The Economic Weapon: The Rise Of Sanctions As A Tool Of Modern War

>> Niall Ferguson: Hello, my name is Niall Ferguson. I'm the Milbank Family Senior Fellow here at the Hoover Institution and the chair of the Hoover History Working Group. And we've just had the privilege of hearing a terrific presentation by the historian Nicholas Mulder, whose new book, The Economic Weapon, the Rise of Sanctions as a Tool of Modern War.

Was probably the best timed book of 2022, coming out just before the Russian invasion of Ukraine and the imposition of sanctions on Russia. Nicholas, welcome to the Hoover Institution. You got the timing right, but you'd obviously been thinking a lot about this subject well before the invasion of Ukraine.

And you were able to show where this idea arose that sanctions could be a kind of alternative to warfare as well as just a supplement to it. Talk about where that idea came from.

>> Nicholas Mulder: Yeah, so it begins in the end of the 19th century and the early 20th century, the first great era of globalization, when interdependence was at levels that were very considerable.

And the idea of using interdependence between countries in order to make sure that wars would not break out first arose. And in the first world war, the allies used economic blockade as a very powerful weapon against the central powers. And after the first world War, they created the League of Nations.

And it was that experience of economic war, the same administrators, the policies of economic warfare that had been pioneered in the great War, that were then used by the League of Nations as a peacekeeping tool in the interwar period. And that's really what the book is about.

>> Niall Ferguson: Now, most people who think about the League of Nations, if they think about it at all, regard it as a colossal failure.

And one, the textbook conclusion is that none of this worked. And another world war broke out in 1939. But that's not quite the story you tell. In fact, some of these economic sanctions worked in the interwar period. Talk about the successes.

>> Nicholas Mulder: So the successes were successes of deterrence and using sanctions as a threat.

And that's very important because it's often forgotten that countries can alter their behavior by not doing aggressive things even before sanctions are imposed. And the experience of being exposed to economic blocks in World War I had been so frightening that many countries, when faced with this threat in the 1920s, for example, Yugoslavia in 1921 and Greece in 1925, preferred to back down.

And so a number of diplomatic crises in the 1920s were diffuse as a result of threats of sanctions. And even as late as 1940, Britain and the United States were able to use the threat of sanctions and interdictions of oil supply in order to convince Franco not to join the axis.

So there were a number of notable successes that haven't really receive the attention that they're due.

>> Niall Ferguson: The failures, of course, are the things that people remember. The failure to prevent Italy overrunning Ethiopia, the failure to constrain Japan in its attacks on China. Talk a little bit about those failures.

Why were they failures? And what are the lessons of the 1930s when it comes to sanctions?

>> Nicholas Mulder: So the 1920s had been a period of economic prosperity and reconstruction, but the 1930s took place in the shadow of the Great Depression. And that's important because it gave revisionist powers such as Italy, Japan and Nazi Germany, the opening that they had been looking for to challenge the international system.

But these were also large industrial powers that had the prospect of developing military technology, had large populations, and had a measure of self sufficiency and the technological means to try and augment their self sufficiency in trying to become fully autarkic. And when that didn't work, they chose to expand their territorial empire and get direct control over the resources that they lacked.

So faced with those sorts of antagonists, the threat of sanctions merely accelerated the timetable for aggression that these countries were considering. And that's part of the dynamic that leads to these major clashes of the late 1930s.

>> Niall Ferguson: So there's a paradox. Sanctions can be a deterrent and sometimes worked as a deterrent in the twenties, in 1940 with Spain.

But in other cases, they almost seem to expedite the militarization and radicalization of the targeted regime. And the most extreme case, this seems to me at least, to be Japan, which ultimately opts for an enormously risky war. Think Pearl Harbor, in the wake of ever tougher economic sanctions imposed on it.

That's a case that has been mentioned recently in connection with contemporary events. But before we get to the recent past, the present, let's talk about the relationship between sanctions on Japan and the war in the Pacific.

>> Nicholas Mulder: Yeah, so there's still some disagreement among historians about what the goal of the Roosevelt Administration was in 1940 and 41 when it began to really ramp up economic pressure.

Whether this was part of a strategy to make Japan pursue peace or whether actually, as Mark Trachtenberg, for example, has argued, it was all part of an aggressive strategy of rollback. But regardless of that dispute, there is agreement on what actually happened and that Japan faced steadily increasing economic pressure, starting with very mundane things like aviation fuel, but ending with iron ore, scrap metal, really vital inputs for major industrial activity.

