Economic Deterrence Through Economic Engagement

Economic Deterrence Through Economic Engagement Abstract This essay suggests that a state’s economic engagement with a potential military aggressor can be understood as an attempt to increase its deterrent capability. It first introduces the concept of economic deterrence and derives three strategies of economic deterrence from classic deterrence theory: (1) punishment, (2) denial, and (3) diminution. Next, it suggests that economic engagement can be employed to advance the ability, credibility, and communication for economic deterrence, as well as to create favorable conditions to adopt the three economic deterrence strategies. Finally, the essay discusses the requirements for effective employment of engagement policy for economic deterrence. Should the United States abandon its economic engagement policy toward China and Russia, which has been a pillar of its global strategy since the end of the Cold War? Answering this question requires a sound understanding of the strategic logic of economic engagement in international politics.1 Yet, the strategic rationale of engagement policy has remained strangely undertheorized. While economic statecraft has won much attention in the post–Cold War context, many analyze the impact of negative economic sanctions rather than economic engagement (Cortright and Lopez 2002; Drezner 2011; Haass 1998; Hufbauer et al. 2007). Although a significant number of scholars and practitioners address the use of economic side payments in maintaining peace or in coercive diplomacy (Baldwin 1985; Haass and O'Sullivan 2000; Newnham 2008; Nincic 2010; Paulson 2008), the specific mechanisms and strategies of economic engagement remain theoretically unelaborated. Especially, the rich strategic studies literature on deterrence is not well represented in the discourse on economic engagement. As Michael Mastanduno (2003, 176) observes, “our knowledge of the workings of economic engagement is still fairly [at a] preliminary stage.” This research note suggests that one important way of understanding economic engagement is viewing it as an extension of deterrence strategy—defined as efforts or policies to prevent the deterred state from beginning military aggression. I first introduce three specific strategies of economic deterrence: (1) punishment, (2) denial, and (3) diminution. Next, I suggest that a deterring state can deliberately adopt economic engagement in its relations with a potential aggressor in order to create a favorable condition for economic deterrence, as well as to better employ the three strategies of economic deterrence.2 Finally, this essay discusses the specific considerations that a state needs to take into account before employing engagement policies for economic deterrence. The Strategies of Economic Deterrence From Military Deterrence to Economic Deterrence For many, military threat has been the central tool of implementing deterrence (Morgan 1977, 17; Snyder 1961, 9–10). The emphasis on military dimension, however, does not mean that military force is the only means of deterrence. The goal of any deterrent effort is to achieve a political objective—dissuading the adversary from making the political decision to launch a military attack—not implementing certain military programs for deterrent purposes. Moreover, military force plays the central role in deterrence because it is considered to be the most effective means in affecting others’ decisions in the anarchic international realm (Mearsheimer 2001, 55–57), not because it is the only tool. As Patrick Morgan (1977, 27) suggests, it is possible to articulate state ability to deter an attack by nonmilitary means. In this vein, economic deterrence can be defined as efforts utilizing economic threats to discourage the deterred state's military aggression. Similar to military deterrence, economic deterrence affects the potential aggressor's decision by manipulating the cost-benefit expectations of military aggression. The state adopting economic deterrence threatens to manipulate the deterred state's commercial, financial, production, or investment activities and performance and tries to convince the potential aggressor that military aggression would not result in net gains or would even incur net losses. I articulate that economic deterrence is a concept related to the prevention of military aggression—thus, a strategy for protecting security—that is distinguished from the use of economic statecraft in conducting ordinary diplomatic relations. In other words, I follow the perspective that considers deterrence as an idea that pertains to the prevention of military aggression yet posit that nonmilitary tools of deterrence deserve more attention. Not all states, however, are capable of utilizing economic deterrence. A state that does not command significant economic power—in terms of market size, financial resources, technological development, or leadership in global production network—simply cannot issue a credible economic threat. Moreover, the deterring state needs to be in an asymmetric economic relationship with the deterred state in which the latter state has more to lose if bilateral economic exchanges were restricted (Hirschman 1980[1945]; Keohane and Nye 2001). Therefore, economic deterrence is likely to be employed by an economically larger and more developed state against an economically smaller and relatively backward state. Table 1 summarizes different economic deterrence strategies that can be adopted by a deterring state in order to discourage the targeted state's military aggression. Below I discuss these strategies in more detail.3 Table 1. Strategies of economic deterrence Strategy  Mechanism  Punishment  Threaten to impose two types of costs that can undermine the gains from aggression: (1) economic costs or (2) domestic political costs.  Denial  Threaten to reduce the likelihood of military success by (1) diminishing the quantity of surplus resources for military use, (2) limiting access to cutting-edge technologies, or (3) constraining operational capability through restrictions on strategic materials and financial resources.  Diminution  Threaten to diminish the size of benefit by (1) pulling out investment, trade, or production activities from contested territories or (2) destroying economic assets in contested territories.  Strategy  Mechanism  Punishment  Threaten to impose two types of costs that can undermine the gains from aggression: (1) economic costs or (2) domestic political costs.  Denial  Threaten to reduce the likelihood of military success by (1) diminishing the quantity of surplus resources for military use, (2) limiting access to cutting-edge technologies, or (3) constraining operational capability through restrictions on strategic materials and financial resources.  Diminution  Threaten to diminish the size of benefit by (1) pulling out investment, trade, or production activities from contested territories or (2) destroying economic assets in contested territories.  View Large Table 1. Strategies of economic deterrence Strategy  Mechanism  Punishment  Threaten to impose two types of costs that can undermine the gains from aggression: (1) economic costs or (2) domestic political costs.  Denial  Threaten to reduce the likelihood of military success by (1) diminishing the quantity of surplus resources for military use, (2) limiting access to cutting-edge technologies, or (3) constraining operational capability through restrictions on strategic materials and financial resources.  Diminution  Threaten to diminish the size of benefit by (1) pulling out investment, trade, or production activities from contested territories or (2) destroying economic assets in contested territories.  Strategy  Mechanism  Punishment  Threaten to impose two types of costs that can undermine the gains from aggression: (1) economic costs or (2) domestic political costs.  Denial  Threaten to reduce the likelihood of military success by (1) diminishing the quantity of surplus resources for military use, (2) limiting access to cutting-edge technologies, or (3) constraining operational capability through restrictions on strategic materials and financial resources.  Diminution  Threaten to diminish the size of benefit by (1) pulling out investment, trade, or production activities from contested territories or (2) destroying economic assets in contested territories.  