Podcast: Play in new window
- Former State Dept. official Edward Fishman breaks down the rise of economic statecraft
- How modern warfare is waged by “guerrillas in gray suits” — not soldiers on battlefields
- Why controlling chokepoints and financial systems may prevent military escalation
This week, we’re joined by Edward Fishman, Author of Chokepoints: American Power in the Age of Economic Warfare, to unpack how the world’s most critical conflicts are now being fought with financial systems, sanctions, and supply chain control — not conventional weapons. Drawing from his experience as a former State Department official and top sanctions expert, Fishman explains how nations like the U.S. wield economic tools to shape global power without firing a shot.
We discuss the evolution of warfare into the financial realm, how “guerrillas in gray suits” are replacing boots on the ground, and why chokepoints — from sea lanes to semiconductor supply chains — are the new battlegrounds of international influence.
▶ Learn more about Edward Fishman’s new book, Chokepoints: American Power in the Age of Economic Warfare, here: https://www.penguinrandomhouse.com/books/726149/chokepoints-by-edward-fishman/
"I do think that we are moving toward an unraveling of economic interdependence because I do think that ultimately states will take significant steps to reclaim their sense of economic security. And I worry that instead of a clean break that some have been hypothesizing, where you'll have a US-led block and a Chinese-led block in some near image of the Cold War, that you could have something that was much more chaotic, in which every nation is for itself, where the US almost sleepwalks into a quasi-form of autarchy, and we have much slower economic growth, higher inflation, and worst of all, an incentive for military conquest and imperialism. That's the thing I fear the most." —Edward Fishman
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Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany.
I'm really looking forward, Dave, to the author of Chokepoints, Edward Fishman. A good friend of ours says, "When goods, currencies, and services don't cross borders, armies, missiles, and drones do." That is the reality of Chokepoints, and the military side is what we're trying to avoid. Economic warfare is what keeps us out of a lot of those military news events.
David: Edward says that to up its game America should start investing in people. And he looks at an interdisciplinary melange. Economic warfare, in his view, requires an interdisciplinary toolkit, legal acumen, diplomatic skill, regional expertise, economic creativity, and lo and behold, guess what? His bio, that's almost how it reads. He teaches at Columbia University's School of International and Public Affairs, the Senior Research Scholar at the Center on Global Economic Policy, previously served at the US State Department, the Pentagon, and the Treasury Department, and now routinely writes for the New York Times, Wall Street Journal, the Washington Post, Foreign Affairs. Great to have him.
Edward Fishman, welcome. The timing of this interview is appropriate, and the writing of your book Chokepoints: American Power in the Age of Economic Warfare most timely. You've given us an excellent look into the historical and contemporary interactions of US policymakers with Iran, Russia, and China. And with that fresh perspective, I think we can better appreciate what unfolds in the months and years ahead. So again, welcome to the Commentary.
Edward: Thanks so much for having me on today.
David: The Bosporus in ancient times and modern times, the Strait of Hormuz, even in recent weeks, Malacca and many others are geographical choke points. Historically, they've been strategic for whoever controlled them. Control the flow of food, energy, or commerce, and you're a power player. Today's choke points include a longer list, with finance and technology near the top. Give us the big picture transformation from what was conventional to what could now be considered economic warfare.
Edward: I think economic warfare has existed for as long as history. You go back and look at Ancient Greece. At the eve of the Peloponnesian War, the 27-year war between Athens and Sparta that ultimately brought down the Athenian Empire, it started with an Athenian embargo on Megara, a neighboring city state that had allied with one of Athens's enemies. And even in the Napoleonic Wars in the early 19th century, you had Napoleon implement what was known as the Continental System, which was an embargo on Britain at the time. So you've seen economic warfare really in every single chapter of history.
The thing that has changed so much is that historically economic warfare was really an offshoot of military force. Sieges, naval blockades, you needed to actually use physical force to block another country's access to the international trading system, to being able to access the financial system.
What happened in the 1990s when countries like China and Russia and other former Soviet states entered the global financial system, the dollar-based financial system, when they entered global supply chains, what you got was the creation of these invisible choke points like the dollar, like semiconductor technologies, parts of energy supply chains that governments could manipulate just by changing their domestic laws.
In the case of the United States, the US president can, with the stroke of a pen, cut off any other foreign company or individual from accessing the dollar. So what happened, really, at the turn of the 21st century is we saw a change, a revolution in economic warfare where deploying really hard-hitting economic weapons became much easier, much less risky than it always had been throughout history.
