Merlin Weekly Macro: Diplomatic leverage in short supply

Western diplomats are in overdrive. Their activity, whether aimed at Ukraine or Israel, is driven by genuinely good intent, even if sometimes counterproductive. Among the less secure it is also dictated by the need to show their domestic electorates that they and their countries are relevant as powerbrokers on the world stage. That latter desire is a double-edged sword: political kudos can accrue if you’re demonstrably successful in achieving a diplomatic outcome, but failure has the opposite effect of exposing yourself as weak and ineffective.

As Churchill said, ‘diplomacy is the art of telling plain truths without giving offence’. But he also knew that diplomacy is more than fine words and politeness. Successful diplomacy depends on one word: “leverage”. What force can I exert that will ensure the person on the receiving end understands the consequences of ignoring my wish and knows that I am not bluffing; call it the ability to twist arms mixed with a hint of diplomatic blackmail while holding their eye and smiling.

Diplomatic leverage in short supply

Joe Biden is lost in a muddle of his own making. He talks the talk of the rightness of the fight against what he calls ‘evil’, but when push comes to shove, his resolve is mired in conditions and disclaimers. A good example: ahead of the Iranian drone and missile strikes on Israel, he had declared his support for Israel as “ironclad”, and to reinforce his strength of purpose, he repeated the word. But he then followed it up with the terms and conditions: that if Israel were then to retaliate, the US would not deploy its own resources in offensive support of them. At a press conference where a journalist asked the President what advice he would give to the Iranians about a direct strike, his blunt reply was “don’t”, implying that the consequences from America for Iran would be severe. America, Jordan, the UK and France all helped the defence effort that night. But since then the international response to Iran’s defiance, including America’s, has generated much noise but very little light. Later, unmoved by the exhortations from Lord Cameron and German foreign minister Anna Baerbock at meetings in Tel Aviv, prime minister Netanyahu stated flatly that Israel would take its own decisions in its national interest. To prove the point, that was swiftly followed by a missile attack on Iranian military and nuclear installations in Isfahan.

Diplomacy without leverage is an empty vessel. Even the Americans, the world superpower, are finding that leverage is in very short supply. The biggest provider of ordnance to Israel, the American threat to withhold military assistance on humanitarian grounds in Gaza has not tempered the Israeli reaction; faced with the explicit Iranian goal of the annihilation of the State of Israel, whether the rest of the world likes it or not, rationally the Israeli government has decided the interests of the country and its people come first.

Biden has even less leverage over Iran. In the nearly four years of his presidency, the Iranians have locked him out of returning to JCPOA (the nuclear containment agreement which Trump unilaterally walked away from as a “bad deal; a really bad deal”). As a sweetener for American readmittance, in 2021 Biden announced a staggered sanctions relief package worth potentially $90bn to Iran, of which the latest $10bn waiver was renewed as recently as 13 March without any assurances in return that the funds would not be used to support Iran’s proxy groups in the Middle East. But even if Iran’s reserves have been significantly dented by long-term sanctions, its revenue lifeline has been to increase the percentage of its oil going to countries who could not care less whether the oil is sanctioned or not. According to the Kpler Institute which tracks global oil shipments, in 2023 90% of Iran’s oil exports were to China.

The diplomatic elephant in the room: China

Joining the dots, the next question is obvious. So why not apply sanctions to China? Both Iran and Russia would quickly feel the economic squeeze, undermining their ability to fund their war/conflict programmes. But to close the net completely, India also would have to be subject to sanctions as it too is buying significant volumes of surplus Russian oil.

Herein lies the problem: there is zero appetite to sanction either. China at around 18% of global GDP is simply too woven into the fabric of the global economy to take the risk without causing significant economic pain to all. India is far less important but is now the world’s most populous country: politically, sanctioning both countries would mean declaring economic warfare on a third of the global population.

Sanctions are only effective if they are 100% enforceable. History says that freezing assets held in western depositories is relatively easy; far more difficult is enforcing trade sanctions on goods which are settled directly without going through any international clearing system.

Oh what a tangled web we weave.

The US might have trade tariffs in place against China (and in reverse: the tit-for-tat escalation in the trade war begun by Donald Trump in 2018, all of which are still in place), and these are likely to go higher if Trump wins in November. But last week, while his foreign minister was exhorting Netanyahu to tone it down with Iran, Germany’s Chancellor Olaf Scholz was in China pleading with General Secretary Xi Jinping for the need for a level playing field in trade and commerce. China is Germany’s third largest export market and German companies are finding the operating environment in China increasingly difficult. On the other hand, always a big exporter to Germany and the wider EU, China has been accused in terms of inciting economic warfare in defiance of WTO rules of flooding the European market with cheap electric vehicles at prices domestic manufacturers cannot compete with thanks to massive production subsidies from the Chinese government. Scholz’s concerns are two-fold: first, the competitive threat to the German car industry which is already having to react to President Biden’s Inflation Reduction Act which would effectively prevent electric cars made in Germany to be exported to the US (encouraged with US subsidies, European car makers are switching investment to the US so their products are allowable as stamped ‘Made in America’); second, as alleged by the US Trade Secretary Gina Raimondo, Chinese EVs are instruments of espionage like “smartphones on wheels” collecting drivers’ data which is reported to China.

Scholz has also been encouraging Xi to get Putin to negotiate a settlement in Ukraine. Xi will do what is in China’s strategic interest. It suits him to have NATO preoccupied with Ukraine and depleting western military stocks while he has half an eye on the recovery of Taiwan. More significantly though, Xi and Scholz are counterparties with some mutually beneficial interests; but if not soulmates (it is difficult to envisage either having the emotional capacity) Xi and Putin are firm partners, their mutual admiration and respect are strong.

Divide and conquer

Xi’s explicit aim is a New World Order with China and the creed of Chinese Communism at the helm. One means of achieving that is to split the opposition: Putin is doing his best to achieve that via Ukraine; Xi is gradually driving a subtle trade wedge between the EU and the US, dividing their interests. Ukraine and the Middle East are flashpoints in a much more profound long-term battle to tilt the balance of geopolitical power and to gain the upper hand.

The combined military power of the western alliances is greater than that of the opposition. But their capacity to confront the threat is constrained by the limits of each member’s democratic mandate. While they might have broad alignment of interests, that is not the same as uniformity. The autocracies are not immune from domestic political pressure (Tehran knows that only too well with only 43% turnout in the recent parliamentary election, hardly a ringing endorsement) but if politically secure, their strategic planning can be much longer-term (and when insecure, they become less predictable). Whether they succeed or not in their ambition depends partly on the effectiveness of their planning and execution and partly on how much the west lets them get away with it, or deters then with the threat, “so far and no further”. And means it.

As we go to press, Congress sees the light

Divisions among NATO members linger about what is the ultimate goal in Ukraine. However, they were most pronounced when for six months, US Congress refused to endorse the $60bn military funding package for 2024 to President Zelensky. Sanity has finally prevailed in Washington as the bill passed its considerable hurdles in the House on 20ᵗʰ April (a similar but smaller package for Israel was agreed too). Assuming no more hiccups, Zelensky’s lifeline has been restored. But with fresh supplies of artillery shells and air defence missiles on their way he now knows that he has a finite window of nine months to determine the fate of his country: because if Donald Trump wins on November 5ᵗʰ, is inaugurated in late January 2025 and is as good as his word, the financial and military aid taps from the US will be off and he will be reliant on Europe for support. History will judge Trump and any deal he does with Putin; that will be of no consolation to the Ukrainians.

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