War has always had substantial economic costs, but war is becoming increasingly costly for both belligerents and bystanders. This is due to both the monetary costs of fighting and the economic fallout of sanctions.
During the cold war, there was a theory that nuclear war would ensure a mutual self-destruction – and this assured mutual self-destruction was a deterrent to war. With a globalised economy, there is an argument that war between major powers could lead to an equivalent mutual economic self-destruction, making war much more costly than in the past.
Why war is becoming more costly?
Modern warfare is highly technological with modern warfare costing high sums. According to the economist, a single medium to long-range subsonic Tomahawk cruise missile costs roughly $1.5 million per missile. A Javellin anti-tank missile can cost in the region of $115,000. Modern warfare is very expensive (though drone warfare may decrease some costs). But, this is only part of the cost of war; just as significant, if not more so is the impact to trade and confidence in a highly globalised world economy.
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When war was profitable
In the middle-wages wars of conquest were often profitable for those taking part. The cost of running an army wasmuch lower. The equipment was basic, the army could to an extent live off the land and soldiers’ pay was low. Invading another country to take territory could often led to an economic bonus. If the country was successful in capturing land and raw materials it represented an increase in wealth. This is a time when mercantilism – not trade was the dominant economic model. There were no effective sanctions for countries which transgressed international law.
This is not to say all wars were ‘profitable’ – Europe was decimated by the ‘hundred years war – a prolonged war that left most combatants impoverished, but seizing land in other countries was often quite profitable for the colonial powers – which is perhaps one reason why there was so much colonial conquest.
However, by the turn of the twentieth century, war was already becoming more expensive. An army needed much greater material support. Also, trade was becoming much more important to countries. Relying on food imports, combatant countries could find themselves subject to naval blockades. Both Germany and Great Britain tried to blockade food supplies during the First World War, leading to rationing in both countries. In the end, the effective Allied blockade of Germany was an important factor in turning German public opinion against the war.
It was an early indication of how globalisation had many economies interdependent and war could be fought on other fronts than the front line.
The impact of sanctions
The sanctions imposed on Russia due to the invasion of Ukraine, have been unprecedented for a major economy. It has caused serious economic problems for Russia. The West has used a wide-ranging spectrum of sanctions, including banning trade in some areas, freezing Russian Central Bank assets, seizing assets of ‘oligarchs’ and banning some oil imports. The rouble has fallen, inflation increased, debt default looks likely and living standards in Russia are set to fall by at least 15%. If the West were able to cut off their imports of gas, the economic hit would be even greater.
Not only official sanctions have hurt Russia, but also ‘unofficial’ sanctions – with many western companies responding to public opinion and voluntarily ending business in Russia. The economic cost of the Russian invasion of Ukraine will be very high and the power of sanctions will be evident.
Since 2014, when sanctions were first imposed on Russia, Putin responded by encouraging more ‘economic self-sufficiency’ Foreign and government debt were reduced and foreign currency reserves were increased. Industry was encouraged to be more ‘self-sufficient’ But, actually, key sectors, even in military supplies are still dependent on foreign imports of raw materials and certain components which are not manufactured in Russia. The Russian aviation industry is in great difficulty if they cannot get spare parts for a plane; it is very time consuming to develop your own aviation industry. Without access to previous supply chains, output will be hit in many sectors.
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It is true that it is always possible to evade sanctions, especially when many countries (China/Latin America/South Africa) are not taking part. Economies are resilient and there will be some ways around the western sanctions. But, there is no quick fix – there will be very significant readjustment costs, and the previous years of consumerism and foreign holidays the Russian elite enjoyed, will take many years to reclaim.
The economic cost of China vs US
There will be quite a few countries looking at the impact of these economic sanctions with great interest. Russia’s economy is relatively small and not particularly integrated into the world economy.
What about a country like China? Unlike Russia, China’s growth has been largely dependent on its export industries in good s(19% of GDP in 2021). China’s prosperity is heavily interdependent on the world economy. Any sanctions affecting Chinese exports to the west would have a devastating impact on the Chinese economy and Chinese jobs. And equally Chinese retaliation would have a damaging effect on the West. (Note the Russian economic sanctions are entirely different to recent US/China trade war – which is very limited in scope)
It is not just the level of trade. There is also a very high degree of trade integration. China manufactures Apple products, but it does not manufacture the whole phone in one place. Different components come from a bewildering array of countries, e.g. glass screen (US/China..); Camera – US, Aus; gyroscope based in Switzerland; compass, Japan; battery China. Touch ID, based in Taiwan etc. (See: where is iPhone made)
Equally, sanctions on China would deeply affect the West. China is the dominant producer for a range of manufactured goods. Some goods are non-essential like clothes and toys, but we are reliant on China for the production of many pharmaceuticals, that could be hit by retaliatory sanctions.
Also, whilst countries like the UK and US run a trade deficit with China (US imports more goods and services than it exports). The counterpoint to this is that China runs a financial account surplus. Many years of trade surpluses for China has led them to accumulate very significant foreign currency assets. China’s net foreign assets stand at $26.8 trillion in 2020 (World Bank) Some of these foreign assets are liquid such as US government securities, others are more illiquid like investment in African infrastructure.
A serious economic conflict could cause China to sell foreign assets or use its leverage in countries reliant on Chinese investment (especially Africa). If China sold all its US securities it would lead to depreciation in the dollar, which could cause US inflation and higher interest rates. But, at the same time selling US securities that weakens the dollar would strengthen the Chinese Yuan, hurting their vital export industries.
China has foreign currency reserves of $3,222.4 billion (November 2021), which is the highest level in the world (Japan is second with $1,259.9 (January 2022) Foreign currency reserves give greater security for a country to manage its exchange rate. But, the action of the West in freezing foreign currency reserves of the Russian state bank may put a different complexion on the reliability of foreign currency reserves held in the currency of countries that may not support you. To make it simple “Don’t save with your potential enemies.”
The Chinese and American economies are deeply intertwined and any economic conflict could inflict serious economic pain. This is not to say a war is impossible. Humans can act in irrational ways, there are motivations beyond economic. However, the level of economic integration would be very painful to untangle and will hopefully be a significant factor in discouraging any future larger-scale war.
Further reading