Chapter 45: Trade Wars, Sanctions, and Economic Weapons
The Tweet That Shook the World
On March 2, 2018, the President of the United States typed a tweet: "Trade wars are good, and easy to win."
Within hours, stock markets around the world tumbled. The price of steel and aluminum surged. Governments from Beijing to Berlin began drawing up lists of retaliatory tariffs. A new era of economic conflict had begun — or rather, an old era had returned.
The US-China trade war that followed was the most significant trade conflict in decades. The United States imposed tariffs on over $360 billion worth of Chinese goods — everything from steel and electronics to furniture and handbags. China retaliated with tariffs on American soybeans, pork, cars, and whiskey.
Soybeans. Think about that for a moment. American farmers in Iowa, who had spent years building their export business to China, suddenly found their biggest market closed. Soybean prices crashed. Farms went bankrupt. The US government had to provide billions in emergency subsidies to its own farmers — to compensate them for the damage caused by its own trade policy.
Meanwhile, Chinese factories that depended on American components scrambled for alternatives. American consumers paid higher prices for goods that had become more expensive because of tariffs. And the global economy, already fragile, slowed further.
Trade wars are good, and easy to win? Not for the soybean farmer in Iowa. Not for the factory worker in Guangdong. Not for the consumer anywhere.
But trade wars happen anyway. They happen because trade is not just about economics. It is about power.
Look Around You
The next time you see news about tariffs, sanctions, or trade disputes, ask yourself: who actually pays? Not which country — which people? The government that imposes a tariff does not pay it. The company that faces a sanction passes the cost along. Somewhere down the chain, an ordinary person — a farmer, a worker, a consumer — bears the real burden. Follow the money to the human being.
What Is a Tariff, Really?
A tariff is simply a tax on imported goods. When the United States imposes a 25 percent tariff on Chinese steel, it means that anyone who imports Chinese steel into the US must pay a 25 percent tax to the US government on top of the price.
Who pays this tax?
This is the question that most people — including many politicians — get wrong.
The foreign country does not pay it. China does not write a check to the US Treasury. The tariff is paid by the importer — the American company that buys the Chinese steel. That company then faces a choice: absorb the cost (lower profits), pass it on to customers (higher prices), or switch to a different, potentially more expensive supplier.
In practice, studies of the US-China trade war found that American consumers and businesses bore almost the entire cost of the tariffs. Prices on tariffed goods went up by roughly the amount of the tariff. Chinese exporters did not cut their prices to compensate. The tariff functioned as a tax on Americans, not on the Chinese.
This is the dirty secret of tariffs: they are sold to the public as a punishment for the foreign country, but they are paid by domestic consumers and businesses.
"A tariff is a tax. It is paid by the citizens of the country that imposes it. Calling it 'protection' does not change who writes the check." — Milton Friedman
Why Countries Impose Tariffs Anyway
If tariffs hurt your own consumers, why do governments impose them? Several reasons.
To protect domestic industries. If Chinese steel is cheaper than American steel, American steelmakers will lose business and workers will lose jobs. A tariff on Chinese steel makes it more expensive, giving American producers a chance to compete. The cost is borne by everyone who buys steel — car manufacturers, construction companies, ultimately consumers — but the benefit is concentrated in the steel industry and the communities that depend on it.
To raise revenue. Before income taxes existed, tariffs were a primary source of government revenue. The US government was funded mainly by tariffs until the early twentieth century. Many developing countries still depend on tariff revenue because they lack the administrative capacity to collect income taxes effectively.
To retaliate. If another country imposes tariffs on your goods, you impose tariffs on theirs. This is how trade wars escalate. Each side retaliates, and the spiral of tariffs makes everyone worse off — but neither side wants to be the one to back down.
To exert political pressure. Tariffs can be targeted at politically sensitive goods. When China retaliated against US tariffs by targeting soybeans, it was not a random choice. Soybeans are grown in the American Midwest — the political base of the president who started the trade war. The tariff was designed to cause maximum political pain.
To address national security. Some goods are considered too strategically important to depend on foreign suppliers. Steel, semiconductors, energy, pharmaceuticals — governments argue that domestic production of these goods is worth the higher cost because dependence on foreign suppliers creates vulnerability.
A Brief History of Trade Wars
Trade wars are not new. They are a recurring feature of the global economy, and they have a disturbing tendency to escalate.