David: Interdependence is a theme that you develop particularly towards the end of the book. And looking at globalization, today's battlefield is different, and so too are some of the players on the front lines, lawyers, diplomats, economists, even some retired bond traders. Without a highly interdependent world economy, these characters wouldn't wield the power that they do. Maybe you could explore for us the amplification of economic warfare as a result of globalization.
Edward: I think probably the best way to illustrate this is with a concrete example. If you go back even as recently as the 1990s, right before the beginning of what I call the age of economic warfare, the most prominent case of sanctions in the 1990s was when the United Nations imposed an embargo on Saddam Hussein's Iraq. They imposed this embargo within a couple of days of Saddam Hussein's annexation of Kuwait in August of 1990. And the embargo stayed in place all the way up until 2003 when George W. Bush had the second, even bigger, invasion of Iraq. And the primary goal of that embargo was to stop Iraq from selling oil on the global marketplace.
Well, in order to actually do that, in order to stop Iraq from selling oil, the United States and 20 other countries had to have a multinational naval force patrol the Persian Gulf 24/7 and send commandos to inspect ships whenever they thought that Iraq might be selling oil in contravention of the embargo.
So even as recently as the '90s and early 2000s, to impose an oil embargo, you needed to deploy naval force. But what happened was, with the interdependence of the international financial system, the interdependence of oil markets, of shipping markets— When you look at the oil embargoes that were imposed on Iran in the lead up to the nuclear deal in the 2010s, the US didn't have backing from the UN for an oil embargo, and they didn't deploy a single naval vessel to do it.
All they did was, and this was under the Obama administration, was threaten banks in places like China, Turkey, and India, and say, "If you keep buying Iranian oil, if you keep paying for Iranian oil, processing payments for Iranian oil, then you will be cut off from the US financial system."
So because of that financial interdependence that really kicks into high gear in the '90s and is really crystallized in the 2000s, you get the US being able to use this non-military form of economic warfare. And the Iran oil sanctions of the 2010s were even more successful and more impactful than the Iraq oil sanctions of the 1990s, and it didn't involve a single US naval vessel.
David: Well, and you've got an even slightly nuanced version of that with not 20 countries and warships looking and inspecting, harnessing of self-interest in the most recent iteration with Russia, but making sure that you get the insurance companies in the UK, for instance, to get on board with not covering ships that carry Russian oil unless they meet a certain expectation, price caps, and things like that. So the insurance industry weaponized, that's a newer iteration.
Edward: That's exactly right. It's not just the dollar-based financial system that can serve as a choke point. Really, the way that I define a choke point is it's part of the global economy in which one country has a dominant position, and there are few, if any, substitutes. You talk about maritime insurance, 95% of all oil cargoes are insured by the London-based International P&I Club. So you do have, really, this choke point over the global oil market that was leveraged to try to cap the price of Russian oil. And the thing that is true, though, also about choke points is they're not immutable.
Once you start weaponizing them, you do create an incentive for other countries to build workarounds and to basically mitigate the impact of that choke point. So in the case of maritime insurance, over time, the Russians have successfully found alternatives, although I think that when you have a big maritime accident, some sort of a spill or something like that, and if the Russian government doesn't actually come forth with paying out claims that they said that they're going to do—because it has been effectively the Russian state that's been covering some of these oil cargoes—then I think you could see in some ways a reinforcement of International P&I insurance being the key to the global seaborne oil trade.
David: Globalization of finance and of supply chains has been at the heart of global growth since the 1970s, and particularly since the end of the Cold War. In some sense, we're weaponizing the benefits of inclusion in the global marketplace. Can you explain how US power extends globally, and in some sense, how the US legal jurisdiction spills out beyond our borders via the dollar and US debt markets?
Edward: I think your point about legal jurisdiction is very important because a big part of the story of how the United States weaponized the world economy, part of it is, of course, having the choke points controlled by American companies, having US banks playing the key role in international settlement of transactions, which is true of the correspondent banking system in my hometown of New York City, and it's also true that you need the global reserve currency like the dollar. But in order to actually weaponize that economic dominance, you actually need a legal system that's capable of doing so.
And if you go back before the late aughts and early 2010s, many banks around the world didn't really even consider US sanctions when they were taking on new clients or processing transactions. After all, BNP Paribas saw itself as a French bank, not an American bank, even though it relied on access to the US financial system and having a subsidiary in the United States. But what happened was, in the late aughts and throughout the 2010s, the Department of Justice in the United States, as well as the Office of Foreign Assets Control at the Treasury Department, started imposing a series of escalating fines and legal settlements on a number of foreign banks.