And by the summer of 1941, after us policymakers had successfully used oil sanctions against Spain the summer before to keep Franco out of the war, they thought that they could do the same thing with Japan, but they miscalculated. And within Japan, these sanctions really decided the argument in favor of the hardliners, who said that the liberal world economy was a harsh and dangerous environment from which Japan should escape by creating this greater East Asian corporal prosperity sphere.

And that is what it set out to do. And the embargo was also not just a US embargo, it was an Anglo Dutch American embargo. So it included all the British colonies in Asia and the Dutch East Indies, which were the major oil producer in Asia. And that, as a result, was also the prime target of the japanese offensive in December 41.

>> Niall Ferguson: So fast forward to February of 2022 and President Putin's decision to invade Ukraine despite the repeated threat of sanctions. Now, at the time that war broke out, many people in Washington argued that they were imposing unprecedented sanctions. Richter scale eight sanctions on Russia, and this would be enough.

It almost seemed, to end the war. You were a true applied historian, because within less than two months, you wrote a piece in the Wall Street Journal saying, no, actually, that's not going to work. It's very unlikely that these sanctions will have that effect on Russia. Why were you a sceptic about the claims that were made for sanctions at the beginning of the war?

>> Nicholas Mulder: Mainly for historical reasons, whenever sanctions were used against economies as large as Russia's, right. Let's remind ourselves that Russia is the 11th largest economy of the world in nominal terms, and the 6th or 7th largest in purchasing power parity terms. So this is a very substantial target.

The last time targets on that scale were hit with sanctions was in the 1930s, and it didn't work at that point. So my thoughts were already that this faced steep odds as a war deciding instrument. On top of that, Russia, of course, unlike Japan and Italy, is not resource poor.

So Russia does have a large commodity base from which to draw. It's suffering grievous damage to its human capital, to its technological capacities. Its future potential for growth is severely impaired. But none of that is in itself something that will make a regime like Putin stop this war that, of course, it embarked upon in defiance of clear sanctions threats also.

And in general, I think there's a tendency to overestimate the short term crippling effect of economic war. When it is decisive, it's more of an ancillary factor. And I would say in this year, it's really also been a sideshow to the brave resistance shown by the Ukrainians. But it's on the battlefield where the Ukrainians have really made the difference.

Compared with that, the sanctions, I think are really a second order campaign against Russia.

>> Niall Ferguson: My last question looks ahead. The United States has been imposing measures that you could call economic warfare, even sanctions, on China, cutting it off most recently from the most sophisticated semiconductors. Where do you think this is leading?

Do you see the United States successfully using economic measures to constrain China's bid for parity, if not dominance, in the Asia Pacific? Or is there a risk that this approach leads, as happened in the 1930s, to conflict, in fact escalates the tension between the two superpowers?

>> Nicholas Mulder: I'm quite concerned with the recent US measures against China, mainly because I think that they underestimate the potential for this escalatory spiral in which we arguably already find ourselves right now.

China since 2015 has been pursuing autarkic policies to the made in China 2025 strategy, and it's now certainly doubling down on the efforts to develop a domestic semiconductor industry. It seems that as long as there are some economic ties between the US and China, there are certainly risks and we do well to remind ourselves of those.

But there is also leverage in interdependence. What I worry about is that at the same time we are trying to pursue a deterrent strategy, reminding China how crippling western sanctions could be and decoupling at the same time. But those two things can't both work simultaneously. Decoupling reduces the leverage and the interdependence that sanctions need.

So if you want to think of it this way, interdependence is the fuel that sanctions need. By reducing it, we also reduce their potency. And it seems to me that that is the hard dilemma that us policymakers face vis a vis China.

>> Niall Ferguson: Well, Nicholas, this book has been not only well timed, but enormously well argued, and it certainly has helped shape my thinking on the question of sanctions, what they can achieve and their unintended consequences.

Once again, the title of the book is The Economic Weapon, The Rise of Sanctions as a Tool of Modern Warfare. We've been really very fortunate to have Nicholas Mulder here with us at the Hoover Institution. And we hope we'll be inviting him back in the not too far distant future because I gather another book is in the works on economic warfare, a different kind, the kind in which you confiscate the assets of your enemies.

I'm Niall Ferguson, Milbank Family Senior Fellow speaking to you from the Hoover Institution.