The Smoot-Hawley Tariff (1930): During the Great Depression, the United States passed the Smoot-Hawley Tariff Act, raising tariffs on over 20,000 imported goods to record levels. The intention was to protect American industries and jobs. The effect was catastrophic. Other countries retaliated with their own tariffs. World trade collapsed by 65 percent between 1929 and 1934. The tariff war deepened and prolonged the Depression.
This is the cautionary tale that economists invoke whenever tariffs are discussed. And it is a powerful one — the experience of the 1930s is a major reason why the postwar order was built around the principle of reducing trade barriers.
Napoleon's Continental System (1806-1814): Two centuries before Smoot- Hawley, Napoleon tried to use trade as a weapon against Britain. He declared that no European country could trade with Britain — a continent-wide blockade aimed at strangling the British economy.
It partially worked. British trade with Europe declined sharply, causing economic distress. But the Continental System also backfired. European countries that depended on British goods — and on trade with British colonies — suffered enormously. Smuggling became so widespread that the system was unenforceable. Russia's refusal to comply with the Continental System was one of the reasons Napoleon invaded Russia in 1812 — a decision that destroyed his army and ultimately his empire.
US Sanctions on Japan (1939-1941): In the late 1930s, as Japan expanded its empire in Asia, the United States responded with escalating economic sanctions. First, a "moral embargo" on aircraft parts. Then restrictions on scrap metal and oil exports. In July 1941, the US froze all Japanese assets and imposed a complete oil embargo.
Japan depended on the US for about 80 percent of its oil. The embargo was an existential threat. Japanese leaders calculated that they had about 18 months of oil reserves. Rather than accept economic strangulation, they chose war.
On December 7, 1941, Japan attacked Pearl Harbor.
This is the most extreme example of economic weapons escalating to real weapons. When you cut off a country's access to essential resources, you leave it with two choices: submission or violence. Japan chose violence.
What Actually Happened: The Chicken Tax
Not all trade wars are dramatic. Some are absurd — and they last forever.
In 1962, France and West Germany imposed tariffs on American chicken imports. The American poultry industry was flooding European markets with cheap chicken, and European farmers demanded protection.
President Lyndon Johnson retaliated with a 25 percent tariff on several European imports, including light trucks and vans. This was aimed squarely at the Volkswagen bus, which was popular in America.
The European chicken tariffs were eventually removed. The American "Chicken Tax" on light trucks remains in effect to this day — over sixty years later. It is one of the reasons foreign automakers build trucks in the United States rather than importing them. It has shaped the American automobile market for generations.
Once a tariff is in place, it creates beneficiaries who lobby to keep it. American truck manufacturers love the Chicken Tax because it protects them from foreign competition. The original dispute about chicken is long forgotten. The tariff lives on.
This is a universal pattern: tariffs are easy to impose and almost impossible to remove, because someone always benefits from them.
Sanctions: War Without Bullets
If tariffs are the conventional weapons of economic conflict, sanctions are the heavy artillery.
Sanctions are restrictions imposed by one country (or a group of countries) on economic activity with another country. They can take many forms:
- Trade embargoes: banning all or specific trade with the target country
- Financial sanctions: freezing assets, blocking access to banking systems
- Investment restrictions: prohibiting investment in the target country
- Travel bans: restricting the movement of specific individuals
- Technology restrictions: blocking the export of specific technologies
The United States has the most powerful sanctions apparatus in the world, for a simple reason: the US dollar is the dominant currency of international trade and finance. Most international transactions pass through American banks or use American financial infrastructure. If the US blocks a country or company from the dollar system, it becomes almost impossible for that entity to do business internationally.
This gives the United States extraordinary leverage — a kind of economic superpower that parallels its military superpower.
+------------------------------------------------------------------+
| HOW SANCTIONS FLOW THROUGH AN ECONOMY |
+------------------------------------------------------------------+
| |
| IMPOSING COUNTRY |
| (e.g., United States) |
| | |
| v |
| +------+--------+ |
| | Sanctions | |
| | imposed on: | |
| | - Trade | |
| | - Finance | |
| | - Technology | |
| +------+--------+ |
| | |
| +-----+------+--------+----------+ |
| | | | | |
| v v v v |
| DOLLAR TRADE TECH ASSET |
| SYSTEM BANS EXPORT FREEZES |
| blocked on key controls of elites' |
| goods wealth |
| | | | | |
| +-----+------+--------+----------+ |
| | |
| v |
| TARGET COUNTRY |
| | |
| +-----+-------+----------+----------+ |
| | | | | |
| v v v v |
| GOVERNMENT BUSINESSES BANKS ORDINARY |
| loses cannot cannot PEOPLE |
| revenue, import/ access face |
| faces export global shortages, |
| pressure freely finance inflation, |
| | | | unemployment |
| | | | | |
| +-----+-------+----------+----------+ |
| | |
| v |
| INTENDED EFFECT ACTUAL EFFECT |
| Government changes =/= Ordinary people suffer; |
| its behavior government often survives |
| by tightening control |
| |
| THIRD-COUNTRY EFFECTS: |
| - Countries doing business with the target are also affected |
| - Must choose: comply with sanctions or face penalties |
| - Creates pressure to find alternatives to dollar system |
+------------------------------------------------------------------+
Do Sanctions Work?