So first, Standard Chartered, the British bank, was fined nearly a billion dollars and almost had its American banking charter revoked. You had HSBC, the largest bank in the UK, fined $2 billion in 2012 for violating sanctions. And then in 2014, BNP Paribas, the French bank, was fined $9 billion, which actually wiped out their entire net income for the year because BNP Paribas had violated sanctions.
So what happened, basically, was by threatening these foreign banks with their access to the US banking system, saying that they would revoke their banking charters or saying that they would be unable to use the correspondent banking system, these banks effectively paid massive fines to the US government for violating US sanctions, not their domestic sanctions.
Effectively, the US government claimed legal jurisdiction successfully over the entire international financial system. And by virtue of making these fines high enough, they incentivized private banks to invest massive amounts of resources in sanctions compliance, to build up very large teams to invest in software. And the net effect of that is that the entire international financial system has been conscripted as the front-line infantry in American economic warfare.
So now, when Washington issues a new sanction, it's not just banks whose headquarters is in New York who implement those sanctions. It's banks all around the world who use the OFAC SDN list, the list of Specially Designated Nationals to screen effectively all of their clients and transactions.
David: In theory, HSBC, Standard Chartered, they could have said, "No, we're not paying you," but they just would've had access denied to the US and the US financial pipes, if you will.
Edward: That's right. This was a legal settlement. They agreed to make this payment and preferred to make the payment than losing access to the dollar. I think maybe it's helpful to explain some of the reasons they made that decision.
In the foreign exchange market, you've got 90% of all foreign exchange transactions that use dollars. International equity market capitalization is something like 60 to 70% dollars. Debt markets are even higher. Trade finance, 80% of trade finance is conducted in dollars. So it's very challenging really to be an international bank without access to the dollar.
And so for most of these banks, the prospect of losing access to the dollar, not being able to do business in the United States, is existential. And so even paying a fine that wipes out BNP Paribas's entire net income for the year in 2014 was worth it for them.
David: There's a lot of history leading up to the weaponization of our currency in 2022. I'm thinking of Russia in particular. What are your thoughts on how the world will continue to react to that?
Edward: I think that it's one of these issues where once the cat is out of the bag, it's very difficult to put it back in. I think that part of the reason you've seen this massive rally in gold prices in recent years is because central banks have preferred to allocate more and more of their reserves away from the dollar and to gold, seeing it as a hedge against being sanctioned by the United States. Some countries obviously store their gold in the United States, but many are actually choosing to repatriate it, to bring it on shore, viewing that also as another geopolitical hedge. So I think there's been significant fallout. I think the thing that's interesting, though, if you look back at the 2022 US and G7 sanctions on Russia, and particularly the sanctions on Russia's central bank, which were the most impactful of all of the various Russia sanctions, because Putin, his main strategy to sanctions-proof his economy was accumulating very large foreign exchange reserves, 630 billion, approximately, by 2022.
It was expected at the time and feared by people like the Treasury Secretary Janet Yellen, that were the United States to sanction Russia's central bank that it would lead to the end of the dollar's role as the global reserve currency. And as I talk about in my book Chokepoints, she actively lobbied against taking that step of sanctioning Russia's central Bank. Ultimately, she lost that internal debate, and the US plus the other members of the G7, including the European Union, Japan, the UK, Canada, et cetera, imposed sanctions on Russia's central bank at the end of February 2022. And the thing that's interesting is if you then fast-forward to the eve of President Donald Trump's second term, so January of 2025, by many metrics, the dollar's role in the international finance has actually increased in that three year period. And so it's a puzzle, but if you look at it, well, why did it increase?
The dollar took share away from the pound, the euro and the yen. Basically it took share away from the other currencies that had joined the US in the sanctions on the Central Bank of Russia. And this is in terms of things like payment settlement, where the US share went up quite substantially from 2022 to 2025, and the share for the euro went down substantially as well.
I think what that shows is that when the US acts multilaterally, when it acts with allies to impose financial sanctions, there's actually less of this risk of hedging against the dollar. In some ways, it actually strengthens the dollar because it makes the dollar seem geopolitically equivalent to other reserve currencies. But I think when the US acts unilaterally, there is a very significant risk because it's not just gold that you might diversify into, but it's also the euro or the pound, the yen or other second tier reserve currencies.
