Democracies are finally figuring out that they need to use their trump card—economics—to defend themselves.
The United States and Europe together have double the economic power of China and Russia combined, and could use it more effectively and proactively to put pressure on Moscow and Beijing through tariffs, sanctions, embargoes, export controls, and price caps. Economic pressure could end Russia and China’s territorial aggression or even democratize these two recalcitrant dictatorships.
A proposal for an economic version of NATO, the Western security alliance, is being advanced by former NATO leaders. Current administrations in the United States, Canada, Italy, and Ukraine support related economic coordination.
If China imposed economic sanctions on Australia or Lithuania, for example, a new alliance focused on leveraging the market power of democracies could hit back as a group with their own embargoes, sanctions, tariffs, and price caps.
Joint economic action would protect smaller with bigger democracies. The economically weakest at the edges of the herd would thus be less vulnerable to getting picked off or influenced.
This would serve as the first step toward better economic coordination against the world’s worst dictators. However, it may require secondary sanctions against any countries that violate the agreements for short-term gain.
An alternate approach is for all democracies to impose a 35 percent tariff on Russian exports, which would keep oil flowing but punish Moscow and deprive it of funds for its military.
A Democratic Buyers Cartel
The United States, Canada, and Ukraine proposed a democratic buyers’ cartel in May that would impose a price cap or tariff on Russian oil and gas.“The idea is to create a cartel of buyers, or to persuade the big producers, and Opec in particular, to increase production, which is perhaps the preferred path,” Draghi told the Times. “On both paths, there’s a lot of work to do.”
A democratic buyers’ cartel also decreases energy inflation in countries that participate, either by forcing Russia to sell its energy cheaper or by reinvesting tariff revenues in energy infrastructure, renewable energy, or subsidized hydrocarbon extraction, for example.
It could also put pressure on other illiberal dictatorships, in China, Iran, and Venezuela, for example, to liberalize their economies and political systems. It would serve as a counterbalance against OPEC, which is an oil exporters cartel.
“Europeans would act in concert to set a lower price than they are currently paying for Russian energy,” according to The Washington Post.
“The calculus is that—if Europe moves in unison—Russia would be forced to accept the lower price or suffer a collapse in oil revenue. Some experts have suggested that ‘secondary’ sanctions could be considered for other nations, such as India, that try to undercut the price cap by paying higher prices.”
An Economic NATO
The economic NATO “proposal is inspired by Nato’s Article 5, which states that a military attack on one ally is considered an attack on all,” Rasmussen and Ivo Daalder, former U.S. ambassador to NATO, wrote in a report, according to the Times.“The aim is to produce the same deterrence and solidarity in the economic realm among democracies that Nato produces in the security realm. It’s time to tell the bullies that if they poke one of us in the eye, we’ll all poke back.”
“Rasmussen and Daalder are proposing that an economic Article 5 commitment could be implemented through existing structures such as the G7,” according to the Times. But Rasmussen and Daalder “said other democracies would have to be ‘involved’ and a standalone organization may have to be set up to manage the new guarantee.”
Daalder told the Times that sanctions, tariffs, and secondary sanctions would help concentrate supply chains in democracies.
That would alleviate future supply chain risks to European electricity grids.
Stronger Export Controls
In addition to an economic NATO and democratic buyers’ cartel, the democracies should coordinate tougher controls on strategic commodity and technology exports to China and Russia.The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, which replaced CoCom in 1996, has been less effective.
If Washington broadened CFIUS to include all democracies, it would mean that Beijing could not go to Taiwan, for example, if the United States and Europe denied semiconductor technology to China.
Stronger American Leadership
Germany, as usual, is dragging its feet on any economic measures against Moscow, and the Biden administration is essentially deferring while soft-selling the idea of more coordination.The world has tried coordination-lite against dictators, which didn’t work very well. The International Energy Agency (IEA), for example, was founded in 1974 to counter the power of OPEC. But it was ineffective at even mild coordination, for example, of strategic petroleum reserve releases.
The world’s democracies will need more leadership from Washington to coordinate the level of price caps, tariffs, embargoes, and sanctions.
These could and should be adopted at upcoming NATO and G7 summits in Spain and Germany, respectively. But Washington will have to do more than soft-sell the ideas. Countries like Germany and India, which resist economic measures against Moscow, may have to pay a short-term price to follow their long-term interests.
Washington must take the initiative—before it is too late. That will require real leadership and harder-hitting strategies.