This is the central question, and the honest answer is: sometimes, partially, and often not in the way intended.
Iran: The United States has maintained sanctions on Iran in various forms since 1979. The most comprehensive sanctions — imposed from 2012 onward and tightened dramatically in 2018 — have devastated Iran's economy. Oil exports dropped by 80 percent. The currency lost much of its value. Inflation soared. Ordinary Iranians faced shortages of food, medicine, and basic goods.
But have the sanctions achieved their stated goal of changing Iran's behavior? Iran has not abandoned its nuclear program. It has not changed its government. If anything, the sanctions have strengthened hardliners within Iran who argue that the West cannot be trusted.
The human cost has been enormous. Iranian patients have struggled to obtain medicines for cancer, hemophilia, and other serious conditions — not because medicines are formally sanctioned, but because the banking restrictions make it nearly impossible for Iranian importers to pay for them. Sanctions are supposed to target governments, not sick people. In practice, they target everyone.
Russia: After Russia's invasion of Ukraine in 2022, the Western world imposed the most comprehensive sanctions ever deployed against a major economy. Russian central bank reserves ($300 billion) were frozen. Major Russian banks were cut off from the SWIFT international payment system. Thousands of Western companies pulled out of Russia.
The initial shock was severe. The ruble crashed. Stock markets were suspended. There were predictions that Russia's economy would collapse.
It did not collapse. Russia redirected its oil exports to India and China, which were willing to buy at a discount. It developed alternative payment systems. Its economy contracted modestly in 2022 but stabilized.
The sanctions hurt — Russian consumers face higher prices and fewer choices, and the technology sector has been damaged by the loss of access to Western semiconductors and software. But the sanctions did not stop the war. And they imposed costs on the sanctioning countries as well: higher energy prices in Europe, disrupted trade, and inflation.
Cuba: The United States has maintained an economic embargo on Cuba since 1962 — over sixty years. The embargo has devastated Cuba's economy and caused immense suffering for ordinary Cubans. It has not changed the Cuban government or its political system. The Castro regime outlasted ten American presidents.
The Cuba example suggests a troubling truth about sanctions: they may be more effective at causing suffering than at changing behavior. Authoritarian governments can tighten their control in response to sanctions, blaming external enemies for economic hardship and using the siege mentality to justify repression.
"Sanctions are not a middle ground between diplomacy and war. They are a form of war — a war on the civilian population of the target country, disguised as a policy tool." — Joy Gordon, Invisible War: The United States and the Iraq Sanctions
The Weaponization of Interdependence
There is a deeper pattern here. As the world has become more economically interconnected, the networks of trade and finance have become weapons.
Scholars Henry Farrell and Abraham Newman call this the "weaponization of interdependence." The same networks that make the global economy efficient — the dollar payment system, the SWIFT network, global supply chains, internet infrastructure — can be turned into instruments of coercion.
The United States sits at the center of many of these networks, which gives it enormous power. But this power is not unlimited, and using it carries risks.
Risk one: overuse erodes the weapon. Every time the US uses the dollar system as a weapon, it gives other countries an incentive to find alternatives. China has developed its own international payment system (CIPS). Russia and India have conducted trade in rupees and rubles. Central banks are diversifying their reserves away from dollars. The dollar's dominance is not in immediate danger, but every sanction chips away at it.
Risk two: collateral damage. Sanctions often hurt allies and neutral countries. When the US sanctioned Iran, European companies that had invested in Iran were forced to withdraw. When the US sanctioned Russia, European consumers faced higher energy prices. This creates resentment and weakens alliances.
Risk three: escalation. Economic weapons, like military weapons, can escalate. A tariff provokes a retaliatory tariff. A sanction provokes a counter-sanction. And as we saw with Japan in 1941, economic strangulation can lead to military conflict.