View Large Economic Deterrence by Punishment Similar to punishment strategy in military deterrence, economic deterrence by punishment discourages military aggression by threatening to impose large costs that exceed the amount of gains that might be attained through military attack. Specifically, two types of costs can be articulated. First, the deterring state can threaten the potential aggressor with large economic costs. It can declare to the deterred state that military aggression will result in restrictions on foreign commercial, financial, investment, or production relations, and consequent losses of the wealth generated by economic activities that rely on these relations. For instance, restricting trade diminishes the economies of scale and industrial efficiency, thereby causing a decline in the overall performance of the targeted state's economy. Limiting foreign financial exchanges destabilizes the deterred state's currency and reduces the amount of financial resources that can be mustered for diverse purposes. Denying access to foreign direct investments (FDIs) diminishes the resources and technologies that could be employed for economic development. When the deterring state can demonstrate that these economic costs are likely to exceed the gains from military aggression, the deterred state is incentivized to refrain from military attack out of expectation that it would eventually be worse off. This argument emphasizing economic costs of aggression has a long history, embraced by many political leaders and scholars in diverse contexts. By the mid-nineteenth century, British liberal political leaders, most notably Robert Peel and Richard Cobden, argued that the fear of large economic costs discouraged military conflict between economic partners (Cobden 1870). Before World War I, Norman Angell (1911) articulated that large economic costs made great power wars obsolete. More recently, scholars examining the relationship between economic interdependence and peace have argued for the existence of the “capitalist peace” (Gartzke 2007; Schneider and Gleditsch 2012). The economic costs argument of economic deterrence by punishment can be envisaged as a translation of these worldviews into a deterrence strategy. Second, the deterring state can threaten the deterred state to introduce economic difficulties that would result in large domestic political costs. Restrictions on the deterred state's foreign economic relations would undermine the interest of powerful domestic groups within the deterred state that have stakes in continuing unimpeded international economic exchanges. When the deterring state can impose large losses on these economic interest groups, the interest groups might choose to punish their own government for the misconduct of foreign relations (Kastner 2007; Kirshner 2002; Papayoanou and Kastner 1999). Moreover, large and extensive economic frustration might even instigate popular protest or revolt against the government (Hufbauer et al. 2007). Fearing these political outcomes induced by the deterring state's economic restrictions, the leaders of the deterred state would refrain from military aggression. From the perspective of the leaders, the political costs, such as the loss of power, can be far greater than any material gains obtained by military actions. These indirect, yet more subtle, political costs of aggression have been emphasized in the literature on economic sanctions that focus on the use of economic pressure for coercive purposes (Drezner 2011; Kirshner 2002). This essay suggests that the domestic political costs argument can be endorsed as a mechanism for economic deterrence as well. Economic Deterrence by Denial Economic deterrence by denial discourages military attack by threatening the deterred state that military aggression will not be successful. The deterring state persuades the deterred state that, by denying the latter state's access to diverse foreign economic inputs, it can diminish the size, quality, or operational capability of the deterred state's military force. If the deterred state believes that its military performance would be significantly undermined due to the deterring state's economic measures—to the extent that military success is not feasible—it will refrain from military aggression. The deterring state employing economic deterrence by denial can affect the deterred state's military capacity in three specific ways. First, the deterring state can threaten to diminish the deterred state's ability to mobilize sufficient military force for aggression. A state's military capacity builds on its economic capacity or latent power (Mearsheimer 2001, 57–75). By restricting the deterred state's foreign economic exchanges, the deterring state can diminish the pool of material resources from which the deterred state draws military power while rendering the translation of latent power into military power less efficient and more costly. As long as having sufficient surplus resources remains an important condition for military effectiveness (Knorr 1956), the deterred state would expect the likelihood of its military success to decrease if the deterring state can significantly reduce its latent power. Second, the deterring state can weaken the quality of the deterred state's military force by limiting access to important technologies. It is widely agreed that having technologically advanced, cutting-edge weapon systems is key to military success in today's battlefields (Tellis et al. 2000). As Stephen Brooks (2005, 16–46) suggests, however, it is difficult to remain competitive in military-related technologies without access to global production networks led by multinational corporations (MNCs). Moreover, while the boundaries between civilian and military technologies have become blurred today, a state needs to maintain access to all advanced technologies in order to remain competitive in military-related technologies (Bureau of Industry and Security 2006; Paarlberg 2004). In this condition, if the deterred state is denied access to diverse civilian and military-related advanced technologies, as well as to the MNCs that lead technology development, then it will be difficult to build and maintain a cutting-edge military force that can achieve victory. If the deterred state expects the likelihood of its military success to significantly diminish due to the deterring state's economic measures that undermine its military competitiveness, then it will be inclined to rethink military aggression. Third, the deterring state can threaten to reduce the operational capability of the deterred state's military force by limiting access to strategic raw materials and financial resources. Raw materials, such as oil and rubber, are crucial for the operation of a modern mechanized army, navy, and air force. The importance of financial resources in operating military units is obvious, since it is very costly to maintain the combat-readiness of modern military assets (Tilly 1990). If the deterred state's military is not well supplied with strategic materials or financial resources due to the deterring state's economic measures, it will be less likely to show good performance on battlefields. Accordingly, the likelihood of the deterred state's military success would diminish, and the deterred state would be less optimistic about military aggression. Economic Deterrence by Diminution Economic deterrence by diminution affects the deterred state's behavior by threatening to diminish the size of benefits that can be obtained through military aggression. Conventional approaches to deterrence focus on deterrence by punishment or denial since they view that the size of expected gains (“B” in pb(B)-pc(C) formula) is difficult to manipulate. This is because the goal of military aggression tends to be territories, and the value of coveted territories does not easily change in a modern nation state (Pape 1996, 16). Missing in this perspective is that the deterring state can employ economic means in order to diminish the “spoils of war” for the deterred state (Liberman 1998), even when it cannot alter the strategic or nationalistic value of contested territories. When the deterred state recognizes that the size of its material gains is likely to be insignificant, even if it can minimize costs and achieve military success, it will be motivated to eschew aggression. The strategy of diminution can be implemented in two different ways. First, the deterring state can issue threats that foreign economic actors will desert the contested territories so that the deterred state would not obtain any significant gains in wealth. The deterring state can communicate with the deterred state that MNCs and FDIs would leave the territories where the deterred state chooses military aggression. While MNCs conduct production activities around the globe in order to maximize their competitive advantage, they are inclined to abandon occupied territories in fear of exploitation by a territorial aggressor. The aggressor would also find it difficult to attract FDIs from MNCs in newly obtained territories. This is because, while an aggressor needs to strengthen centralized control over the new territories, MNCs move away from stronger regulations, especially by a foreign occupier. Moreover, occupying one state would not contribute to the occupier's power because the aggressor is unable to obtain the entire value-adding chain of MNCs’ global production networks. In other words, the aggressor cannot attain the capacity to make a final product by conquering one country since the occupied state produces only a certain part of the final product in geographically dispersed production schemes (Brooks 2005). The aggressor, in short, cannot expect to obtain large wealth from military actions in the MNC-led globalized economy. Moreover, the deterring state can threaten to stymie foreign trade and financial relations of the territories targeted by the deterred state. When the contested territories’ economy relies on foreign commercial and financial exchanges, loss of access to important export destinations and financial transactions would dramatically diminish their wealth. If those territories rely on foreign goods, raw materials, factors of production, or financial resources for manufacturing activities, losing access to foreign economic inputs would render their economy less efficient and less profitable. The deterring state can persuade the deterred state that occupying an open, finance-centered economy or trade dependent state would not generate any significant material gains. Second, the deterring state can threaten the deterred state that it will destroy economic assets that are located in the contested territories. The deterring state, often in conjunction with the authorities governing the threatened