Government by Blackmail: How States Can Influence States

We know that there is a big difference between theory and practice in how states relate to states. The theory is that each state is autonomous and rules what goes on inside it, and for anything that connects states they either follow treaties and conventions or interact as equals. The practice is that larger nations have the most say. The Mekong River goes through China, Laos, Myanmar, Thailand, Cambodia, and Vietnam, but the Mekong River Patrol jointly operated by some of these nations was a Chinese initiative involving significant Chinese police south of China’s border. US drug control south of its border is similar. 

What accounts for the difference between theory and practice? Research by Florian Überbacher and Andreas Georg Scherer looked at this question by examining a specific example: how the famous Swiss banking secrecy was eliminated. Although there can be many ways that large states influence smaller ones, this example is a good illustration of one simple approach: it was done through blackmail by the US. The interesting part is how the blackmail was done.

The problem with states blackmailing states is that statecraft is supposed to be different from running a mob, and any state action resembling what mobsters do can create resistance in the short run and hurt the blackmailing state in the longer run. As of May 2019, we are observing the US placing tariffs on Chinese exports with the explicit purpose of forcing a more favorable trade agreement, an obvious blackmail tactic, and China responding by doing … nothing. The US actions against Swiss banks were more effective, not just because Switzerland is smaller but also because they did not target Switzerland. Instead, they targeted the Swiss banks and used the potential damage to the banks as a way of blackmailing Switzerland, which cares about its banks because they are a large part of the economy.

The script was simple. A whistleblower revealed (to no one’s surprise) that Swiss banks held money that should have been taxed in the US, and US authorities proceeded to demand that the Swiss government turn over information about suspicious accounts. In addition—and this is the important point—US authorities turned increasingly aggressive in pressuring Swiss banks, to the point of making it clear that they were ready to inflict significant economic damage. It was the state version of telling potential snitches that the boss knows where their families live and children go to school and can act on this information. It worked: banks panicked, and the Swiss government agreed to release much more information than before.

All this sounds unusual as a state behavior, and maybe it is something done only when authorities are getting tired of tax evasion and want to act on banks making it easy and on states protecting the banks. But wait, does this resemble something we are also seeing now? The Chinese firm Huawei’s chief financial officer is currently under arrest in Canada at the request of the US, which is seeking extradition. By President Trump’s executive order, Huawei has been banned from using US technology in its products, ranging from mobile telephone infrastructure equipment (such as 5G gear) to components of phones its sells outside the US. The ban is formally for security reasons, but in an interview, the president has explicitly linked its fate to the outcome of the trade negotiations. So statecraft still has a component of blackmail, and we can look forward to seeing how states like Russia and China will learn from this and change how they do statecraft in their vicinity.

Überbacher, F. and A. G. Scherer 2019. "Indirect Compellence and Institutional Change: U.S. Extraterritorial Law Enforcement and the Erosion of Swiss Banking Secrecy." Administrative Science Quarterly, forthcoming.