When allies threaten each other with trade, nobody wins

CNBC reports that the United Kingdom has announced new sanctions targeting Israeli settlements in the West Bank, and that US officials have warned London of potential economic consequences if it proceeds. Whatever one thinks of the underlying dispute in the Middle East — a matter of political and moral complexity I will not pretend to resolve — the structural situation here is one I recognize at once. It is a great power threatening a smaller ally with commercial injury to alter its foreign policy conduct. That is not trade. That is tribute.

Let me state the principle plainly. Free exchange between nations, like free exchange between individuals, produces gains on both sides precisely because it is voluntary. The moment a sovereign says to another, 'conduct your foreign affairs as we instruct or we will deny you the benefits of commerce,' the exchange ceases to be free and becomes coercion. The merchants of both nations suffer; the consumers of both nations pay higher prices or forgo goods; and the diplomatic relationship is poisoned by a resentment that does not quickly dissolve. I noted in The Wealth of Nations that mercantile restrictions are almost always a tax on the many to benefit the interests of the few — and that observation holds whether the restriction is imposed by a legislature captured by a domestic producer or by a foreign power enforcing its foreign policy preferences.

Nor is the United Kingdom blameless in the arithmetic. Sanctions are themselves a form of mercantile restriction — a deliberate interference with the flow of trade and investment to achieve a political end. I do not say they are never justified; a nation that does business with a regime engaged in manifest injustice has questions to answer before the impartial spectator. But the impartial spectator also asks: what institution adjudicates whether the settlement activity in question rises to the level that warrants disrupting commerce? A unilateral declaration by one government — however sincerely motivated — is not the same thing as a finding under a framework of international law that both parties have accepted. The legitimacy of the instrument matters as much as the sincerity of the motive.

This is precisely where the institutional question becomes unavoidable. Markets among nations, like markets among individuals, require a framework of rules, adjudication, and enforcement that is not itself the property of the strongest party. When the United States warns an ally of 'economic consequences' for a lawful foreign policy choice, it is — whatever its intentions — claiming the right to act as judge, prosecutor, and bailiff simultaneously. That is not a rule of law. That is the kind of arrangement I described when writing of the East India Company: a private or sovereign interest that has set itself up as a toll on a traffic it does not own, answerable to no tribunal but its own convenience.

The constructive question, then, is this: what framework makes the exchange of both goods and diplomatic obligations honest? An alliance of democratic nations ought to be capable of building institutions — whether through the WTO, bilateral treaty, or multilateral agreement — that distinguish legitimate foreign policy differences from genuine violations warranting collective sanction. Without such a framework, every powerful nation becomes a mercantilist bully, and every weaker ally must choose between its conscience and its commerce. That is a choice no free people should be forced to make. I infer, from the pattern described in CNBC's report, that we are some distance from having built that framework — and that the distance is growing.