1. Research

The weaponisation of trade

Macro Strategist
Deutsche Bank Research Management
Stefan Schneider

Countries broke new ground in the types of economic weapons they deployed in 2022. Next year, this may escalate further. These could include new multi-country buyer cartels, the supply of rare earth metals and other green transition commodities and the adoption of digital currencies.

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Several taboos were broken this year in how trade is used as a weapon. That sets up 2023 to be a year when countries may test new ways to weaponise their economic advantages.
Consider the new tactics utilised in trade disputes this year. First and foremost, the US froze foreign currency reserves held by Russia’s central bank. It also used its control of payment systems to restrict Russia’s access to trade. In addition, wealthy Russian expats had their assets expropriated by various western countries. Meanwhile, many western companies self-sanctioned.
In turn, Russia broke new ground in restricting commodity exports. Europe is now scrambling to find alternative natural gas supplies On top of that, many countries have been at risk from restrictions on food exports from ports in the Black Sea. Meanwhile, the US also upped the ante on China and implemented a host of new restrictions on technology exports and dealing with companies tied to the military.
As we look into 2023, countries may further push the barriers on the types of economic capabilities they can use as trade weapons. Many could be considered. Some perhaps could come in the form of new multi-country buyer cartels, restrictions on the supply of rare earth metals and other green transition commodities, the nationalisation of foreign companies, further restrictions on foreign workers, and adoption of digital currencies.
What happens if other countries decide to flex their muscle against the US? Western expats living in ‘competitor’ countries are not used to having their assets expropriated. Meanwhile, any restriction on dealing with US companies connected to the military could be very broad reaching. After all, the US
military-industrial complex is so vast that a large number of companies are either suppliers to the military or suppliers to those suppliers.
As more economic factors are weaponised it is possible that the established sanctions strategy will move away from ‘particularisation’. That is to say, the current sanctions playbook leans more towards restrictions on particular individuals and companies, whilst trade continues for everyone else. But as economic disagreements grow more intense, this will likely spread to encompass more of a country’s economy and push the world towards a multi-polar state.
A world with three or four powers all flexing their muscle means less globalisation and less growth. Indeed, the right-hand chart shows that economic cycles tend to be the longest when the world is dominated by a single power. The new world means increased premiums and hedging costs on assets that cross the multi-polar divide. It means nearshoring and friendshoring. It also means recreating industries at home that were previously deemed too expensive to host. The worrying thing is that as countries become more selfsufficient, there is less incentive to pursue a compromise with difficult trade partners.

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