Podcast | No old normal: Inside the West’s economic war - Trade Treasury Payments

Government understanding of supply chains and increased defence spending are key to global security, Rebecca Harding, economist and chief executive of think tank the Centre for Economic Security, and editorial board member at TTP, says in a new book.

The preface of The World At Economic War ends with a provocative statement: that there is no longer an “old normal” to return to. The global order present since the end of the Second World War has changed irreparably, she says, and democratic institutions are struggling to keep up.

Globalisation, Harding says, has failed to benefit stakeholders equally. Trust in the multilateral rules-based order to deliver a balance “between the ravages of the market and the requirements of an inclusive civil society” has proven misplaced, leading to increased political polarisation and growing economic nationalism.

At the same time, Western nations have failed to adequately take into account the importance of economics to national security. This has allowed Russia and China — both countries that are willing to subordinate business interests to national ones — to dominate key supply chains in defence and critical infrastructure. This was first laid bare by the energy crisis in Europe sparked by Russia’s 2022 invasion of Ukraine, but extends far beyond it. 

The book gives the example of the US F-35 fighter jet, a core component of the country’s military power. The jet’s production requires around 300,000 different components from 2000 suppliers around the world. A disruption of tier two or three suppliers could cause the “strategic equivalent of the butterfly effect”, hindering readiness in the event of ‘kinetic’ warfare.

In addition, the fiduciary duty of public companies to shareholders rather than their home country means they are vulnerable to foreign control. Harding notes that the UK’s critical infrastructure is particularly affected, with 70% of its water industry owned by overseas interests in 2022, while American firms owned 19% of the country’s assets in the same year.

BRICS (Brazil, Russia, India, China and South Africa) countries, in contrast, are seeking ways to reduce their reliance on the West, driven by tariffs, sanctions and ideological differences. The growth of non-dollar payment systems, including China’s CIPS (Cross-Border Interbank Payment System), could limit the US’ ability to wage economic war, Harding says, in particular by limiting the efficacy of any sanctions it may wish to implement.

The ability of Western powers to defend against economic warfare, or even retaliate in kind, is further weakened by a lack of knowledge about global trade flows. “Hidden within trade data,” Harding says, “is sanctions evasion, money laundering or sub-threshold trade-based […] warfare.” Identifying these activities is difficult, though, because of the nature of trade documentation.

Manual trade finance document checking is time-consuming and makes unified datasets of what is being traded where difficult. Newer technologies like generative AI come with their own risks, however, including hallucination and documentary forgery by rouge actors, while the ownership structures of technology providers are often opaque.

Meanwhile, the US’ turn towards economic nationalism under the first Trump administration has shown no signs of slowing, with tariffs imposed on friend and foe alike. Harding argues that this means Europe must design its economic security framework with US involvement as an open question, rather than a given.

The solutions

The book does not simply lay out the issues we face, however. Harding offers concrete recommendations for governments, businesses and economists to follow in order to ensure national security going forward.

The first is the creation of a ministry of economic war within government. Such a department would be responsible for mapping supply network vulnerabilities and developing the tools necessary to counter them. At a European level, these departments would work together to model not only the domestic economic impact of policy, but also potential responses by foreign powers and its impact of national security.

Harding also argues that Nato should take a more frontline role in economic security by invoking Article 2 of the treaty, says that members must “seek to eliminate conflict in their international economic policies and will encourage economic collaboration between any or all of them”. This would mean a working as an alliance to develop financial structures enabling member states to protect their supply chains.

One potential avenue for this is the creation of national security and resilience funds that would deploy capital to build up supply side infrastructure critical for national defence whilst working alongside partners in other countries.

Most important of all, Harding suggests, is a change in attitude. Arguing that “the future is less frightening if it is anticipated,” she encourages defence experts and economists to adopt a preparedness mindset. This does not necessarily mean expecting kinetic warfare, but it does mean moving on from the “certainties of the past” that no longer exist.

The World at Economic War is available now from London Publishing Partners’ website or Amazon.