territories, can destroy manufacturing facilities, farms, mines, oil fields, or even cities, and remove population from the contested geographical areas, in order to deny any material gains to the aggressor. The emphasis in this case is placed on deliberately reducing the wealth in contested territories, rather than inflicting damages on the operational capabilities of the aggressor's military as in a scorched earth policy. When the deterred state is convinced that its expected gains are likely to be tarred by the deterring state's destructive activities, shirking military aggression becomes a more attractive option. Economic Engagement and Economic Deterrence Economic engagement advances the ability to use economic deterrence in two important ways. On the one hand, it creates or improves overall conditions for the employment of economic deterrence. On the other hand, specific engagement policies can be adopted in order to make economic deterrence by punishment, denial, or diminution a feasible option for the deterring state. “Setting the Stage” for Economic Deterrence Scholars suggest that capability, credibility, and communication are critical components of successful deterrence (Paul 2009, 2). It is obvious that the deterring state must possess the capability to alter the targeted state's calculation over military aggression. The deterring state, at the same time, must be able to issue a credible threat to the deterred state through a channel that effectively communicates its intentions to the deterred state's decision makers (Mercer 1996; Press 2005; Schelling 2008, 260–68). This essay suggests that an economically capable state can deliberately employ economic engagement in order to address these three aspects and advance its economic deterrence capability. As Thomas Schelling (2008, 71) observes, “Deterrence involves setting the stage . . . and waiting.” Economic engagement precisely aims to set the stage for economic deterrence. First, economic engagement endows the deterring state with the capability to affect the potential aggressor's calculation through economic means. Different from military deterrence, it is difficult to alter the deterred state's judgment through economic means without having significant economic ties. An economically closed deterred state would not pay attention to the deterring state's threat to employ economic deterrence since it is largely not vulnerable to external economic manipulations. By allowing the potential aggressor to obtain significant material gains through economic engagement, the deterring state creates or expands the stakes and actors within that state that it might be able to manipulate. Moreover, an economically larger and more advanced deterring state's engagement with the potential aggressor is likely to establish an asymmetrically interdependent relationship, which places it in a relative power position to issue deterrent economic threats. As Albert Hirschman suggests, a smaller and less developed economy tends to gain more from exchanges with a larger and more developed economy. This is because broader economic ramifications are bound to be larger in the economically smaller and less developed state when exchanges occur between states that have large gaps in economic size and level of development (Hirschman 1980[1945]). Thus, when economic ties develop, the potential aggressor is likely to be put in a weaker position in vulnerability interdependence with the deterring state (Waltz 1971), in which the former state would lose more once the deterring state restricts major economic exchanges. This asymmetric relationship strengthens the deterring state's capability to use economic deterrence. Second, economic engagement allows the deterring state to increase the credibility of its deterrent economic threats. On the one hand, engagement enables the deterring state to send costly signals to the deterred state and make its threats more credible (Fearon 1997). The deterred state would try to distinguish whether the deterring state is serious or bluffing when it encounters economic threats. For the deterring state, one important method of showing its resolve is declaring to adopt measures that would hurt itself as well (Schelling 2008, 36). Economic engagement links certain economic activities of the deterring state with those of the deterred states. Thus, the deterring state would lose something, however small, when it imposes restrictions on economic exchanges with the deterred state. These losses, representing the willingness to accept costs, allow the deterring state to convey a more credible threat to the deterred state. On the other hand, asymmetric interdependence, created by economic engagement, allows the deterring state to issue a credible economic threat, as well as to increase the capability to utilize economic deterrence. For a credible threat, the deterring state has to lose less than the deterred state if bilateral economic exchanges are restricted or even severed. As long as the engagement by an economically larger and more developed deterring state benefits the potential aggressor more, the latter state has more to lose if the former restricts bilateral economic exchanges. This condition gives the deterred state good reason to consider that the deterring state's economic threats are serious. Third, economic engagement expands the deterring state's ability to communicate its intentions with the deterred state. For effective communications, the deterring state must have strong links with key actors within the deterred state. Economic engagement helps establish the pathways for communication between the deterring and the deterred state. Expanding economic exchanges entails more interactions and ties between leaders, officials, bureaucratic organizations, and diverse societal actors (Haas 1964). These different actors can serve as channels for communication between the deterring and the deterred states that can cope with sensitive situations. Moreover, the experiences of interactions themselves serve as the foundation for effective exchanges of information between the two parties. In sum, the deterring state can improve its capability, credibility, and communication for economic deterrence through engagement. Below I examine the specific economic engagement policies that can be adopted to advance the three economic deterrence strategies discussed above. Engagement and Economic Deterrence by Punishment Economic deterrence by punishment is a widely articulated—at least implicitly—strategy when economic engagement is endorsed in a state's relationship with a potential security competitor. When an economically more powerful deterring state engages with the potential aggressor, it allows the latter state to obtain significant material gains. In exchange, the deterring state obtains an ability to impose domestic political and economic costs. As Joseph Nye (2016/17, 58) emphasizes, engagement “entangles” the deterred state, so that “a successful attack simultaneously impose[s] serious costs on the attacker as well as the victim.” For instance, the West actively engaged in financial and commercial exchanges with Russia in the Gorbachev and Yeltsin years in a significant part to increase the costs of hostility (Wilson 2014). Similarly, the Clinton administration pressed economic engagement with China, arguing that less economic engagement would only diminish costs of aggression for Beijing (The New York Times 2000). The engagement policies that should be adopted by the deterring state to advance deterrence by punishment are straightforward. Since increasing the economic and political costs of aggression is key, the deterring state needs to focus on expanding the size of gains for the deterred state and increasing the number of people within that state who benefit from economic exchanges. It should allow the potential aggressor to obtain large benefits in international trade and finance by reducing trade barriers and lowering monetary regulations, as well as helping that state to join major international economic regimes (Ikenberry 2012). At the same time, the deterring state would enable freer flow of FDIs into the deterred state from which the potential aggressor can derive resources for economic development. Moreover, the deterring state can expand its own production activities within the potential aggressor so that the larger population of the latter state benefits from economic interactions with the deterring state. In implementing these policies, the deterring state can focus on facilitating the potential aggressor's access to highly mobile economic inputs that have particularly large consequences on the overall economic performance of a country. Especially, foreign capital, technology, and high-skilled labor can help a relatively backward potential aggressor generate large wealth yet are sensitive to political risks and can easily leave the deterred state. The deterring state can encourage these economic actors’ active involvement in pursuing engagement with the deterred state in order to increase both the cost of aggression and its ability to manipulate economic relations. Engagement and Economic Deterrence by Denial Economic engagement to advance deterrence by denial entails more sophisticated considerations and subtle processes. This is because economic deterrence by denial involves affecting a sensitive dimension in interstate relations, threatening to diminish the size, quality, or operational capability of the deterred state's military. Nonetheless, there are several different engagement policies that can be implemented to increase the