Economic Nationalism: Old Wine, New Bottles
Alongside trade wars and sanctions, we are seeing a resurgence of economic nationalism — the idea that countries should prioritize domestic production, reduce dependence on foreign supply chains, and use economic policy to strengthen national power.
The slogans are familiar:
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"Make in India" (India, launched 2014): Incentivize manufacturing in India, reduce dependence on Chinese imports, build domestic capacity.
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"Buy American" (United States, various iterations): Require government agencies to purchase American-made goods. Subsidize domestic manufacturing. Bring supply chains home.
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"Made in China 2025" (China, launched 2015): Achieve self-sufficiency in key technologies — semiconductors, artificial intelligence, electric vehicles, aerospace. Reduce dependence on foreign (especially American) technology.
These programs are strikingly similar in their logic, even though the countries pursuing them are rivals. Each recognizes that economic dependence creates vulnerability. Each seeks to build domestic capacity in strategic industries. Each uses government policy — subsidies, tariffs, regulations, procurement preferences — to achieve its goals.
Is this a return to protectionism? Partly. But it is also something more: a recognition that in a world of geopolitical rivalry, economic self-reliance is a form of national security.
The question is where to draw the line. Self-reliance in semiconductors and defense technology? Most would agree that makes sense. Self-reliance in everything? That is the road to inefficiency and poverty — no country can make everything well.
The art of economic strategy lies in choosing what to protect, what to build, and what to trade for — and doing so based on clear-eyed analysis of your country's needs, not on slogans or ideology.
Think About It
The US-China trade war raised prices for American consumers by an estimated $800-1,200 per household per year. Was it worth it? For what purpose?
Sanctions on Russia were meant to stop the war in Ukraine. They did not. But they did hurt millions of ordinary Russians. Is it morally acceptable to impose economic suffering on a civilian population to pressure their government?
India's "Make in India" aims to build domestic manufacturing. But some of the tariffs India has imposed to encourage this — on electronics, for example — have raised prices for Indian consumers. How should India balance the goal of self-reliance with the cost to consumers?
If you were advising India's government, which industries would you prioritize for self-reliance, and which would you be comfortable depending on imports? How would you make that decision?
When Economic Weapons Become Real Weapons
Let us return to the most dangerous aspect of economic conflict: the possibility that it escalates to military conflict.
The historical pattern is clear:
Pre-WWI trade rivalry: Britain and Germany were major trading partners in the early 1900s. But economic rivalry — competition for markets, colonies, and resources — contributed to the tensions that erupted in World War I.
1930s trade collapse: The tariff wars of the 1930s, combined with the Great Depression, destroyed international economic cooperation. Countries turned inward, forming rival economic blocs. The breakdown of trade contributed to the political extremism that led to World War II.
US-Japan oil embargo (1941): As discussed earlier, the American oil embargo pushed Japan toward the attack on Pearl Harbor.
Today: US-China: The United States and China are locked in a deepening economic rivalry. Tariffs, technology restrictions, sanctions on Chinese companies, competition for semiconductor supremacy, disputes over Taiwan.
Taiwan is the most dangerous flashpoint. The island produces over 90 percent of the world's most advanced semiconductors, through a single company: TSMC. If China were to invade Taiwan, or if the United States were to cut China off from Taiwanese chips, the economic consequences would dwarf anything we have seen. The entire global electronics industry would be disrupted. The economic damage could exceed $1 trillion.
But the danger is not just economic. When great powers become convinced that their economic survival is threatened — when they feel they are being strangled by sanctions, cut off from essential resources, denied access to critical technologies — the temptation to use military force grows.
Economic warfare does not always prevent real warfare. Sometimes it provokes it.
The Dollar Weapon
One weapon deserves special attention because it is so powerful and so uniquely American: the dollar.
The US dollar is the world's primary reserve currency. About 60 percent of global foreign exchange reserves are held in dollars. Most international trade is invoiced in dollars. Most commodity markets — oil, gold, grains — are priced in dollars. The vast majority of international bank transfers pass through the American financial system.
This gives the United States a weapon that no other country possesses.
When the US imposes financial sanctions, it does not just block a country from trading with America. It blocks that country from trading with almost anyone, because almost all international transactions require access to the dollar system.
This is an extraordinary concentration of power. And countries are beginning to push back.
China's yuan is being used more in international trade. Central banks are diversifying their reserves. Russia, after its reserves were frozen in 2022, has accelerated efforts to conduct trade in non-dollar currencies. India and Russia have negotiated trade in rupees. Saudi Arabia has considered pricing oil in yuan.
