Trade policy and security policy have an intimate past, but a divided future.

For fifty years, the quest for peace, stability, and prosperity in the Western-oriented world tied military power to the promotion of the market economy through trade agreements. After the Second World War, beginning in Europe under the aegis of the Marshall Plan’s postwar reconstruction and the prevention of Soviet expansion, the United States and its sometimes-reluctant European partners won the arms race—but readily conceded to cuts in their trade defense. The expansion of trade and investment, mediated through the system that became the World Trade Organization, was part of a larger strategy for security and stability. Mr. Realpolitik married Ms. Free Trade. Niccolò Machiavelli wedded Adam Smith.

Fredrik Erixon
Fredrik Erixon is the director of the European Center for International Political Economy.

Yet the happy couple has lately become unhappy. The partnership is no longer equal. Trade policy is increasingly tasked to fill the void left by the West’s, and especially Europe’s, diminishing military authority. That act has not been convincing. Europeans have not been keen to save the marriage. But faced with a grand Russian challenge to its own view of order and security, will Europe now resuscitate the partnership?

A Relationship on the Rocks

The historic partnership between #trade policy and security in #Europe is no longer equal.
Tweet This

Once the Cold War ended, the glue that had kept Western leadership on security and trade together lost its sticking power. An attempt to save the relationship was made in Doha in November 2001, when a new round of talks was launched aimed at lowering trade barriers around the world. Haunted by the September 11 terrorist attacks, the United States and other countries were scrambling support for global companionship. The Doha round of trade negotiations was virtually born in the ashes of New York’s World Trade Center. It died some years later, however, because a good part of the world soured on American leadership, especially because of its praetorian wars in the Middle East.

The world also changed. China’s magnificent economic expansion gave rise to zero-sum or even Westphalian spirits in global economic policy. Many countries, particularly other emerging powers like Brazil and India, felt they could not support trade agreements that would give China disproportionate economic advantages. Other states doubted or even distrusted Beijing’s credentials for global trade leadership—in short, China’s willingness to look out for others, not just itself. So the spirit of free trade collapsed as the West’s authority in world security politics declined. In Europe, trade policy was then embraced by leaders who still wanted to exercise influence in other parts of the world—leaders who desired a semblance of power.

The shifting role of trade policy has been particularly problematic in Europe. To understand the impacts of that shift, it is first necessary to have a clear picture of what trade policy is essentially about.

In modern thinking, it is about trade liberalization, perhaps even free trade. However, trade policy is no relative of economic liberalism. Trade liberalization is one particular direction of trade policy, just as protectionism is another. Rather, the core instinct of trade policy is mercantilism, the desire to seek new export opportunities without exposing domestic production to new competition. Even if that desire is tempered by the need to offer reciprocal market access to trading partners, a country’s trade policy and the agreements it signs reflect how domestic politics determine which sectors should follow market rules and which should enjoy political privileges. A good trade policy promotes market-based trade, sometimes by freeing up markets. A bad trade policy, however, reinforces structures of mercantilism and patrimonial systems of privileges: it creates political loyalties around a flow of goods and services.

The spirit of free trade collapsed as the West’s authority in world security politics declined.
Tweet This

The problem is that trade policy has been tasked to fill in for a deficient security policy—and has done so in a way that has promoted political loyalties rather than secular market relations. As Europe, the cradle of realpolitik, has devalued its military capacity, policymakers have lost their ability to understand power. European governments have increasingly seen military spending as an unexhausted source of budgetary savings. Power has become alien to Europe’s elevated ethos of perpetual peace at home and to the European Union’s foundational vision that economic interdependence alone can make war history. For Europe, trade has increasingly become the go-to policy for those occasions when there are unresolved problems with other countries. When Europe makes efforts to command authority or even wield power in the world, it often does so at the point of a customs office.

Yet trade policy cannot substitute for security policy. Nor can competing or supplemental ambitions of peace and security distract European governments away from the pursuit of mercantilist desires in their trade policy. In the broken relationship that results when trade policy is given a direct strategic or foreign policy purpose, security policy is the disaffected partner—hurt, lonely, and agonized over being dismembered from friends and family. On current trends, security policy is at risk of becoming the continuation of trade policy. Matters of territorial integrity are increasingly exposed to the politics of trade; decisions about stability and security are outsourced to the haggling merchants at the bazaar of trade politics.

Trade Policy’s Unsuccessful Charade

A number of cases illustrate Europe’s ineffective tendency to use trade policy as the preferred or only medium of foreign and security policy.

