Weaponization of Trade and Finance

Syllabus: GS2-International Relations / GS3-Economy

Context

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

What is 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 practice departs from the traditional role of trade and finance as instruments of cooperation and globalization.
• Tools of trade weaponization: Tariffs and Sanctions, Restrictions on exports of critical technologies or materials, Currency Manipulation etc.

Recent incidents of trade and finance weaponization

• Tariff War 2.0: The ongoing US-China trade friction has seen high tariffs and investment restrictions being imposed to gain strategic advantage and secure supply chains.
• Financial Sanctions: The West’s exclusion of Russia from the SWIFT network and freezing of its central bank reserves post-Ukraine invasion is a classic case of financial weaponization.
• Technology Denial Regimes: Restrictions on semiconductor exports to China and controls over AI or quantum computing hardware highlight technology weaponization.

Consequences of Economic Weaponization

• Erosion of Multilateral Institutions: The WTO’s dispute settlement mechanism is losing credibility amidst unilateral tariff impositions.
  • Institutions like the IMF or World Bank face legitimacy crises as they’re perceived as Western-dominated.
• Decline of Rules-Based Global Order: Growing unilateralism is leading countries to ignore international norms and treaties in favour of national interest.
• Economic Fragmentation: The world is witnessing “geo-economic decoupling” with regional trading blocs, such as RCEP or IPEF, gaining importance.
• Global Inequality: Supply chain disruptions, like those witnessed during the pandemic and Ukraine war, have further deepened global inequalities.

Steps taken against trade weaponization

• Regional Trade Agreements: Countries are forming regional trade agreements (RTAs) to enhance cooperation and reduce reliance on major economies.
  • Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),
  • Regional Comprehensive Economic Partnership (RCEP) etc.
• Alternative Financial Systems: Russia’s SPFS, China’s CIPS, and proposals for a BRICS payment system are alternatives to the SWIFT network.
  • Development of Central Bank Digital Currencies (CBDCs) is being pursued to gain monetary independence.
• Mineral Security Partnership (MSP) to diversify and stabilize global supply chains of Critical Minerals.
• Reform of the WTO: Ongoing discussions to reform the World Trade Organization (WTO) aim to enhance its dispute resolution mechanisms and address the challenges posed by unilateral trade actions.
• Indo-Pacific Economic Framework (IPEF): It serves as a countermeasure to economic coercion by countries that use trade as a tool of influence, promoting a more equitable and rules-based trading system.

Concluding remarks

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

Source: TH