US and China are weaponising global trade networks

With the end of the cold war, it looked as if globalisation had tamed power politics and heralded a more peaceful world. The networks that distributed money, information and production seemed to resist state control. Economic conflict appeared irrational: attacking a rival would hurt your economy as well.

That’s not quite how it turned out, as US President Donald Trump’s recent tweets about forcing American businesses to leave China make clear. We are at the beginning of a new “quiet war”, where the global networks that were supposed to tie countries together have become a distributed and complex battlefield. Great powers such as the US and China are wielding supply chains as weapons in their grand disputes, while smaller states such as Japan and South Korea copy their tactics. Businesses like FedEx, Huawei and Samsung are pawns on the battlefield or collateral damage.

What went wrong? States woke up and realised that global networks could be weaponised. The connections are not flat and open-ended, instead they have become more centralised, providing choke points that states could exploit. Key nodes, such as financial clearing systems, dominant market players and suppliers of crucial components created critical vulnerabilities. Google’s Android operating system, Huawei’s 5G technology or JPMorgan Chase’s dollar-clearing department could be used by powerful states to coerce adversaries or cow insufficiently co-operative allies.

The US began converting networks into tools of domination after the September 11 terror attacks. The internet became a distributed system of surveillance, while the US press-ganged global finance into service. International banks are exposed to US regulators because they clear dollar transactions through US institutions. The US turned this vulnerability into the cornerstone of a vast system of secondary sanctions, implemented by foreign banks.

This allowed the US administration, often with Europe’s support, to isolate Iran and North Korea, among others. The Trump administration is no longer limiting the war to rogue states. It is trying to undermine China’s access to global networks.

But US over-reach is leading to countermeasures, as targeted states begin to respond. As the US has sought to cut Huawei off from American components, China has ramped up the development of its own semiconductor industry to ensure that it cannot be held to ransom. Meanwhile Europeans have created a special financial arrangement to insulate trade with Iran. Russia has, perhaps impishly, asked to use the arrangement and China is trying to build its own global financial infrastructure. Former Treasury secretary Jacob Lew has warned that “the plumbing is being built and tested to work around the United States”.

Some states are moving to offence. For decades, China has used restricted market access to punish countries for inconvenient policies. Now it is threatening retaliation against US firms such as FedEx, and contemplating designating HSBC as an “unreliable entity” because it provided information that has been used against Huawei. Even Europe is beginning to think more aggressively; influential policy intellectuals have started talking about how Europe could build its own capacities to retaliate against US sanctions unilateralism. Meanwhile Japan has restricted exports of specialised chemicals critical to Samsung’s supply chain in order to extract concessions from South Korea in a dispute over wartime forced-labour practices.

It is getting harder to identify the winners, and easier to see the losers. Decades of globalisation have produced an interdependent world. States will incur one set of costs when they are attacked using these interconnections and another when they seek to defend their economy by disentangling.

The world economy risks descending into a game of tit-for-tat, as states seek to exploit their rivals’ vulnerabilities and retaliate when rivals exploit their own. Economic relations that appeared to be a substitute for war have become a kind of war by other means.

The writer is a professor in Georgetown’s Edmund Walsh School of Foreign Service. Henry Farrell also contributed

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