David: Jeff Currie, former head of global commodity research at Goldman and now with Carlyle, has suggested that the old dollar recycling, a part of the petrodollar system, is being replaced by a system of gold recycling where net settlement of trade imbalances is and will be in gold. What other workarounds to dollar hegemony do you see developing in the years ahead?
Edward: Yeah, I think that the biggest threat to dollar hegemony and the biggest near-term risk is really in terms of the dollar's use as a payment settlement currency. I think when you think about the dollar's global role, it's helpful to break down between a store of value, medium of exchange, and unit of account. Store of value in terms of the dollar as an investment vehicle I think is eroding because there has been such an overweight US position that most funds and central banks have taken in recent years. But it's not eroding quickly, and I don't think there is really an alternative in a macro sense to investing in US dollar assets in a big way. But when you look at payment settlement, there's significant efforts, state-driven efforts out of places like China, to develop real workarounds to the dollar-based system.
Probably the most sophisticated of these is called mBridge. This is a project that China actually spearheaded alongside the Bank of International Settlements as well as the central banks of Thailand, the UAE, and now Saudi Arabia, to effectively settle cross-border payments using federally-issued stablecoins—so basically central bank digital currencies. This project actually achieved minimum viable product at the end of 2024, and China's got hundreds of people working on it. And when you look at how it compares just from a convenience perspective to the current method of clearing cross-border payments, which oftentimes involve multiple foreign exchange transactions using the dollar as this intermediary currency, the current process can sometimes take a week or more to settle a transaction, whereas using central bank digital currencies or stablecoins to settle cross-border payments can happen in a matter of seconds.
So I do think we are on the precipice of a really significant shift in terms of how cross-border payments work. Other countries—like I said, China—have these state-backed initiatives to make that happen. In the US, we've been relying really on privately issued alternatives, and the stablecoin in particular has been the main one in the US. And so I do think that those efforts, like mBridge, the digital RMB, which is China's central bank digital currency, do pose a threat particularly to the dollar's role as a payment currency.
David: We tend to think of the wars in Iraq and Afghanistan as our response to 9/11. You talk about the gorillas in gray suits and the major shift towards economic warfare following the terror attacks of 9/11. Walk us through that inflection point.
Edward: Sure. So in the wake of the 9/11 attacks on the United States, it became apparent that the plotters, the actual attackers on the World Trade Center as well as the Pentagon, had actually operated in the United States. They'd used the US financial system. They had bank accounts in their own name. They had wired money in and out of the United States. The entire cost of the 9/11 attacks was something like half a million dollars. So it wasn't a huge amount of money, but at the same time, the US government was honestly flabbergasted by the fact that these Al-Qaeda operatives had been able to use the US financial system unimpeded. And so George W. Bush actually made it a very high-level priority to check terrorist financing in the wake of 9/11, basically to try to starve Al-Qaeda and other terrorist groups of cash and resources and make it impossible for them to do another 9/11. And so what happened was he created a new division of the Treasury Department called the Office of Terrorism and Financial Intelligence.
It exists to this day, it's called TFI by people who are in government, and he appointed, as the first head of TFI, a lawyer by the name of Stuart Levey. Levey had previously worked at the Justice Department on immigration issues and some counterterrorism issues. He really did come from a legal and regulatory background more than a national security background, and he comes to this job with a big chip on his shoulder because Treasury is not considered a serious player in national security.
But through a series of really impressive moves, including one in 2005 when Levey and his colleagues at Treasury successfully isolate North Korea from the international financial system by using what's called a Section 311 action on a Macau-based bank called Banco Delta Asia, they prove that the Treasury Department actually can play a really meaningful role. They can manipulate the risk calculus of the financial sector, and so that winds up being almost a proof of concept against North Korea, and Levey then goes on to really spearhead the financial sanctions against Iran.
David: It's a great transition that Treasury's War was written by Juan Zarate years ago, and indeed the Treasury, in many respects, supplanted the State Department as the muscle behind our foreign policy. I think, as you develop in your book, you'd add to that the Commerce Department. Maybe you can explain, starting with the global banking system, and you mentioned isolating North Korea, maybe then you can move to the Commerce Department.
Edward: Yeah, so Commerce really enters the equation much later. Treasury and Stuart Levey, he comes in 2004. By 2005, he's shown what Treasury's tools can do against North Korea. Then you are off to the races with Iran in 2006. And so Treasury really establishes itself quite a bit.