deterring state's ability to wield economic denial strategy. Engagement that allows the potential aggressor to obtain large material gains can be considered a policy to increase the deterring state's denial capability, as well as the ability to impose costs. Put bluntly, the deterring state, through economic engagement, obtains an ability to affect the size of the deterred state's surplus resources that can be converted for military use. By diminishing the deterred state's latent power, the deterring state, in effect, can impede the deterred state's military build-up. Yet, a distinctive engagement policy for denial strategy is achieving a cooperative relationship in high technology and strategic raw materials. The deterring state can allow the potential aggressor to participate in global production networks led by MNCs. In today's world where the boundaries between civilian and dual-use technologies have become unclear, these MNCs enable the potential aggressor to obtain productive efficiency of military-related goods and facilitate the deterred state's technology development (Brooks 2005, 80–89). At the same time, the deterring state can help the potential aggressor to maintain better access to strategic raw materials and high technology that would help the latter state to achieve significant military advancements in terms of quality and operational capability. In exchange, the deterring state obtains more ability to influence the military capacity of the deterred state. Although the potential aggressor might possess a better military as a consequence of engagement, its military forces become significantly vulnerable to external manipulation. By cutting off access to MNCs’ production networks or FDIs, the deterring state can undermine the competitiveness, development, and production of weapons in the deterred state. Similarly, when the deterred state becomes dependent on foreign strategic raw materials, the deterring state can more easily manipulate the deterred state's ability to conduct military operations. Moreover, the deterring state can obtain better military-related information. As Mitchel Wallerstein (2009, 13–14) points out, “When US companies are involved in foreign sales or cooperative production agreements, there is typically some sharing of technical data and information that can help them learn about the capabilities of foreign militaries.” By exploiting military and technological intelligence of the deterred state, the deterring state can more effectively stymie the deterred state's military performance. There are examples of economic engagement at least partly aiming to advance denial capability. In the years leading up to the Pacific War, the United States continued exporting oil to Japan—until the imposition of full embargoes in September 1941—in order to exercise influence over Japan's ability to launch military aggression (Miller 2007). In the early 1990s, the Nunn-Lugar Cooperative Threat Reduction Program enabled the United States to affect Russia's military capacity (Shields and Potter 1997) by linking economic aid with the dismantling of numerous military systems and the conversion of weapons-grade uranium to reactor fuel. Engagement and Economic Deterrence by Diminution Economic engagement to advance deterrence by diminution focuses on increasing an ability to effectively threaten to diminish the size of expected gains from military aggression. The key to successful engagement for diminution capability is communicating with the deterred state about the economic realities of a highly globalized world. Especially, the deterring state needs to convince the deterred state that important economic assets that tend to be related with large profit, such as finance, high skilled labor, and advanced technology, are highly mobile and will easily leave the contested territories where a military aggression occurs. One important way of demonstrating this economic situation is inviting the potential aggressor to global production networks. The decision to avoid political-military risks in threatened territories is largely made by economic actors on the market, especially by MNCs that spend a large amount of FDIs and are engaged in production activities in those territories (Milberg and Winkler 2013). Engagement policy, then, can focus on inviting the potential aggressor to get involved in an important part of the global value-added chain, so that the potential aggressor can have a better understanding of the wealth-creating activities in a globalized economy. Once the potential aggressor becomes an active participant in the global production network, it will be able to recognize that important economic actors evade territories that are occupied by a foreign aggressor (Brooks 2005, 247–61). Accordingly, the deterred state will have a negative assessment of the expected economic gains from military aggression. Economic engagement, in this sense, has an “educational” effect on the potential aggressor. Moreover, economic engagement for diminution can concentrate on establishing the channels to communicate information about the new economic realities that make military aggression less profitable. While the deterred state's domestic economic actors would recognize the difficulties of seizing economic gains through aggression, its decision makers might not be aware of the implications of extensive economic globalization. Thus, more exchanges with the deterred state's decision makers are important, often through top-level economic dialogues and membership in major international economic organizations. The core mechanism of diminution strategy—mobile economic assets avoiding a military aggressor, thereby diminishing the material value of the contested territories—is observed in today's international politics. For instance, after the Russian invasion of Crimea in late February, 2014, the EU and the United States threatened to ban certain investment and commercial activities in Crimea in early March, in order to deter Russia from formally seizing Crimea from Ukraine (Robert and Traynor 2014). As the West impeded transactions of Ukrainian wealth in Crimea, Russia could secure less “spoils of war,” although it eventually annexed the former Ukrainian territory on March 18, 2014. When to Pursue Deterrence through Engagement There are two important conditions that need to be taken into account before employing engagement for deterrent purposes. First, the deterring state needs to ensure that asymmetric economic relations are likely to persist in the future. The problem for the deterring state employing engagement policy is that the condition of asymmetric interdependence might change as economic engagement continues over a protracted period of time. By allowing the deterred state to obtain larger gains through engagement, the deterring state in the long run would enable that state to diminish the gap in economic power between the two states. In short, economic engagement entails the danger of helping the deterred state to match the deterring state. Therefore, it is important for the deterring state to ensure that economic engagement does not induce dramatic changes in its relative economic status vis-à-vis the deterred state. Although engagement for deterrent economic capabilities involves allowing the deterred state to obtain large material gains, the deterring state should not offer an opportunity for the deterred state to achieve economic “leapfrogging.” Instead, economic engagement should lead to the deterred state's gradual economic growth. At the same time, the deterring state needs to make continuous adjustments to protect its own gains from economic exchanges with the deterred state, so that it can at least partly offset the latter state's material growth. Second, the deterring state needs to take into account the deterred state's economic interactions with other states. If there are other states that can replace the role of the deterring state in the deterred state's international economic relations, the latter state would not consider the deterring state's threat credible. Therefore, it is important for the deterring state to carefully observe the shape of international economic structure before implementing engagement policy. When multiple powerful economies compete with the deterring state, it needs to define the extent of economic engagement carefully so that others will not capitalize on its engagement with the deterred state. In practice, it would be helpful for the deterring state to utilize a multilateral framework when it wants to begin an engagement policy. Through multilateral coordination (Martin 1992), the deterring state would be able to assure that others would not intervene in search of profit when it issues a deterrent threat against the deterred state. Conclusion The arguments presented in this essay can be best understood as a building block for a more systemic investigation of the relationship between economic engagement and economic deterrence. Moreover, based on the theoretical framework presented in this essay, future researches can derive testable hypotheses and conduct systemic empirical tests. This essay also provides a theoretical guideline for compiling comprehensive data on economic engagement and its deterrent impact. Footnote 1 In this essay, economic engagement refers to a state's decision to adopt policies designed to increase the size and extent of economic exchanges with a targeted state. For specific policies of engagement, see Baldwin 1985, 42. 2 I use “deterred state” and “potential aggressor” interchangeably to refer to the state that the deterring state chooses to engage with. 3 In this essay, I do not consider what Thomas Schelling calls manipulation of risk. This is because risk strategy is usually endorsed in coercion, not in deterrence. See Schelling 2008. References Angell Norman. 1911. The Great Illusion . London: G. P. Putnam and Sons. Baldwin David A. 1985. Economic Statecraft . 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Economic Deterrence Through Economic Engagement

