Economic policy is increasingly being used for conflict between EMs

Economics and defense policy is an odd intersection. Pure-play economics people tend to underplay defense’s importance as it's been built deep into peace-time assumptions or ignored as a political economy concern. Meanwhile, the defense ecosystem tends to treat the US’s use of economic tools as “law-based sanctions” while it's the squishy “geoeconomics” when other countries do it. 

The international policy set in cities like DC and Brussels is slowly warming up to the defense significance of economic policies. However, the weaponization of economic policy is on the rise around the world. As geopolitical tensions flare, countries are increasingly using their financial and commercial systems as tools of conflict rather than cooperation. This represents a concerning shift away from the post-war economic order and toward the fractured, protectionist regimes that defined the pre-WWII era.

The trend is evident even among relatively small or emerging economies that lack the resources of major powers. Recent examples include Iraq considering an oil export ban against Jordan over its Hamas stance, Serbia politically targeting its Albanian minority through discriminatory budget allocations, and Kosovo prohibiting Serbian currency as part of its fight for independence. The most brazen use of economic warfare is arguably Ukraine's drone strikes on Russian energy infrastructure, which aim to undermine energy revenues,  bleed the Kremlin war machine and generate domestic political stress in the process.

While trade volumes may remain resilient due to structural supply chain integration, the weaponization of currencies, sanctions, capital flows, and energy access points to a retreat from conflict-dampening economic interconnectedness. Unlike the trade collapse of the early 20th century, monitoring south-south trade, FDI, and cross-border finance may better indicate the real level of economic decoupling.

In a world where cheap drones can cripple billion-dollar assets, no economy is immune from this new era of economically-entangled conflict. De-escalation and a return to cooperation are urgently needed yet highly unlikely to avoid a general degradation of growth and development.