In 2010, the European Union was dissatisfied with Sri Lanka’s policy on human rights and wanted to effect improvements. For want of a better approach, the EU decided to withdraw preferential treatment that removed tariffs on certain categories of Sri Lankan exports to the union. The European Commission describes this setup, known as the Generalized Scheme of Preferences Plus (GSP+), as a “special incentive arrangement for sustainable development and good governance.”

Unsurprisingly, Colombo did not budge when faced with Europe’s action. The country was presented neither with a trade ban nor with a cut in foreign aid; it could still export to Europe, even at preferential tariff rates under the standard GSP. Tougher action could possibly have provoked a submissive reaction, but it would also have disturbed Europe’s political equilibrium on the question of trade with Sri Lanka. In practice, the move did not mean much more than that customs officers in the EU had to treat imports of Sri Lankan–made Victoria’s Secret brassieres a bit differently, which was exactly what some competing interests in Europe had lobbied for. Europe’s intention to improve human rights in Sri Lanka through trade may or may not have been legitimate, but it could never be effective as long as Europe’s commercial interests prevented leaders from acting beyond a limited amount of trade.

In another episode, after Russia’s invasion of Georgia in 2008, the EU was confused about the degree to which its response should involve the use of power. The union wanted, at the least, to support Georgia’s economy, which had been damaged by the Russian aggression. But it did not know how to do so without drawing the ire of European interests that did not desire competition from Georgia. After a surprisingly heated debate, defined by sectoral bickering about import and export interests in the EU’s trade with Georgia, the union ended up deciding in the fall of 2008 to prolong Georgia’s GSP+ status.

What the EU did not do, however, was to offer Georgian exporters completely free access to the EU market, which would have given Georgian exports a boost. Nor did the union direct the attention of its trade policy toward Russia’s exports to Europe. Trade sanctions against Russia were proposed but ran up against heavy opposition from commercial interests and member states that argued the Russian aggression was an isolated incident.

The then newly elected French president, Nicolas Sarkozy, whose country held the rotating presidency of the EU, brokered a peace agreement between Russia and Georgia. Although the deal later failed, it was initially heralded as Sarkozy’s moment in global politics. In a subsequent speech to EU ambassadors, Sarkozy offered to put France’s “friendship with Russia at the service of the whole of the European Union.”

However, Sarkozy did not mention France’s desire to leave its commercial relationship with Russia undisturbed. A French company, partly owned by the government, was pitching for a contract to sell Mistral-class warships to Russia—ships that, according to the Russian navy chief, Admiral Vladimir Vysotsky, would have enabled Russia to win the war against Georgia “in 40 minutes instead of 26 hours” had they been in Russia’s possession.

The EU’s Mercantilist Russia Policy

There are many examples of Europe replacing foreign or security policy with trade policy, or turning to trade policy because it has no other means of power, and therefore allowing commercial interests to define Europe’s security policy. An obvious case is Europe’s reaction to Russia’s 2014 invasion of Ukraine, the biggest challenge to peace and stability in Europe since the really cold days of the Cold War.

Europe’s naivete about #Russia has to do with the increasing role of trade and commercial policy in its security policy.
Tweet This

Europe’s collective policy vis-à-vis Russia can only be understood in light of the pair’s commercial relations. Europe’s naïveté about Russia’s direction of travel under President Vladimir Putin, its self-deception on learning what kind of creature inhabits the Kremlin, and its weak economic response to Russian aggression in Eastern Europe all have to do with the increasing role of trade and commercial policy in the Europe’s security policy.

The European response to Russia’s annexation of Crimea and destabilization of Ukraine is hardly an expression of economic authority. To the extent that Europe’s sanctions have been effective, this has happened by accident rather than design. The measures have had an economic impact on Russia, but they have not changed Russia’s policies. Nor were Europe’s sanctions intended to inflict so much damage on Russia’s economy that the only rational reaction from the Kremlin would have been to change course or at least temporarily regroup. It is true that the sanctions have had a growing influence on the Russian economy, but the pressure has not been sufficient to affect the choices made by the Kremlin. What really has had an effect on Russia’s economy is the sharp drop in oil prices and the Kremlin’s response to the economic decline that has only reinforced the downward spiral.

For sanctions to stand a chance of changing the behavior of the Kremlin, they would have to hit thick and fast—and be backed up by military authority. Once the United States moved toward sanctions, Europe was pushed to act with greater determination.

Europe’s sanctions were nevertheless designed to avoid strong economic consequences for Russia and the EU. Putin, however, multiplied their effect by doubling down on his strategy of destabilizing Ukraine and of stoking fear about his sequential intentions in Europe, adding more uncertainty to the future of economic relations between Russia and the West. Furthermore, Russia’s response to the sanctions and, more importantly, the fall in oil revenues have reinforced flawed economic and regulatory policies, partly as a necessity to help state-owned firms and Kremlin-connected tycoons affected by the ruble crisis and the downturn.