Foreign Policy Analysis , Volume Advance Article – Mar 16, 2018

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Abstract

Abstract This essay suggests that a state’s economic engagement with a potential military aggressor can be understood as an attempt to increase its deterrent capability. It first introduces the concept of economic deterrence and derives three strategies of economic deterrence from classic deterrence theory: (1) punishment, (2) denial, and (3) diminution. Next, it suggests that economic engagement can be employed to advance the ability, credibility, and communication for economic deterrence, as well as to create favorable conditions to adopt the three economic deterrence strategies. Finally, the essay discusses the requirements for effective employment of engagement policy for economic deterrence. Should the United States abandon its economic engagement policy toward China and Russia, which has been a pillar of its global strategy since the end of the Cold War? Answering this question requires a sound understanding of the strategic logic of economic engagement in international politics.1 Yet, the strategic rationale of engagement policy has remained strangely undertheorized. While economic statecraft has won much attention in the post–Cold War context, many analyze the impact of negative economic sanctions rather than economic engagement (Cortright and Lopez 2002; Drezner 2011; Haass 1998; Hufbauer et al. 2007). Although a significant number of scholars and practitioners address the use of economic side payments in maintaining peace or in coercive diplomacy (Baldwin 1985; Haass and O'Sullivan 2000; Newnham 2008; Nincic 2010; Paulson 2008), the specific mechanisms and strategies of economic engagement remain theoretically unelaborated. Especially, the rich strategic studies literature on deterrence is not well represented in the discourse on economic engagement. As Michael Mastanduno (2003, 176) observes, “our knowledge of the workings of economic engagement is still fairly [at a] preliminary stage.” This research note suggests that one important way of understanding economic engagement is viewing it as an extension of deterrence strategy—defined as efforts or policies to prevent the deterred state from beginning military aggression. I first introduce three specific strategies of economic deterrence: (1) punishment, (2) denial, and (3) diminution. Next, I suggest that a deterring state can deliberately adopt economic engagement in its relations with a potential aggressor in order to create a favorable condition for economic deterrence, as well as to better employ the three strategies of economic deterrence.2 Finally, this essay discusses the specific considerations that a state needs to take into account before employing engagement policies for economic deterrence. The Strategies of Economic Deterrence From Military Deterrence to Economic Deterrence For many, military threat has been the central tool of implementing deterrence (Morgan 1977, 17; Snyder 1961, 9–10). The emphasis on military dimension, however, does not mean that military force is the only means of deterrence. The goal of any deterrent effort is to achieve a political objective—dissuading the adversary from making the political decision to launch a military attack—not implementing certain military programs for deterrent purposes. Moreover, military force plays the central role in deterrence because it is considered to be the most effective means in affecting others’ decisions in the anarchic international realm (Mearsheimer 2001, 55–57), not because it is the only tool. As Patrick Morgan (1977, 27) suggests, it is possible to articulate state ability to deter an attack by nonmilitary means. In this vein, economic deterrence can be defined as efforts utilizing economic threats to discourage the deterred state's military aggression. Similar to military deterrence, economic deterrence affects the potential aggressor's decision by manipulating the cost-benefit expectations of military aggression. The state adopting economic deterrence threatens to manipulate the deterred state's commercial, financial, production, or investment activities and performance and tries to convince the potential aggressor that military aggression would not result in net gains or would even incur net losses. I articulate that economic deterrence is a concept related to the prevention of military aggression—thus, a strategy for protecting security—that is distinguished from the use of economic statecraft in conducting ordinary diplomatic relations. In other words, I follow the perspective that considers deterrence as an idea that pertains to the prevention of military aggression yet posit that nonmilitary tools of deterrence deserve more attention. Not all states, however, are capable of utilizing economic deterrence. A state that does not command significant economic power—in terms of market size, financial resources, technological development, or leadership in global production network—simply cannot issue a credible economic threat. Moreover, the deterring state needs to be in an asymmetric economic relationship with the deterred state in which the latter state has more to lose if bilateral economic exchanges were restricted (Hirschman 1980[1945]; Keohane and Nye 2001). Therefore, economic deterrence is likely to be employed by an economically larger and more developed state against an economically smaller and relatively backward state. Table 1 summarizes different economic deterrence strategies that can be adopted by a deterring state in order to discourage the targeted state's military aggression. Below I discuss these strategies in more detail.3 Table 1. Strategies of economic deterrence Strategy  Mechanism  Punishment  Threaten to impose two types of costs that can undermine the gains from aggression: (1) economic costs or (2) domestic political costs.  Denial  Threaten to reduce the likelihood of military success by (1) diminishing the quantity of surplus resources for military use, (2) limiting access to cutting-edge technologies, or (3) constraining operational capability through restrictions on strategic materials and financial resources.  Diminution  Threaten to diminish the size of benefit by (1) pulling out investment, trade, or production activities from contested territories or (2) destroying economic assets in contested territories.  Strategy  Mechanism  Punishment  Threaten to impose two types of costs that can undermine the gains from aggression: (1) economic costs or (2) domestic political costs.  Denial  Threaten to reduce the likelihood of military success by (1) diminishing the quantity of surplus resources for military use, (2) limiting access to cutting-edge technologies, or (3) constraining operational capability through restrictions on strategic materials and financial resources.  Diminution  Threaten to diminish the size of benefit by (1) pulling out investment, trade, or production activities from contested territories or (2) destroying economic assets in contested territories.  View Large Table 1. Strategies of economic deterrence Strategy  Mechanism  Punishment  Threaten to impose two types of costs that can undermine the gains from aggression: (1) economic costs or (2) domestic political costs.  Denial  Threaten to reduce the likelihood of military success by (1) diminishing the quantity of surplus resources for military use, (2) limiting access to cutting-edge technologies, or (3) constraining operational capability through restrictions on strategic materials and financial resources.  Diminution  Threaten to diminish the size of benefit by (1) pulling out investment, trade, or production activities from contested territories or (2) destroying economic assets in contested territories.  Strategy  Mechanism  Punishment  Threaten to impose two types of costs that can undermine the gains from aggression: (1) economic costs or (2) domestic political costs.  Denial  Threaten to reduce the likelihood of military success by (1) diminishing the quantity of surplus resources for military use, (2) limiting access to cutting-edge technologies, or (3) constraining operational capability through restrictions on strategic materials and financial resources.  Diminution  Threaten to diminish the size of benefit by (1) pulling out investment, trade, or production activities from contested territories or (2) destroying economic assets in contested territories.  