Economic Statecraft and UK Strategy

Submission to the House of Commons Liaison Sub-Committee on Scrutiny of Strategic Thinking in Government

Professor Jonathan Boff, University of Birmingham, 15 September 2023

 

Abstract

  1. This paper addresses the Sub-Committee’s case study on the UK’s place in the 21st century international order. It explains what Economic Statecraft is, and why UK national Strategy needs to take it more seriously. It argues that Economic Statecraft is both important and useful in its own right, and because it represents UK Strategy in microcosm. Both face many of the same obstacles. Identify and overcome the problems in one, and we come closer to improving our exercise of both. History can help with this. We need to move beyond  our default Ends/Ways/Means models of Strategy. These fail because they seek to disaggregate problems which demand a more holistic approach. Economic Statecraft might be an excellent pilot for better Strategy along such lines. 

 

Introduction

  1. Economic Statecraft is a useful lens to use to explore UK Strategy in two ways. First, it is an essential tool for facing the challenges of today and tomorrow. The UK should be good at using it, but isn’t, despite having considerable historical experience and significant comparative advantage in this space. We missed an opportunity for thought leadership of the West over Putin’s aggression against Ukraine and risk repeating the mistake over China. This is a shame and leaves a dangerous gap in our armoury. Secondly, Economic Statecraft is UK Strategy in microcosm: it’s complex, difficult, and requires the ability both to see problems in the round and to cooperate closely across Whitehall.

 

  1. This paper will, first, define Economic Statecraft, set it in historical context, and explain why it is vital today. Secondly, it will suggest possible applications of Economic Statecraft, and its strengths and weaknesses as a tool of UK Strategy. Thirdly, it will showcase a historical example which might provide grounds for optimism about cross-government interoperability when it comes to Economic Statecraft. Lastly, it will broaden discussion back out to the shortcomings of UK Strategy more broadly.

 

Definition and Context

  1. Economic Statecraft is the use of economic means to achieve political ends. It involves using economic levers of power to change the behaviour of a rival or opponent. It has 3 aspects:
    1. Negative or destructive levers such as sanctions, energy control, asset freezes and property seizure. Say ‘Economic Statecraft’ to most people, and they will hear ‘Sanctions’, and respond that ‘Sanctions don’t work.’ They misunderstand the nature of sanctions. They are only tools. What matters is less the inherent quality of the tools, but how they are used. Success or failure is determined by a complex mix of factors including the objectives pursued, the nature of the target, the exact methods used and the quality of execution, and of course the level of consent and support, within both government and public opinion, at home and abroad. And they ignore the second aspect:
    2. Positive or Constructive levers such as trade; FDI; aid for victims of aggression: emergency help with debts, and so on.
    3. Thirdly, there is a domestic need to build resilience in our own supply chains and reduce our own vulnerability to economic pressure from others.

 

  1. Economic Statecraft is therefore about Sticks, Carrots, and Shields. It can operate on two different levels:
    1. Aggregate: the blunt instrument aimed at entire economies and populations, indiscriminately.
    2. Particular: a smart weapon targeting specific supply chain vulnerabilities, organisations or individuals.

Historically, searches for a silver bullet have tended to disappoint.

 

  1. From the time of the Napoleonic Wars until overhauled by America in 1943-5, Great Britain led the world in Economic Statecraft, leveraging her wealth, industrial strength and military might to hurt her enemies, cow neutrals, and hire allies. No state was better at surfing the Economic Statecraft wave and calibrating its use as challenges and opportunities rose and fell. British decision-makers became very skilled at moving the slider of strategic decision-making backwards and forwards between the two extremes of politics and economics. Sometimes, political considerations dominated decisions; at other times, economics was in charge. So, for instance, in times of relative peace, when the risks and costs of losing were both low, economics tended to dominate and the Treasury got a veto on pretty much every strategic decision. But when we moved to a world where uncertainty rose and/or the price of defeat became extreme, Treasury objections took second place to the political imperative to spend. The need to mobilise all our resources grew stronger and with it the importance of integrated effort. That was when Economic Statecraft became most important. Good examples include the two world wars and the Cold War: existential threats to our way of life that required statesmen to use every tool in the kit. It is no accident that the most successful examples of Economic Statecraft were associated with Total War: the blockade of Germany 1914-18; Lend Lease; Bretton Woods; and the Marshall Plan.