In its economic response to Russian aggression, Europe has displayed two core weaknesses of its post–Cold War approach to dealing with Moscow. Both show how the breakdown between security policy and trade policy has weakened Europe’s authority.

First, for more than a decade, Europe has outsourced its security policy vis-à-vis Russia to commercial policy, because such a strategy espoused the Kantian instinct of Europe’s own integration project. European postwar cooperation has been a success, but it has deceived many in Europe into believing that the post–Cold War settlement could follow the same playbook. Perpetual peace would emerge if Russia could be snared into economic interdependence.

Yet political leaders to the east of the Carpathian Mountains were never convinced about the extension of the European project into their territories. Russia’s political establishment never bought into the idea. There, in its Eastern neighborhood, the EU no longer commands military authority. And as long as the EU is unwilling to project such authority, it will remain weak in relation to Russian leaders who are prepared to spill blood on the altar of territorial control, buffer zones, and power balances.

The faltering partnership between trade policy and security policy has had adverse effects closer to home. There are far too many political and economic actors in the EU who have mentally distanced themselves from the concept of power and, consequently, made themselves susceptible to the Kremlin’s deceptions and threats. It is a remarkable sign of confusion and weakness that some big multinationals from EU countries kowtow to the Kremlin for commercial contracts even as the Russian government moves the territorial target for its policy of destabilization into the EU.

It may be cynical or coldhearted, but the Russian leaders read the messages from Europe’s political leaders. Absent a missile defense shield and a nuclear trip wire adapted to the Western alliance’s eastward expansion, Europe cannot move toward a tit-for-tat escalation in its current conflict with Russia. Putin boasts that he can take Kiev in two weeks, but European leaders increasingly fear that Russia will walk into continental Europe in a few months’ time.

The combination of weak military authority and the gradual replacement of that authority by foreign commercial policy erodes European power. If the only stick Europe carries in relation to the Kremlin is economic sanctions, the use of that stick has to be measured and proportionate in view of scenarios with far more serious and adverse developments. If the union fires away its heavy economic artillery now, there will not be much left if, say, Russian troops seize control over Kiev or move into a Baltic country. While sanctions need to hit hard if they are to work, Europe’s sanctions program has to be compressed because there are limits to what Europe can do in the event of an escalation to direct military conflict with Russia.

The second core weakness is that European governments have for decades allowed their commercial integration with Russia to reinforce their own mercantilist structures and habits. Hard-line scholars of war and international relations have complained about Europe’s commercial openness to Russia, a stance often presented as an embarrassing surrender to the ideology of free trade. Yet Europe’s real problem is about neither free trade nor ideology. The real problem is that commercial policy toward Russia has been dominated by coveted, protected, and state-directed sectors and companies with no interest in free trade or market-based exchange. Rather, those actors are concerned with defending their privileges and maintaining their political support.

In other words, a good part of Europe’s trade integration with Russia has developed as a consequence of political choice rather than market choice. That has enabled Russia to influence Europe through trade instruments. A market-based approach to the EU’s commercial and economic integration with Russia in the past decade would have denied Moscow that power.

The sector in which the EU’s approach to commercial policy creates the biggest problem is energy. In the past ten years, the union has allowed Russian state interests to radically disenfranchise efforts to reduce the role of political loyalties in the energy sector. Thuggish state exporters in Russia and their industrial friends in the EU have conspired to weaken market disciplines in Europe and reinforce commercial structures based on political privileges. There has been a remarkable process of lobbying and industrial barter around the EU’s energy sector, its linkages to Russia, and the degree to which Russian energy interests and their companions should be subject to normal market disciplines.

Once the prospect of economic sanctions against Russia emerged in March 2014, the process of political and economic logrolling in Europe reached embarrassing levels. The EU decided against using sanctions that were far more likely to be effective because the merchants of mercantilism did not want them and had the economic power to stop them.

In the second round of measures introduced in April, Europe decided to use selected financial sanctions. That was partly because of their effectiveness, and partly (and importantly) because the financial sector has not been allowed to build up huge buffers of political loyalties around its commercial integration with Russia, as other sectors have. Russian-linked financial interests carry weight in the United Kingdom. The failure of UK governments to prevent the financial rot spread by Kremlin-connected oligarchs in Europe is as embarrassing as France’s initial refusal to stop its sale of Mistral-class warships to Russia. But the financial sector does not carry the same influence in foreign or commercial policy as do energy companies or industrial firms on the continent.