View Large Economic Deterrence by Punishment Similar to punishment strategy in military deterrence, economic deterrence by punishment discourages military aggression by threatening to impose large costs that exceed the amount of gains that might be attained through military attack. Specifically, two types of costs can be articulated. First, the deterring state can threaten the potential aggressor with large economic costs. It can declare to the deterred state that military aggression will result in restrictions on foreign commercial, financial, investment, or production relations, and consequent losses of the wealth generated by economic activities that rely on these relations. For instance, restricting trade diminishes the economies of scale and industrial efficiency, thereby causing a decline in the overall performance of the targeted state's economy. Limiting foreign financial exchanges destabilizes the deterred state's currency and reduces the amount of financial resources that can be mustered for diverse purposes. Denying access to foreign direct investments (FDIs) diminishes the resources and technologies that could be employed for economic development. When the deterring state can demonstrate that these economic costs are likely to exceed the gains from military aggression, the deterred state is incentivized to refrain from military attack out of expectation that it would eventually be worse off. This argument emphasizing economic costs of aggression has a long history, embraced by many political leaders and scholars in diverse contexts. By the mid-nineteenth century, British liberal political leaders, most notably Robert Peel and Richard Cobden, argued that the fear of large economic costs discouraged military conflict between economic partners (Cobden 1870). Before World War I, Norman Angell (1911) articulated that large economic costs made great power wars obsolete. More recently, scholars examining the relationship between economic interdependence and peace have argued for the existence of the “capitalist peace” (Gartzke 2007; Schneider and Gleditsch 2012). The economic costs argument of economic deterrence by punishment can be envisaged as a translation of these worldviews into a deterrence strategy. Second, the deterring state can threaten the deterred state to introduce economic difficulties that would result in large domestic political costs. Restrictions on the deterred state's foreign economic relations would undermine the interest of powerful domestic groups within the deterred state that have stakes in continuing unimpeded international economic exchanges. When the deterring state can impose large losses on these economic interest groups, the interest groups might choose to punish their own government for the misconduct of foreign relations (Kastner 2007; Kirshner 2002; Papayoanou and Kastner 1999). Moreover, large and extensive economic frustration might even instigate popular protest or revolt against the government (Hufbauer et al. 2007). Fearing these political outcomes induced by the deterring state's economic restrictions, the leaders of the deterred state would refrain from military aggression. From the perspective of the leaders, the political costs, such as the loss of power, can be far greater than any material gains obtained by military actions. These indirect, yet more subtle, political costs of aggression have been emphasized in the literature on economic sanctions that focus on the use of economic pressure for coercive purposes (Drezner 2011; Kirshner 2002). This essay suggests that the domestic political costs argument can be endorsed as a mechanism for economic deterrence as well. Economic Deterrence by Denial Economic deterrence by denial discourages military attack by threatening the deterred state that military aggression will not be successful. The deterring state persuades the deterred state that, by denying the latter state's access to diverse foreign economic inputs, it can diminish the size, quality, or operational capability of the deterred state's military force. If the deterred state believes that its military performance would be significantly undermined due to the deterring state's economic measures—to the extent that military success is not feasible—it will refrain from military aggression. The deterring state employing economic deterrence by denial can affect the deterred state's military capacity in three specific ways. First, the deterring state can threaten to diminish the deterred state's ability to mobilize sufficient military force for aggression. A state's military capacity builds on its economic capacity or latent power (Mearsheimer 2001, 57–75). By restricting the deterred state's foreign economic exchanges, the deterring state can diminish the pool of material resources from which the deterred state draws military power while rendering the translation of latent power into military power less efficient and more costly. As long as having sufficient surplus resources remains an important condition for military effectiveness (Knorr 1956), the deterred state would expect the likelihood of its military success to decrease if the deterring state can significantly reduce its latent power. Second, the deterring state can weaken the quality of the deterred state's military force by limiting access to important technologies. It is widely agreed that having technologically advanced, cutting-edge weapon systems is key to military success in today's battlefields (Tellis et al. 2000). As Stephen Brooks (2005, 16–46) suggests, however, it is difficult to remain competitive in military-related technologies without access to global production networks led by multinational corporations (MNCs). Moreover, while the boundaries between civilian and military technologies have become blurred today, a state needs to maintain access to all advanced technologies in order to remain competitive in military-related technologies (Bureau of Industry and Security 2006; Paarlberg 2004). In this condition, if the deterred state is denied access to diverse civilian and military-related advanced technologies, as well as to the MNCs that lead technology development, then it will be difficult to build and maintain a cutting-edge military force that can achieve victory. If the deterred state expects the likelihood of its military success to significantly diminish due to the deterring state's economic measures that undermine its military competitiveness, then it will be inclined to rethink military aggression. Third, the deterring state can threaten to reduce the operational capability of the deterred state's military force by limiting access to strategic raw materials and financial resources. Raw materials, such as oil and rubber, are crucial for the operation of a modern mechanized army, navy, and air force. The importance of financial resources in operating military units is obvious, since it is very costly to maintain the combat-readiness of modern military assets (Tilly 1990). If the deterred state's military is not well supplied with strategic materials or financial resources due to the deterring state's economic measures, it will be less likely to show good performance on battlefields. Accordingly, the likelihood of the deterred state's military success would diminish, and the deterred state would be less optimistic about military aggression. Economic Deterrence by Diminution Economic deterrence by diminution affects the deterred state's behavior by threatening to diminish the size of benefits that can be obtained through military aggression. Conventional approaches to deterrence focus on deterrence by punishment or denial since they view that the size of expected gains (“B” in pb(B)-pc(C) formula) is difficult to manipulate. This is because the goal of military aggression tends to be territories, and the value of coveted territories does not easily change in a modern nation state (Pape 1996, 16). Missing in this perspective is that the deterring state can employ economic means in order to diminish the “spoils of war” for the deterred state (Liberman 1998), even when it cannot alter the strategic or nationalistic value of contested territories. When the deterred state recognizes that the size of its material gains is likely to be insignificant, even if it can minimize costs and achieve military success, it will be motivated to eschew aggression. The strategy of diminution can be implemented in two different ways. First, the deterring state can issue threats that foreign economic actors will desert the contested territories so that the deterred state would not obtain any significant gains in wealth. The deterring state can communicate with the deterred state that MNCs and FDIs would leave the territories where the deterred state chooses military aggression. While MNCs conduct production activities around the globe in order to maximize their competitive advantage, they are inclined to abandon occupied territories in fear of exploitation by a territorial aggressor. The aggressor would also find it difficult to attract FDIs from MNCs in newly obtained territories. This is because, while an aggressor needs to strengthen centralized control over the new territories, MNCs move away from stronger regulations, especially by a foreign occupier. Moreover, occupying one state would not contribute to the occupier's power because the aggressor is unable to obtain the entire value-adding chain of MNCs’ global production networks. In other words, the aggressor cannot attain the capacity to make a final product by conquering one country since the occupied state produces only a certain part of the final product in geographically dispersed production schemes (Brooks 2005). The aggressor, in short, cannot expect to obtain large wealth from military actions in the MNC-led globalized economy. Moreover, the deterring state can threaten to stymie foreign trade and financial relations of the territories targeted by the deterred state. When the contested territories’ economy relies on foreign commercial and financial exchanges, loss of access to important export destinations and financial transactions would dramatically diminish their wealth. If those territories rely on foreign goods, raw materials, factors of production, or financial resources for manufacturing activities, losing access to foreign economic inputs