 

The Need for Economic Statecraft Today

  1. The world we face today is evidently not one of gloves-off, no-rules conflict like that of 1914-18 and 1939-45. The challenge to our values and way of life posed by Putin’s Russia or Xi’s China, is, however, the greatest we have faced since the end of the Cold War, and consequently Economic Statecraft has returned to the headlines. After 24 February 2022 the Americans led a widespread Western imposition of a wide range of sanctions on Putin’s regime. China’s economic rise, and the depth of its integration into global supply chains, would both argue for better Economic Statecraft contingency planning, even were Beijing’s intentions less aggressive than they seem currently to be. Economic Statecraft will only grow in importance.

 

Strengths and Weaknesses

  1. Economic Statecraft is, however, not easy. There are three levels of difficulty. First, it can carry unforeseeable macro risks. The dramatic wave of economic nationalism and de-globalisation of trade and commerce that followed the First World War, for instance, damaged international cooperation, making it harder both to navigate the Great Depression when that struck, and then for the democracies to unite and stand up to the dictatorships whose path to power was smoothed by that Depression. There’s not much we can do about such risks if they are genuinely unforeseeable, but we need to be aware that uncertainty exists. Secondly, there are limits to what a Sticks-only approach in particular can achieve against hardened targets such as Russia and China. Their economic vulnerabilities are too few, their willingness to subordinate the economic welfare of their subjects to the state’s political objectives too determined, and the tools of domestic coercion available too strong. We need to adopt a holistic approach which balances Sticks with Carrots, reinforcing our alliances in Asia and shifting the narrative from purely negative ones where the only criterion of success is the failure of Putin or Xi. Economic Statecraft is no silver bullet. It works by Attrition and so its effects are slow. It works best when an opponent’s flows are being interdicted AND their stocks are being actively run down. Thirdly, it is hard to execute. It depends on significant domestic and international consensus despite creating economic winners and losers in different sections of society and thus being inherently divisive. Sanctions on food or medicines, for instance, can arouse particular controversy for seeming to target the innocent. Within government, friction can arise in at least three structural ways. First, the interests of departments often differ. Those who see part of their job as facilitating trade and commerce, such as the Treasury and DBT, are, unsurprisingly, sometimes wary of attempts to restrict either. Secondly, jealousy about power and precedence drives difficulties over ownership and leadership of important initiatives. Finally, there are fundamental differences of ethos and language between different parts of Whitehall which complicate communication and mutual understanding between, say, Treasury, the Securocracy, and the ‘Social’ departments of State.

 

  1. Even so, Economic Statecraft may still be better than the alternatives of doing nothing or opening fire. Britain’s unique record as the world’s masters in the dark arts of Economic Statecraft, is no birthright, but was built on hard-won experience and a lot of intense thought and preparation. Much of this has atrophied but we can learn lessons from our history. Further, the UK possesses both an absolute and comparative advantage, relative to most of the rest of the world, when it comes to the use of Economic Statecraft. Great Britain retains more of the economic power it had a century ago than it does of its military might. The UK also many of the world’s best economists and is well positioned to offer thought leadership to the West. So Economic Statecraft is something we should do: because we can, because it makes friends, because it might deter other potential threats, and because it offers a uniquely flexible tool for calibrating deterrence and thus of speaking to rivals in a sophisticated language. Finally, if we do not study and embrace Economic Statecraft, we can be sure that the USA will. Indeed, they already are. So far, they seem to be making a pretty good job of it. Unless we are entirely confident that they will carry on doing so, however, and are prepared blindly to cede all strategic leadership to Washington, we have a positive responsibility to explore the use of Economic Statecraft, and the opportunities and threats it generates.

 

Cross-Government Interoperability

  1. As we decide how best to calibrate our Economic Statecraft in the 21st century, we can look back to how the UK approached the same problem during an earlier period of similar growing grey-zone competition and conflict driven by aggressive adversaries determined to overthrow the rules-based international order in a multipolar world. In the early 1920s the UK was determined not to lose the lessons of Economic Statecraft learned during the First World War and set up an Advisory Committee on Trade and Blockade (ATB). Its job was to capture the lessons learned from blockading Germany during the First World War, to advise on the practical application of Economic Statecraft in both real-time crises and in hypothetical wargames, and to design any machinery that might be necessary to carry out Economic Statecraft in future. It carried out a number of case studies and thought experiments in the 1920s and 1930s. It was not perfect by any means. Its concept of Economic Statecraft was narrow and focussed exclusively on Sticks, forgetting the possibilities of Carrots. Policy-makers’ self-confidence was undermined by economic weakness and austerity and a perceived lack of reliable allies overseas. And by the late 1930s the threats were simply coming too thick and fast to handle. Ultimately, however, the ATB built the mechanism and formed the nucleus of the Ministry of Economic Warfare which fought the Second World War.