I think Juan's book, Treasury's War, came out some— I want to say 2012 or 2013. And so by then you already had Treasury firmly established, and this is a role that only grew since then, right? Because you have the sanctions against Russia in 2014. You've got the Iran nuclear deal, and then of course you get the even bigger Russia sanctions of 2022 where Treasury plays a meaningful role.
Commerce really enters the picture in the first Trump administration, and it's really because of China that Commerce enters the equation. Interestingly enough, and effectively what happens is the Trump administration stumbles upon the fact that they can use the semiconductor supply chains as a choke point the same way that Treasury has been using the financial system as a choke point.
The way that this happens is, in April of 2018, a company called ZTE, which is the second-biggest telecommunications equipment maker in China, is found by the Commerce Department to have violated the settlement of a sanctions violations case that had occurred about a year earlier. They'd been buying US equipment and reselling it to Iran. And Wilbur Ross, who's the Commerce secretary at the time during the first Trump administration, reads a report from his own team about how ZTE had been violating the settlement, and he says, "We got to come down hard on them."
And so they impose on ZTE something called a denial order, which cuts off ZTE's access to all imports from the United States, including, critically, Qualcomm chips that they were using in a variety of their devices, as well as other components from US companies. And within a matter of weeks, ZTE announces that the operating activities of the company have ceased, and this is a major crisis in China, to the extent that Xi Jinping actually immediately picks up the phone, calls Donald Trump, and pleads with him to remove this denial order on ZTE.
Trump ultimately agrees to do so. He thinks Xi Jinping will owe him one down the road. And a number of the more hawkish China officials in the Trump administration are very upset about this. But at the same time, there's this real light bulb moment. It's a realization that they can really cause significant trouble, if not blowing up Chinese companies by virtue of cutting them off from key US technologies. And so it's this same type of export control that then is wielded against Huawei, the largest private technology company in China, the next year in 2019, and then expanded significantly in an extraterritorial fashion in 2020.
And then, Biden, once he comes in, actually takes the export controls that have been applied to Huawei and expands them to cover the entire Chinese economy. So that at the present moment, effectively, you can't sell any advanced semiconductors to China without violating American export controls.
David: I have a question for you on Stuart Levey and Adam Szubin, but before I get there, Iran is obviously in the news these days. We've used sanctions, secondary sanctions, to increase pressure on the Iranian regime. Now we're back to conventional warfare. How do you think the Israeli-US military actions change the calculus of economic pressure with onlookers like Russia and China?
Edward: The recent Israeli strikes against Iran and the US strikes against Iran, I mean, they do mark a major shift in strategy in terms of Iran over the past 20 years. Really, from the beginning of Stuart Levey's campaign to isolate Iran from the international financial system, which starts in 2006, all the way up until the Israeli strikes that started in June of this year, the paradigm had been to impose economic pressure on Iran to try to entice Iran to the negotiating table to make concessions on their nuclear program, while keeping military force in reserve. Basically, using military force as a deterrent to prevent Iran from actually making a decision to weaponize, from taking their supply of enriched uranium and actually fashioning it into a nuclear device. And that paradigm, I would argue, worked very well throughout that 20-year period, even though really, every year Iran was a major concern for the US, they did not acquire a nuclear weapon.
And if you go back to the JCPOA, the Iran nuclear deal from 2015, that was by all accounts an incredibly effective deal. I mean, I think one of the things that's missing from the news right now is there's 400 kilograms of high enriched uranium in Iran that remains at large, that the US government doesn't seem to know exactly where it is. And so, even though there's a lot of self-congratulation about the success of the Israeli and US strikes, it's very possible that Iran could emerge from this as sort of like a North Korea in the Middle East, a nuclear state that may not be looking so pretty but may actually have nuclear weapons.
And so, I do think there are really significant risks to the current military action. It is a significant change. I think, one thing that is important to note is that if this is going to be a success, if the military strikes on Iran are ultimately going to be seen by history as successful, you're going to need to translate the current moment into a durable deal because bombs can set back Iran's nuclear program, but they can't end it. Only the Iranian government can agree to end their nuclear program. And I worry that if you can't get the Iranian government to agree with that, you'll never be able to verify that they've actually ended their nuclear program, and you may be in a cycle of suspicion, strikes, and retaliation that goes on indefinitely.
David: It looked like a stroke of genius, really thinking outside of the box. With Iran, Stuart Levey and Adam Szubin constructed a dilemma where corporations had to choose between business ties to Iran or to the US, and basically do a cost-benefit analysis. You talked about that with respect to the banks, and facing their existential moment, either you comply, pay the fines, move forward, or you're done. Talk to us about corporate self-interest, corporate self-interest as a tool for foreign policy implementation.
