09.11.23 Review

Sanctions Incentives: The West may introduces economic incentives for those who join sanctions

Developed countries may devise a system of trade preferences for developing nations that agree to join the sanctions regime imposed by the Western coalition. Currently, even those countries that generally condemn Russian aggression benefit from not joining the sanctions. This strategy only strengthens local politicians who employ anti-colonial rhetoric and national economic self-interest. However, the situation may change if anti-Western rhetoric and a non-alignment strategy lead to the deterioration of their trade and investment conditions. This trend is already evident in the investment sector, with over 40% of major European companies considering relocating production to more 'friendly' locations. The trade war of the late 2010s and the growing geopolitical tension between the US and China have led to a reduction in foreign direct investment in the Chinese economy by a third in the third quarter of this year for the first time since 1998. A system of trade preferences for 'friendly' countries could become another tool for geo-economic divergence. Western countries remain crucial markets and sources of investment for developing economies and can turn these advantages into factors of political coercion or containment.

Countries in the Global South that refuse to join sanctions against Russia do not necessarily approve of its actions. However, in addition to being wary of the West's methods of economic pressure in general, they profess economic pragmatism or even selfishness.This reflects the attitudes not only of their elites but also of the population seeking to escape poverty. This strategy significantly weakens the effectiveness of Western sanctions and forces the West to establish expensive monitoring systems and impose unproductive secondary sanctions against companies from these countries, which causes additional irritation towards the 'collective West.'

However, another path is possible, according to Marcus Noland, Executive Vice President of the Peterson Institute for International Economics (PIIE). The US should use a system of preferences for access to its market to support and expand the sanctions coalition. In this case, more sustainable politico-economic alliances with structured interests may form. Indeed, today, political populism, based on an anti-colonial and anti-American agenda, aligns with the economic benefit of not joining sanctions, sharply strengthening the positions of populist-national pragmatists like Turkish leader Recep Tayyip Erdogan or Indian Prime Minister Narendra Modi. This trend leads to further cooling of US political relations with countries that could otherwise be their allies on the international stage (such as India).

According to Noland, the US should develop trade preferences, similar to the Generalised System of Preferences (GSP) which operates within the WTO competencies for potential participants in such a coalition. It assumes that developed countries, including the US, grant duty-free access to their markets for developing countries. The crucial difference of the new program should be a limited and renewable period of preference validity.

Noland's idea does not appear to be sufficiently developed at this point. He acknowledges that, as was the case with the GSP, Congress, which must approve the new program, may exclude certain categories of goods in the interest of American producers. For example, clothing and footwear were excluded from the GSP program, which significantly impacted its effectiveness, as its target participants sought to export relatively simple, non-technically complex goods to the American market. Noland believes the new program should be more profitable but does not explain how to achieve this. Moreover, at various stages, the US has denied access to the GSP to several countries for political reasons (for instance, 'communist' Vietnam or Libya, which was accused of supporting terrorism).

Regardless, Noland's proposal represents another step within the logic of building political-economic blocs. Since the 1990s, developed countries have eagerly invested in emerging markets and lowered trade barriers, hoping that economic interaction would lead to gradual political convergence. However, the global trade balance has shifted in favour of autocracies and 'middle powers' who are in no hurry to assist the West in its confrontation with one of the former and, on the contrary, seek to benefit from this confrontation.

When choosing partners and investment targets, Western businesses have begun to weigh profitability against geopolitical risks. International companies are being encouraged to do so by Western governments; for example, in the strategy for developing relations with China adopted by the German government, major corporations are advised to ‘duly consider geopolitical risks when making decisions’. As a result, the flow of direct Western investment into the countries of the Global South is decreasing, and trade between countries of the Global North with those of the Global South has grown several percentage points slower since the start of the Russian full-scale invasion of Ukraine than trade within these groups. In a survey of major European companies conducted by the European Central Bank (ECB), 42% stated that they plan to relocate production to more 'friendly' locations in the coming years. This is a new trend, according to ECB analysts, as only 11% of firms said they have been following this strategy over the past five years. Meanwhile, the US-China trade war and a new awareness of geopolitical risks have already led to a reduction of $11.8 billion worth of foreign direct investment in the Chinese economy in the third quarter of this year for the first time since 1998, according to Bloomberg. Against this backdrop, the idea of trade preferences may develop as one of the instruments of geo-economic coercion.

The BRICS+, expanded this year to 11 countries, is also discussing instruments of geo-economic independence, although these still appear abstract and unrealistic. This is primarily because developed countries remain crucial markets and the main source of investment from the US and the UK. The investment opportunities of the Chinese 'Belt and Road' project are unlikely to compensate for the reduction in these global investments, analysts note. Despite the trade war that has been occurring over the past five years, China continues to increase its trade with the US, demonstrating that reversing globalisation trends will not be so simple. The potential economic costs from worsening trade and investment conditions with Western countries is counter to the previously discussed ideology of 'pragmatic sovereignty' that countries of the Global South adhere to. Therefore, they are unlikely to easily agree on joint action, and the West has much scope to turn trade and investment regimes into a political tool. Nonetheless, in one way or another, the struggle for the ability to convert economic influence into political influence will continue in the foreseeable future.