NATO Should Better Coordinate Its Economic Power Against Russia and China

Tariffs, price caps, export controls, and embargoes can effectively promote democracy globally

(Front-R) Turkey's President Recep Tayyip Erdogan, Britain's Prime Minister Boris Johnson, U.S. President Joe Biden, NATO Secretary General Jens Stoltenberg, Belgium's Prime Minister Alexander De Croo with the leaders of the U.S.-led military alliance pose for a family photo at NATO Headquarters in Brussels, Belgium, on March 24, 2022. John Thys/AFP via Getty Images

Commentary

Democracies are finally figuring out that they need to use their trump card—economics—to defend themselves.

The United States and Europe together have double the economic power of China and Russia combined, and could use it more effectively and proactively to put pressure on Moscow and Beijing through tariffs, sanctions, embargoes, export controls, and price caps. Economic pressure could end Russia and China’s territorial aggression or even democratize these two recalcitrant dictatorships.

A proposal for an economic version of NATO, the Western security alliance, is being advanced by former NATO leaders. Current administrations in the United States, Canada, Italy, and Ukraine support related economic coordination.

If China imposed economic sanctions on Australia or Lithuania, for example, a new alliance focused on leveraging the market power of democracies could hit back as a group with their own embargoes, sanctions, tariffs, and price caps.

Joint economic action would protect smaller with bigger democracies. The economically weakest at the edges of the herd would thus be less vulnerable to getting picked off or influenced.

Former NATO chief Anders Fogh Rasmussen is “calling for the creation of an economic version of the Article 5 mutual defence pledge that defines the transatlantic military alliance in order to thwart commercial coercion by authoritarian states,” according to a June 9 article in the Financial Times.

Rasmussen proposed that all democracies should immediately halt Russian oil and gas imports.

Flags wave outside the Alliance headquarters ahead of a NATO Defence Ministers meeting in Brussels, Belgium, on Oct. 21, 2021. Pascal Rossignol/Reuters

This would serve as the first step toward better economic coordination against the world’s worst dictators. However, it may require secondary sanctions against any countries that violate the agreements for short-term gain.

India, for example, has taken advantage of sanctions on Russia, which decreased Russian energy prices relative to the global market price, to negotiate for an approximate 35 percent discount on oil. This finking severely weakens the power of democratic sanctions against Moscow.

An alternate approach is for all democracies to impose a 35 percent tariff on Russian exports, which would keep oil flowing but punish Moscow and deprive it of funds for its military.

Whatever the strategy, a more coordinated approach is needed, according to Rasmussen. He is exactly right.

A Democratic Buyers Cartel

The United States, Canada, and Ukraine proposed a democratic buyers’ cartel in May that would impose a price cap or tariff on Russian oil and gas.

Italian Prime Minister Mario Draghi proposed similar measures and said they “could be applied to oil on a global level.” Draghi is the former president of the European Central Bank.

“The idea is to create a cartel of buyers, or to persuade the big producers, and Opec in particular, to increase production, which is perhaps the preferred path,” Draghi told the Times. “On both paths, there’s a lot of work to do.”

A democratic buyers’ cartel also decreases energy inflation in countries that participate, either by forcing Russia to sell its energy cheaper or by reinvesting tariff revenues in energy infrastructure, renewable energy, or subsidized hydrocarbon extraction, for example.

It could also put pressure on other illiberal dictatorships, in China, Iran, and Venezuela, for example, to liberalize their economies and political systems. It would serve as a counterbalance against OPEC, which is an oil exporters cartel.

The logo of the Organization of the Petroleum Exporting Countries (OPEC) is seen outside of OPEC's headquarters in Vienna, Austria, on March 3, 2022. Lisa Leutner/AP Photo

“Europeans would act in concert to set a lower price than they are currently paying for Russian energy,” according to The Washington Post.

“The calculus is that—if Europe moves in unison—Russia would be forced to accept the lower price or suffer a collapse in oil revenue. Some experts have suggested that ‘secondary’ sanctions could be considered for other nations, such as India, that try to undercut the price cap by paying higher prices.”

The same buyers’ cartel could also negotiate China’s export prices lower to deter its territorial aggression and human rights abuse.

An Economic NATO

The economic NATO “proposal is inspired by Nato’s Article 5, which states that a military attack on one ally is considered an attack on all,” Rasmussen and Ivo Daalder, former U.S. ambassador to NATO, wrote in a report, according to the Times.

“The aim is to produce the same deterrence and solidarity in the economic realm among democracies that Nato produces in the security realm. It’s time to tell the bullies that if they poke one of us in the eye, we’ll all poke back.”

“Rasmussen and Daalder are proposing that an economic Article 5 commitment could be implemented through existing structures such as the G7,” according to the Times. But Rasmussen and Daalder “said other democracies would have to be ‘involved’ and a standalone organization may have to be set up to manage the new guarantee.”

Russia has weaponized its energy exports to Europe in an attempt—which so far failed—to deter NATO involvement in defense of Ukraine. If Russia denies oil and gas exports to Europe this winter, it could cause not only worse energy price inflation, but extensive electricity blackouts. Many European and British electricity-generating power plants rely on gas imports, much of which come from Russia.

Daalder told the Times that sanctions, tariffs, and secondary sanctions would help concentrate supply chains in democracies.

That would alleviate future supply chain risks to European electricity grids.

“There are geostrategic interests,” Daalder said, “that may have to trump economic interests in a way that wasn’t probably true in the last 30 years, but needs to be true in the next.”

Stronger Export Controls

In addition to an economic NATO and democratic buyers’ cartel, the democracies should coordinate tougher controls on strategic commodity and technology exports to China and Russia.

The U.S. Committee on Foreign Investment in the United States (CFIUS), and the Coordinating Committee on Multilateral Export Controls (CoCom), which was active during the Cold War, can serve as models.

The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, which replaced CoCom in 1996, has been less effective.

If Washington broadened CFIUS to include all democracies, it would mean that Beijing could not go to Taiwan, for example, if the United States and Europe denied semiconductor technology to China.

Employees make chips at a factory of Jiejie Semiconductor Company in Nantong, in eastern China's Jiangsu Province, on March 17, 2021. STR/AFP via Getty Images

A revival, strengthening, and broadening of the CoCom and CFIUS concepts could stop the export of sensitive technology and strategic materials, including energy and other important commodities, to China and Russia. This would help block them from building the massive economies and militaries required for their territorial expansion.

Stronger American Leadership

Germany, as usual, is dragging its feet on any economic measures against Moscow, and the Biden administration is essentially deferring while soft-selling the idea of more coordination.

The world has tried coordination-lite against dictators, which didn’t work very well. The International Energy Agency (IEA), for example, was founded in 1974 to counter the power of OPEC. But it was ineffective at even mild coordination, for example, of strategic petroleum reserve releases.

The world’s democracies will need more leadership from Washington to coordinate the level of price caps, tariffs, embargoes, and sanctions.

These could and should be adopted at upcoming NATO and G7 summits in Spain and Germany, respectively. But Washington will have to do more than soft-sell the ideas. Countries like Germany and India, which resist economic measures against Moscow, may have to pay a short-term price to follow their long-term interests.

Washington must take the initiative—before it is too late. That will require real leadership and harder-hitting strategies.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.