would render their economy less efficient and less profitable. The deterring state can persuade the deterred state that occupying an open, finance-centered economy or trade dependent state would not generate any significant material gains. Second, the deterring state can threaten the deterred state that it will destroy economic assets that are located in the contested territories. The deterring state, often in conjunction with the authorities governing the threatened territories, can destroy manufacturing facilities, farms, mines, oil fields, or even cities, and remove population from the contested geographical areas, in order to deny any material gains to the aggressor. The emphasis in this case is placed on deliberately reducing the wealth in contested territories, rather than inflicting damages on the operational capabilities of the aggressor's military as in a scorched earth policy. When the deterred state is convinced that its expected gains are likely to be tarred by the deterring state's destructive activities, shirking military aggression becomes a more attractive option. Economic Engagement and Economic Deterrence Economic engagement advances the ability to use economic deterrence in two important ways. On the one hand, it creates or improves overall conditions for the employment of economic deterrence. On the other hand, specific engagement policies can be adopted in order to make economic deterrence by punishment, denial, or diminution a feasible option for the deterring state. “Setting the Stage” for Economic Deterrence Scholars suggest that capability, credibility, and communication are critical components of successful deterrence (Paul 2009, 2). It is obvious that the deterring state must possess the capability to alter the targeted state's calculation over military aggression. The deterring state, at the same time, must be able to issue a credible threat to the deterred state through a channel that effectively communicates its intentions to the deterred state's decision makers (Mercer 1996; Press 2005; Schelling 2008, 260–68). This essay suggests that an economically capable state can deliberately employ economic engagement in order to address these three aspects and advance its economic deterrence capability. As Thomas Schelling (2008, 71) observes, “Deterrence involves setting the stage . . . and waiting.” Economic engagement precisely aims to set the stage for economic deterrence. First, economic engagement endows the deterring state with the capability to affect the potential aggressor's calculation through economic means. Different from military deterrence, it is difficult to alter the deterred state's judgment through economic means without having significant economic ties. An economically closed deterred state would not pay attention to the deterring state's threat to employ economic deterrence since it is largely not vulnerable to external economic manipulations. By allowing the potential aggressor to obtain significant material gains through economic engagement, the deterring state creates or expands the stakes and actors within that state that it might be able to manipulate. Moreover, an economically larger and more advanced deterring state's engagement with the potential aggressor is likely to establish an asymmetrically interdependent relationship, which places it in a relative power position to issue deterrent economic threats. As Albert Hirschman suggests, a smaller and less developed economy tends to gain more from exchanges with a larger and more developed economy. This is because broader economic ramifications are bound to be larger in the economically smaller and less developed state when exchanges occur between states that have large gaps in economic size and level of development (Hirschman 1980[1945]). Thus, when economic ties develop, the potential aggressor is likely to be put in a weaker position in vulnerability interdependence with the deterring state (Waltz 1971), in which the former state would lose more once the deterring state restricts major economic exchanges. This asymmetric relationship strengthens the deterring state's capability to use economic deterrence. Second, economic engagement allows the deterring state to increase the credibility of its deterrent economic threats. On the one hand, engagement enables the deterring state to send costly signals to the deterred state and make its threats more credible (Fearon 1997). The deterred state would try to distinguish whether the deterring state is serious or bluffing when it encounters economic threats. For the deterring state, one important method of showing its resolve is declaring to adopt measures that would hurt itself as well (Schelling 2008, 36). Economic engagement links certain economic activities of the deterring state with those of the deterred states. Thus, the deterring state would lose something, however small, when it imposes restrictions on economic exchanges with the deterred state. These losses, representing the willingness to accept costs, allow the deterring state to convey a more credible threat to the deterred state. On the other hand, asymmetric interdependence, created by economic engagement, allows the deterring state to issue a credible economic threat, as well as to increase the capability to utilize economic deterrence. For a credible threat, the deterring state has to lose less than the deterred state if bilateral economic exchanges are restricted or even severed. As long as the engagement by an economically larger and more developed deterring state benefits the potential aggressor more, the latter state has more to lose if the former restricts bilateral economic exchanges. This condition gives the deterred state good reason to consider that the deterring state's economic threats are serious. Third, economic engagement expands the deterring state's ability to communicate its intentions with the deterred state. For effective communications, the deterring state must have strong links with key actors within the deterred state. Economic engagement helps establish the pathways for communication between the deterring and the deterred state. Expanding economic exchanges entails more interactions and ties between leaders, officials, bureaucratic organizations, and diverse societal actors (Haas 1964). These different actors can serve as channels for communication between the deterring and the deterred states that can cope with sensitive situations. Moreover, the experiences of interactions themselves serve as the foundation for effective exchanges of information between the two parties. In sum, the deterring state can improve its capability, credibility, and communication for economic deterrence through engagement. Below I examine the specific economic engagement policies that can be adopted to advance the three economic deterrence strategies discussed above. Engagement and Economic Deterrence by Punishment Economic deterrence by punishment is a widely articulated—at least implicitly—strategy when economic engagement is endorsed in a state's relationship with a potential security competitor. When an economically more powerful deterring state engages with the potential aggressor, it allows the latter state to obtain significant material gains. In exchange, the deterring state obtains an ability to impose domestic political and economic costs. As Joseph Nye (2016/17, 58) emphasizes, engagement “entangles” the deterred state, so that “a successful attack simultaneously impose[s] serious costs on the attacker as well as the victim.” For instance, the West actively engaged in financial and commercial exchanges with Russia in the Gorbachev and Yeltsin years in a significant part to increase the costs of hostility (Wilson 2014). Similarly, the Clinton administration pressed economic engagement with China, arguing that less economic engagement would only diminish costs of aggression for Beijing (The New York Times 2000). The engagement policies that should be adopted by the deterring state to advance deterrence by punishment are straightforward. Since increasing the economic and political costs of aggression is key, the deterring state needs to focus on expanding the size of gains for the deterred state and increasing the number of people within that state who benefit from economic exchanges. It should allow the potential aggressor to obtain large benefits in international trade and finance by reducing trade barriers and lowering monetary regulations, as well as helping that state to join major international economic regimes (Ikenberry 2012). At the same time, the deterring state would enable freer flow of FDIs into the deterred state from which the potential aggressor can derive resources for economic development. Moreover, the deterring state can expand its own production activities within the potential aggressor so that the larger population of the latter state benefits from economic interactions with the deterring state. In implementing these policies, the deterring state can focus on facilitating the potential aggressor's access to highly mobile economic inputs that have particularly large consequences on the overall economic performance of a country. Especially, foreign capital, technology, and high-skilled labor can help a relatively backward potential aggressor generate large wealth yet are sensitive to political risks and can easily leave the deterred state. The deterring state can encourage these economic actors’ active involvement in pursuing engagement with the deterred state in order to increase both the cost of aggression and its ability to manipulate economic