The dollar's dominance is not going to disappear overnight. No alternative currency has the depth, liquidity, and institutional backing of the dollar. But the weaponization of the dollar system is slowly encouraging the creation of alternatives. Each time the US uses the dollar as a weapon, it gives the rest of the world another reason to look for a way out.
"The dollar is our currency, but it is your problem." — John Connally, US Treasury Secretary, 1971
This casual arrogance captures something real about the dollar's power. The United States benefits from the dollar's dominance in countless ways — cheaper borrowing, greater financial flexibility, the ability to impose sanctions. The rest of the world bears the costs and risks.
India and the Weapons of Trade
India has been both a target and a user of economic weapons.
As a target: India faced sanctions after its nuclear tests in 1974 and 1998. These cut off access to nuclear technology, certain high-tech exports, and some financial flows. The sanctions hurt India's nuclear and space programs but also drove India toward greater self-reliance — the very opposite of what the sanctions intended.
As a user: India has imposed trade restrictions for strategic purposes — most notably on Pakistan, with which trade has been heavily restricted at various times. India has also used tariffs strategically, protecting domestic industries while selectively opening others.
In the current geopolitical landscape, India faces a delicate balancing act. It wants to reduce dependence on China (which is its largest source of imports, including in critical sectors like pharmaceuticals, electronics, and solar panels). It wants to maintain good relations with both the US and Russia (buying Russian oil while participating in American-led technology initiatives). And it wants to build its own economic strength without triggering retaliation from larger powers.
This is the fundamental challenge of economic strategy in a world of great- power rivalry: how to protect your interests without provoking conflict, build your strength without antagonizing others, and maintain the freedom to choose your own path in a world where the powerful want you to choose sides.
The Paradox of Interdependence
We arrive at a paradox that sits at the heart of modern trade.
Interdependence is supposed to prevent conflict. The theory, popular since the nineteenth century, is that countries that trade with each other have too much to lose from war. If your factories depend on their raw materials, and their consumers depend on your products, neither side has an incentive to fight. Trade creates mutual dependence, and mutual dependence creates peace.
This theory is partly true. Trade does create incentives for peace. Europe's postwar integration — first economic, then political — was built on this insight. France and Germany, which had fought three wars in seventy years, became so economically intertwined that war between them became literally unthinkable.
But interdependence also creates vulnerability. And vulnerability creates incentives for aggression, if one side believes it can exploit the other's dependence. If you depend on me for oil and I can cut it off, that is not a recipe for peace — it is a recipe for coercion.
The Russia-Europe gas relationship illustrates this perfectly. For decades, Europe bought Russian gas, and Russia earned European revenue. The interdependence was supposed to keep both sides cooperative. Instead, Russia used Europe's gas dependence as leverage, and when war came, Europe had to scramble to find alternative energy sources at enormous cost.
The lesson is not that trade is bad or that interdependence is dangerous. The lesson is that interdependence must be symmetrical to promote peace. When one side depends on the other far more than the reverse — when the relationship is asymmetric — interdependence becomes a weapon, not a bond.
The Bigger Picture
Trade wars, sanctions, and economic weapons are not aberrations. They are inherent in a world where trade creates both cooperation and vulnerability, both wealth and dependence.
The dream of a world governed by free trade — where economic competition replaces military competition, where mutual prosperity makes war obsolete — is a beautiful dream. And it has some basis in reality. Trade has made the world richer, and economic integration has prevented conflicts that might otherwise have occurred.
But trade has never been separate from power. From the spice wars of the sixteenth century to the chip wars of the twenty-first, economic competition has been intertwined with political rivalry, military strategy, and the struggle for dominance.
The tools change — from gunboats to tariffs to sanctions to dollar weaponization to export controls on semiconductors. But the logic remains the same: control the resources, control the chokepoints, control the terms of exchange, and you control the world.
For countries like India, the challenge is clear: build enough economic strength to avoid being a pawn in others' games, while maintaining enough openness to benefit from the global economy. Protect what is strategic. Trade what is profitable. And never forget that in the world of international economics, the line between commerce and conflict is thinner than anyone likes to admit.
"Among individuals, as among nations, respect for the rights of others is peace." — Benito Juarez, President of Mexico
The same principle applies to economics. Trade that respects the rights and interests of all parties promotes peace. Trade that is imposed by the powerful on the weak, that exploits rather than exchanges, that weaponizes rather than cooperates — that kind of trade is not peace. It is war by other means.
The choice, as always, is ours.