Trade Policy Primacy in Asia

Europe is not alone in its security policy revaluation of trade policy, or its sometimes unintended slippage into trade policy primacy. Take the U.S. pivot to Asia. Launched with a big fanfare in 2012, this shift was a natural reorientation of U.S. economic, diplomatic, and strategic priorities. However, the pivot soon hit the buffers of political reality. Today, its only active ingredient is the Trans-Pacific Partnership (TPP), a proposed trade agreement between the United States and eleven other countries in the Asia-Pacific.

While a good part of the security commentariat brands the initiative in security terms, the TPP is really about trade and regulations. The partnership convinces notional allies in the region that the United States wants to export more goods and services to Asia, but it gives no comfort to those countries worried about being swallowed—politically or economically, peacefully or militarily—by China. In other words, the U.S. pivot, heralded as America’s grand contribution to peace and stability in the Asian century, has been reduced to industrial barter in Washington over what should be in and what should be out of the TPP. Perhaps this is how it should be—after all, the big strategic role of Asia for the West seems to be about business. But this does not make for a solid or tailored security policy.

A similar spirit of reductionism, or a similar logic of trade policy primacy, seems to operate in the way China and Japan attempt to deescalate their mutual hostility. Tensions between Beijing and Tokyo have been growing for a long time. Lately, both sides have felt it necessary to activate latent historical conflicts and make them central items of domestic politics. The two sides seem prepared to go to war over what in Japan and China are called the Senkaku and Diaoyu Islands, respectively.

The contacts between political leaders in China and Japan are kept to a minimum. Neither side makes the necessary efforts to start an effective dialogue that could reduce military tensions. Both sides admit that preparations for common crisis management—what should happen the day that one side has to fire against the other—are inadequate. The only talks that have a clear direction are the trade negotiations between the two plus South Korea toward the China-Japan-Korea Free Trade Agreement. Such an agreement would no doubt bring economic gains to the parties, but like all other trade talks, the East Asian nations’ negotiations reflect export interests. The final agreement will be a reciprocal balance of commercial concessions between and within countries.

The talks are not, and could not be, about security problems. When the only meaningful dialogue is about exchanging trade opportunities, the practical consequence is that export interests are allowed to set the tone—if not the substance—of a country’s strategic direction. The point is not that these trade talks should be closed, but that by outsourcing security policy to trade policy, the three states are letting the process of commercial barter, rather than strategic thinking, define their collective attempts to avoid war.

Looking Ahead

The general conditions for peace, stability, and prosperity have changed radically in the past quarter century—often for the better. The authority, or integrity, of traditional security policy has weakened as a consequence of stronger cross-border ties in the economy and the changing global economic power balance. However, many of the current weaknesses in the West’s—and, in particular, Europe’s—security policy are self-inflicted rather than consequences of a changing world order. Too many leaders in the West have fallen for the idea of trade policy as foreign or security policy.

The breakdown in the relationship between the EU’s trade and security policies has wide-reaching effects. In the energy sector, Europe’s susceptibility to Russian political pressures reflects the union’s own confusion over markets and politics. Energy remains one of Europe’s prime security concerns. Yet has Europe now drawn political lessons from its embarrassing trade relations with Russia and started a process to effect change? As the EU turns a page in its long-term effort to build effective foreign and security policy cooperation, is it about to strengthen its political decisionmaking on key security threats?

#Energy remains one of Europe’s prime security concerns.
Tweet This

Yes and no. The EU does have a stronger desire than it did to diversify its energy imports away from Russia. The union’s Kantian approach to Russia no longer convinces many people. However, the process to effect change is likely to be a long one because there are commercial interests that will require support during that transition.

Furthermore, there is a vexing trend that goes in the opposite direction: allowing industrial policy to play a stronger part in European markets and economic policy. While there are different opinions about the economic merits of such an approach, it inevitably distributes political privileges and reinforces the role of politics in domestic as well as foreign commercial policy.

Consequently, the politics of trade and investment are likely to become more charged. This is not good news for security policy—or for those who, like the EU’s High Representative Federica Mogherini, support a more ambitious role for foreign and security policy in the European Union. The EU’s security policy institutions remain weak. Europe’s shrinking military authority is a growing source of instability in Europe and in its neighborhood. Increasing political distortions in Europe’s trade relations give commercial interests a greater say over the way the EU defines its security threats and pursues its strategic ambitions.

The divorce papers between Mr. Realpolitik and Ms. Free Trade have been filed. Perhaps there is still time, however, to stop an annulment of the marriage.

Fredrik Erixon is the director of the European Center for International Political Economy.