Economic warfare

One of the components of grand strategy is economic warfare. Remembering that grand strategy includes, but is not limited to, military means to enforce national policy on other states and quasi-states, economic warfare is a wide-ranging set of measures that put pressure on different aspects of a foreign economy. These can include preventing the opponent from obtaining raw materials or various manufactured goods, manipulating the world financial system to deny cash or credit to the enemy, actual attacks on national currency, and a host of other measures. Economic warfare, as in the Embargo of 1807, can pressure an opponent without resorting to force.

It can be considered a form of asymmetrical warfare. Contrast the devastation caused to Japan in World War Two in the Pacific, with the modern economic dominance of the same country. Japanese trade policies have been called economic warfare. Japanese history, however, regards U.S. embargoes in 1941 as economic warfare against them, and leading to the Japanese decision for war in 1941.

Military attacks can, of course, destroy components of a national economy. The focus here, however, is on warfare that uses financial manipulation rather than explosive force. Within an overall grand strategy, of course, the two can work together, destroying domestic facilities while denying imports.

In this article, the actions discussed are deliberate, and expected to have more than symbolic effect on the opponent. Economic warfare, however, can trigger overt military action by a nation trying to get resources that it cannot obtain through peaceful channels — at least through peaceful channels it is willing to use. Japan, in 1940-1941, could have had increasingly stringent U.S. export embargoes lifted, but that was conditional on Japan withdrawing from what was then French Indochina. Japan saw such a withdrawal as unacceptable to its military operations in China.

Interfering with supplies

In the Second World War, it became obvious, at the level of grand strategy, that the military operations of Germany depended on the output of two industries: ball bearings and petroleum, oil and lubricants. An obvious but very costly measure, in terms of lives and treasure, was to attack the German factories that made ball bearings, the key target being Schweinfurt.

Bearings of various types are quite small, although requiring precision machinery. While it would be much more difficult for Germany to import oil by sea, given Allied naval superiority, a militarily significant quantity of bearings could fit into a transport aircraft.

Competitive purchasing

Germany was able to buy bearings from neutral countries such as Sweden. Allied economic warriors recognized that buying up the Swedish supply, even if prices escalated, could limit the supply available to Germany. A price war over bearings also would put financial pressure on Germany.

So, every week once the program was started, a De Havilland Mosquito fast, high-altitude bomber would deliver, to Britain, bearings bought in Sweden. The purchasing mission essentially had an unlimited budget.

Export embargoes

During the Iran-Iraq War, a number of countries, such as the United Kingdom, attempted to limit the war by banning exports on militarily signficant items. A country under such embargoes, however, may create extremely complex financial organizations to bypass the embargoes.

Export control measures to restrict the proliferation of certain weapons, such as the Missile Technology Control Regime and the Chemical Weapons Convention clearly interfere with the military economy of a country attempting to produce banned weapons. The situation can get very complex, however, when export restrictions on "dual use" technologies are considered: exports that have both peaceful and military applications.

There is little doubt that Iraq, in the 1980s and 1990s, did try to develop weapons of mass destruction. Nevertheless, there can be oversimplifications in export controls. Especially with some of the chemical exports, there was little question of intention; thiodiglycol has dual uses in making ink and mustard gas. The quantities of thiodiglycol involved, would have kept all the bureaucrats of the world writing away for decades, had the application been for ink. Exports of microorganisms were more complex, since some with biological warfare potential also have legitimate use in human and veterinary medicine. The shipment, on August 31, 1987, to State Company for Drug Industries leads with Saccharomyces cerevesiae, which has great potential if a nation plans the production of offensive weapons using a fine Belgian-style ale.

Had Iraq planned to enter the export market in ale, however, denying it the appropriate yeast would be classical economic warfare, as opposed to counterproliferation.

Cartel pressure

Rather than order its private sector not to make specific transactions, when a nation or nations can act as a cartel, they can pressure another state that is depending on their exports. Arab nations within the Organization of Petroleum Exporting Countries (OPEC) used this method to pressure the United States for supporting Israel in the 1973 Arab-Israeli War.

Blockades

Blockades need to be interpreted in the broadest of economic terms, although not all blockades (e.g., during the Cuban Missile Crisis) are economic. When directed at economic targets, a blockade of raw materials that idles an opponent's factories, is as effective as if they were bombed, as long as the needed finished goods cannot be imported.

Exports also can be the target of blockades. In the American Civil War, preventing the Confederate States of America from exporting cotton prevented the South from getting both hard currency, and the goods that could be bought with hard currency and imported.

Interfering with cash and credit

One key weapon against non-national groups, which have no industrial base, is to prevent their buying goods and services they need. Such a goal may not be soluble by competitive purchasing, as with bearings, because there are far too many potential suppliers, some overt and some more shadowy.

Governments supporting a non-national group may provide supplies to them, but there may be no such patron country, or no practical way to ship the needed supplies to the group. At best, those governments may make financial credits available. International arms dealers, however, have one thing in common: they expect prompt cash payment.

If it is not possible to buy up the critical supplies, such as weapons (e.g., shoulder-fired surface-to-air missiles), the opposing country may prevent its opponent from acquiring them, by seizing bank accounts and other financial assets.

Counterfeiting

Attempts have been made to damage a nation's confidence in its currency, by means of distributing counterfeit money. One of the best-known was a Nazi attempt targeting Bank of England notes, Operation Bernhard. It operated from the Sachsenhausen Concentration Camp, using skilled prisoners given a choice to forge or die. Some of the notes were found in Lake Toplitz.

Prior to the end of the Second World War, the Allies made plans for a common occupation currency. The Soviets wanted physical custody of the printing plates. Harry Dexter White, a U.S. official later established, through VENONA communications intelligence and other sources, to be a Soviet agent, pushed to make the plates available.

In a surprise 1948 move, the Western Allies, during the occupation, issued new currency to replace that printed on the Soviet-controlled plates, so the Soviets could not flood the economy.

Freezing assets

It is quite common, especially as part of counterterrorism, for a government to deny an organization or country access to its financial accounts under the control of that government.

Countermeasures by non-national groups

Non-national groups use three types of financing, which are difficult for financial intelligence to track:

1. Charities, which use conventional financial institutions and value transfer,
2. Informal value transfer systems such as hawala and hindi
3. "Commodities- or trade-based money laundering includes the smuggling of bulk cash and the evasion of federal reporting requirements used to track money laundering with commodities such as diamonds, precious metals, gold, and tobacco."

One of the challenges of anti-terrorist FININT is that surveillance of transactions only works when the value transfers go through conventional, regulated banks and other financial institutions. Many cultures use informal value transfer systems, such as the hawala widely used in the Middle East and Asia, where value is transferred through a network of brokers, who operate with funds often not in banks, with the value transfer orders through personal communications among brokers. The brokers know one another and operate on a paperless honor system.

A study from the Institute for Defence Studies and Analysis [India] describes "narco-terrorism" as "the nexus between narcotics and terrorism...It is recognised as one of the oldest and most dependable sources of terrorist financing, primarily because of the magnitudes of finance involved in both the activities." The study indicates that informal value transfer systems, known "... [in] India it is known as hawala, in Pakistan as hundi, in China fei qian (flying money), in Philippines as black market peso exchange" are important means of transferring funds to terrorist organizations.