Syllabus: GS2-International Relations / GS3-Economy

• The Defence Minister of India recently emphasized the growing erosion of global order and multilateralism, driven by the weaponization of trade, finance, and emerging technologies.

What is the Weaponization of Trade and Finance?

• Weaponization of trade and finance refers to the strategic use of trade policies and economic measures by countries to exert political or economic pressure on others. This marks a departure from the traditional role of trade and finance as tools for cooperation and globalization.

Tools of Trade Weaponization:

• Tariffs and Sanctions
• Export Restrictions: Limiting the export of critical technologies or materials.
• Currency Manipulation

Recent Incidents of Trade and Finance Weaponization:

• Tariff War 2.0: The ongoing trade friction between the US and China has led to high tariffs and investment restrictions aimed at securing supply chains and gaining strategic advantages.
• Financial Sanctions: The West’s exclusion of Russia from the SWIFT network and freezing its central bank reserves following the Ukraine invasion is a classic example of financial weaponization.
• Technology Denial Regimes: Restrictions on semiconductor exports to China, and controls over technologies like AI and quantum computing hardware, demonstrate the weaponization of technology.

Consequences of Economic Weaponization:

• Erosion of Multilateral Institutions: The WTO’s dispute settlement mechanism is losing credibility due to the increasing use of unilateral tariffs. Other institutions like the IMF and World Bank are also seen as being Western-dominated, leading to legitimacy crises.
• Decline of Rules-Based Global Order: Unilateral actions are becoming more common, with countries prioritizing national interests over international norms and treaties.
• Economic Fragmentation: The world is experiencing “geo-economic decoupling,” with regional trading blocs like RCEP and IPEF gaining importance, further weakening global economic integration.
• Global Inequality: The disruptions in global supply chains, such as those triggered by the pandemic and the Ukraine war, have exacerbated global inequalities.

Steps Taken Against Trade Weaponization:

• Regional Trade Agreements (RTAs): Countries are forging regional agreements like the CPTPP and RCEP to reduce dependence on major economies and enhance cooperation.
• Alternative Financial Systems: Russia’s SPFS, China’s CIPS, and proposals for a BRICS payment system are alternative solutions to the SWIFT network. Additionally, Central Bank Digital Currencies (CBDCs) are being developed to achieve monetary independence.
• Mineral Security Partnership (MSP): This initiative aims to diversify and stabilize the global supply chains of critical minerals.
• Reform of the WTO: Ongoing reforms to the World Trade Organization aim to improve its dispute resolution mechanisms and address challenges posed by unilateral trade actions.
• Indo-Pacific Economic Framework (IPEF): This framework counters economic coercion, promoting a more equitable and rules-based trading system.

ConcludingRemarks:

• The weaponization of trade and finance signals the beginning of a new era of geopolitical contestation, where economic interdependence no longer guarantees peace.
• For India, which has always advocated for multilateralism and global cooperation, navigating this fractured world order requires strategic clarity, resilient institutions, and a robust technological foundation.