some of the more free-trade-oriented EU members fear. Finally, it would facilitate the design of more ‘optimal’ retaliation measures and thereby make the EU deterrence posture more effective.
Limiting the ability of third-party coercers to pre-empt EU deterrence and retaliation measures is important to make them credible and effective. Delegation helps address this problem. To limit the risks associated with delegation, more equitable burden sharing of EU anti-coercion measures is desirable. The flexibility that comes with delegation is important not just in terms of optimal. It is also important in terms of being able to scale up or scale down retaliatory threats and measures, as the situation demands. Delegation within clearly defined, pre-set parameters flanked by a compensation mechanism would help make the EU’s anti-coercion both more effective and credible. It would not eliminate all the associated risks. There is no free lunch.
[2] European Commission, Commission Proposal for an Anti-Coercion Instrument, December 8, 2021.
[3] Despite a lower degree of (inter-alliance) interdependence, geo-economics was a feature of the Cold War. Michael Mastanduno, Trade as a strategic weapon, International Organization, Vol. 42, No. 1, 1988; Randall Newnham, Deutsche mark diplomacy, Penn State University Press, 2002. Alan Dobson, US economic statecraft for survival, 1933-91, London: Routledge, 2002.
[4] Sometimes economic sanctions are defined more narrowly as the exclusion from the world economy to uphold international norms. See Nicholas Mulder, The economic weapon (New Haven 2022), p. 14.
[5] The literature is focused on compellence as opposed to deterrence. Assessing the success of deterrence involves unobservables and counterfactuals, as the behavioral change is not directly observable. Robert Pape, Why Economic sanctions do not work, International Security 22 (2), 1997; Daniel Drezner, The sanctions paradox, Cambridge: Cambridge University Press, 1999.
[6] Clyde Hufbauer et al., Economic sanctions reconsidered (Washington 2009).
[7] For a critical take on rational deterrence theory, Richard Ned Lebow, Key texts in political psychology and international relations Theory (2016), pp. 3-24.
[8] Richard Nephew, The art of sanctions (New York 2017).
[9] Alexander George, Forceful persuasion (Washington 1991)
[10] RAND, What deters and why, 2021.
[11] Bruce Jentleson and Christopher Whytock, Who ‘won’ Libya, International Security 30 (3), 2006.
[12] This is the rationale behind ‘smart sanctions,’ which target specific, politically relevant domestic actors with the intent of minimizing the costs of broader economic measures. Smart sanctions do not seem to be notably more successful than regular sanctions. Daniel Drezner, Sanctions sometimes smart, International Studies Review 13 (1), 2011.
[13] Thomas Schelling’s famous “threat that leaves something to chance” comes to mind.