relations. Engagement and Economic Deterrence by Denial Economic engagement to advance deterrence by denial entails more sophisticated considerations and subtle processes. This is because economic deterrence by denial involves affecting a sensitive dimension in interstate relations, threatening to diminish the size, quality, or operational capability of the deterred state's military. Nonetheless, there are several different engagement policies that can be implemented to increase the deterring state's ability to wield economic denial strategy. Engagement that allows the potential aggressor to obtain large material gains can be considered a policy to increase the deterring state's denial capability, as well as the ability to impose costs. Put bluntly, the deterring state, through economic engagement, obtains an ability to affect the size of the deterred state's surplus resources that can be converted for military use. By diminishing the deterred state's latent power, the deterring state, in effect, can impede the deterred state's military build-up. Yet, a distinctive engagement policy for denial strategy is achieving a cooperative relationship in high technology and strategic raw materials. The deterring state can allow the potential aggressor to participate in global production networks led by MNCs. In today's world where the boundaries between civilian and dual-use technologies have become unclear, these MNCs enable the potential aggressor to obtain productive efficiency of military-related goods and facilitate the deterred state's technology development (Brooks 2005, 80–89). At the same time, the deterring state can help the potential aggressor to maintain better access to strategic raw materials and high technology that would help the latter state to achieve significant military advancements in terms of quality and operational capability. In exchange, the deterring state obtains more ability to influence the military capacity of the deterred state. Although the potential aggressor might possess a better military as a consequence of engagement, its military forces become significantly vulnerable to external manipulation. By cutting off access to MNCs’ production networks or FDIs, the deterring state can undermine the competitiveness, development, and production of weapons in the deterred state. Similarly, when the deterred state becomes dependent on foreign strategic raw materials, the deterring state can more easily manipulate the deterred state's ability to conduct military operations. Moreover, the deterring state can obtain better military-related information. As Mitchel Wallerstein (2009, 13–14) points out, “When US companies are involved in foreign sales or cooperative production agreements, there is typically some sharing of technical data and information that can help them learn about the capabilities of foreign militaries.” By exploiting military and technological intelligence of the deterred state, the deterring state can more effectively stymie the deterred state's military performance. There are examples of economic engagement at least partly aiming to advance denial capability. In the years leading up to the Pacific War, the United States continued exporting oil to Japan—until the imposition of full embargoes in September 1941—in order to exercise influence over Japan's ability to launch military aggression (Miller 2007). In the early 1990s, the Nunn-Lugar Cooperative Threat Reduction Program enabled the United States to affect Russia's military capacity (Shields and Potter 1997) by linking economic aid with the dismantling of numerous military systems and the conversion of weapons-grade uranium to reactor fuel. Engagement and Economic Deterrence by Diminution Economic engagement to advance deterrence by diminution focuses on increasing an ability to effectively threaten to diminish the size of expected gains from military aggression. The key to successful engagement for diminution capability is communicating with the deterred state about the economic realities of a highly globalized world. Especially, the deterring state needs to convince the deterred state that important economic assets that tend to be related with large profit, such as finance, high skilled labor, and advanced technology, are highly mobile and will easily leave the contested territories where a military aggression occurs. One important way of demonstrating this economic situation is inviting the potential aggressor to global production networks. The decision to avoid political-military risks in threatened territories is largely made by economic actors on the market, especially by MNCs that spend a large amount of FDIs and are engaged in production activities in those territories (Milberg and Winkler 2013). Engagement policy, then, can focus on inviting the potential aggressor to get involved in an important part of the global value-added chain, so that the potential aggressor can have a better understanding of the wealth-creating activities in a globalized economy. Once the potential aggressor becomes an active participant in the global production network, it will be able to recognize that important economic actors evade territories that are occupied by a foreign aggressor (Brooks 2005, 247–61). Accordingly, the deterred state will have a negative assessment of the expected economic gains from military aggression. Economic engagement, in this sense, has an “educational” effect on the potential aggressor. Moreover, economic engagement for diminution can concentrate on establishing the channels to communicate information about the new economic realities that make military aggression less profitable. While the deterred state's domestic economic actors would recognize the difficulties of seizing economic gains through aggression, its decision makers might not be aware of the implications of extensive economic globalization. Thus, more exchanges with the deterred state's decision makers are important, often through top-level economic dialogues and membership in major international economic organizations. The core mechanism of diminution strategy—mobile economic assets avoiding a military aggressor, thereby diminishing the material value of the contested territories—is observed in today's international politics. For instance, after the Russian invasion of Crimea in late February, 2014, the EU and the United States threatened to ban certain investment and commercial activities in Crimea in early March, in order to deter Russia from formally seizing Crimea from Ukraine (Robert and Traynor 2014). As the West impeded transactions of Ukrainian wealth in Crimea, Russia could secure less “spoils of war,” although it eventually annexed the former Ukrainian territory on March 18, 2014. When to Pursue Deterrence through Engagement There are two important conditions that need to be taken into account before employing engagement for deterrent purposes. First, the deterring state needs to ensure that asymmetric economic relations are likely to persist in the future. The problem for the deterring state employing engagement policy is that the condition of asymmetric interdependence might change as economic engagement continues over a protracted period of time. By allowing the deterred state to obtain larger gains through engagement, the deterring state in the long run would enable that state to diminish the gap in economic power between the two states. In short, economic engagement entails the danger of helping the deterred state to match the deterring state. Therefore, it is important for the deterring state to ensure that economic engagement does not induce dramatic changes in its relative economic status vis-à-vis the deterred state. Although engagement for deterrent economic capabilities involves allowing the deterred state to obtain large material gains, the deterring state should not offer an opportunity for the deterred state to achieve economic “leapfrogging.” Instead, economic engagement should lead to the deterred state's gradual economic growth. At the same time, the deterring state needs to make continuous adjustments to protect its own gains from economic exchanges with the deterred state, so that it can at least partly offset the latter state's material growth. Second, the deterring state needs to take into account the deterred state's economic interactions with other states. If there are other states that can replace the role of the deterring state in the deterred state's international economic relations, the latter state would not consider the deterring state's threat credible. Therefore, it is important for the deterring state to carefully observe the shape of international economic structure before implementing engagement policy. When multiple powerful economies compete with the deterring state, it needs to define the extent of economic engagement carefully so that others will not capitalize on its engagement with the deterred state. In practice, it would be helpful for the deterring state to utilize a multilateral framework when it wants to begin an engagement policy. Through multilateral coordination (Martin 1992), the deterring state would be able to assure that others would not intervene in search of profit when it issues a deterrent threat against the deterred state. Conclusion The arguments presented in this essay can be best understood as a building block for a more systemic investigation of the relationship between economic engagement and economic deterrence. 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Foreign Policy AnalysisOxford University Press

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