 

  1. The ATB had another function as well, one left unspoken: to break down the silos of Whitehall departments and get them working together to provide high-level advice in international crises. Designed by the Cabinet Secretary, Sir Maurice Hankey, the committee pulled together high-flying civil servants from across all the major departments of state and gave them the opportunity to work together to build a common approach, resolve frictions that arose along the way, and act as champions for the cross-Whitehall decisions they had made once they were back in their departments. The government of today is not the same as a hundred years ago, but the ATB example shows that XHMG interoperability can be and has been achieved. An updated version of something similar might offer a useful pilot for the adoption of a more holistic approach to UK Strategy more broadly.

 

Broader Strategy

  1. Economic Statecraft, with the demands it makes on cross-Whitehall cooperation, throws up an even deeper challenge to the whole way we conceptualise Strategy. When we think about Strategy we almost inevitably use a mental model that flows from National Interests to Ends and thence to Ways and Means. Most of the literature on the reasons for our failures in Iraq and Afghanistan, including the Chilcot Report, consciously or unconsciously used that model. It explains most of what went wrong by some mixture of setting the wrong objectives, choosing the wrong methods, and/or allocating insufficient or inappropriate resources. The solution, it suggests, lies in a clearer definition of ends and better integration of ends, ways and means: in other words, in continuing to solve complex problems by disaggregating them, but doing so better.

 

  1. That Ends/Ways/Means model worked well for the existential conflicts of the twentieth century when National Interests were unconditional, unlimited and clear. It tends not to apply so well today, when most of the time it is increasingly difficult to define ends without understanding what ways and means make possible, just as the ends one hopes to achieve must affect the means we make available, and the ways we employ. Ends, ways and means are intricately bound up with each other in complex reciprocal relationships and feedback loops, some of them hard to predict, and all of them open to challenge and debate.

 

  1. Rather than breaking the problem down and working harder to choose clearer ends, provide more suitable means, and employ better ways, we need to see the problem in the round, allow more room for the semi-instinctive ‘coup d’oeil’ Napoleon spoke of, and take more account of available resources and our ability to influence outcomes. Perhaps a better model than Ends/Ways/Means would be the Analyse/Choose/Act cycle, an iterative process which concentrates on specific problems or opportunities and how to solve or exploit them. Strategy is, after all, a pragmatic art: ‘policy in execution’, Basil Liddell Hart called it.

 

  1. There are three essentials for such an approach to work. First, we will require better educated decision-makers with considerable experience of working together and a cohesive strategic culture. Perhaps an updated version of something like the ATB might help develop this in its members, and through them across Whitehall, over time. Secondly, it will require better informed publics and voters. And, thirdly, we will need to be prepared to live with uncertainty and accept that the Petraeus question (‘Tell me where this ends’) might not always have an answer. None of this will be easy.

 

  1. The rewards, however, might include interesting new ways of thinking through some of the long-standing debates that have transfixed British strategy for centuries and perhaps even – who knows? – eliminate some of the false dichotomies, unavailable choices and, frankly, magical thinking, on which we have got hung up over the years. Economic Statecraft might be a good place to make a start.

 

 

 

About this Submission

Jonathan Boff is Professor of Military History at University of Birmingham, where he is currently researching the UK’s use of Economic Statecraft and Strategy in the twentieth century for a book to be published by Oxford University Press in 2025. His research combines his work on the history of modern warfare with his earlier twenty-year career in the City, and has led to projects on this subject with a range of UK government organisations. He has also undertaken consultancy for the British Army and for the Chairman of the United States Joint Chiefs of Staff. His previous books have won awards including the British Army Book of the Year. He was educated at Merton College, Oxford and the Department of War Studies, King's College London. He serves on the councils of the National Army Museum and Army Records Society, and is a Fellow of the Royal Historical Society.   

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