Edward: Yeah, look, this is something, and I have spent part of my career in government, part of my career in the private sector, and now part of my career in academia. I think one thing that the government, at least historically when I was there, did not fully grasp, was that private businesses are acting out of their own self-interest. In many cases, they have a fiduciary responsibility to maximize shareholder value, they're trying to make as much money as possible. You can't expect them to make decisions because the US government thinks it's a good idea for them to do business in one country or another. For big companies, you really have to change the risk-benefit calculus or the cost-benefit calculus of specific actions.
And I think, for a big bank, if they're going to be fined a couple million dollars for violating sanctions against Iran, that's a totally acceptable cost of doing business if they're making more than a couple million dollars by virtue of doing that business with Iran. You really do have to make the fines sufficiently onerous, and make the subsequent compliance regimen sufficiently onerous— And that's another piece of this, is oftentimes, in addition to fines, the banks had monitors installed by the Department of Justice basically to oversee their compliance reforms for several years thereafter.
You have to make it onerous enough for the CEOs, the C-suites of these companies and banks, to determine that they actually should be complying with these sanctions because they don't want to lose billions of dollars. It's not worth it for them to do business with Iran.
And I actually think, to take it to the present day, you see a lot of concern in Washington that the export controls on China have not been as effective as some people would hope, and that companies like Nvidia are doing everything they possibly can to go right up to the line of legality by virtue of selling advanced chips to China.
And TSMC, the Taiwanese semiconductor foundry, is also sometimes violating export controls. And I think the challenge, when it comes to these big tech giants, is that many of them have over trillion dollar market caps. And so what kind of a fine would you need to threaten on Nvidia to actually change their cost/benefit calculus, right? It would have to be pretty astronomical.
And you actually have not had the same track record of enforcement from the US government when it comes to export control violations on tech companies that you've had with respect to sanctions violations on banks. And so, in many ways, it's really the banking system internationally that's extremely responsive to US sanctions because the cost-benefit calculus of the various executives of these banks has been shifted so dramatically in recent decades. But if you go outside of the banking sector, if you look at the technology industry or the oil sector, you don't necessarily have that same responsiveness to policy coming out of Washington. And I think that goes a long way to explaining why certain weapons of economic warfare work better than others.
David: Since 2022, you mentioned the uptick in central bank purchases of gold—and this particularly in the emerging markets. They've stepped up their pace of purchases a thousand tons per year, up from three to five hundred tons a year prior to that, and actually before 2009 they were net liquidators. Do you see unintended consequences from weaponizing the dollar? Maybe that's what you were referring to with Janet Yellen's concerns.
Edward: Yes, there are definitely unintended consequences to weaponizing the dollar. And I think one of the things that makes this story so complicated, and you actually put it very well earlier in our interview, is that in many ways it's the US having spread the benefits of integration and then weaponizing them. The only reason why so many countries are involved in the dollar-based system, are involved in the American technology supply chains, is because they've seen benefits to it. They've wanted to be part of the American system. But when you start turning that into a weapon, you create the exact alternative. You send the message that there's danger in being too reliant on the dollar or too reliant on American technologies, and so you create an incentive to hedge.
I think, putting on the hat of a foreign policy professional in the United States, we live in a dangerous world. You need to have coercive tools of statecraft if you're going to have any hope getting what you want in this era of significant geopolitical competition. So that's not to say we shouldn't be using sanctions or export controls. I think what it does suggest, though, is that we should be using them much more judiciously, only in circumstances where there are vital US national interests at stake. And I think, critically, working alongside allies to multilateralize sanctions and export controls, not necessarily because you need the allies on board to make them impactful. I think, because of American economic dominance, the US oftentimes can impose really significant economic harm on other countries when we act alone. But I think when we do act alone, you potentially undermine the dollar, undermine American technology companies. Whereas when you acted with numbers, when you act alongside the euro and the yen and the pound, the dollar doesn't take nearly as much of a hit as it would otherwise.
David: There've been plenty of sticks used to coax Iran, Russia, and China. Just thinking about Joseph Nye's passing in the last month or two, maybe soft power died with him. What are our remaining carrots?
Edward: Yeah, that's a great question. I think, probably the biggest deficiency in American economic statecraft is that we are much better and we've become much better at sticks than carrots. We do sanctions and export controls and tariffs very liberally, but we've become incredibly unlikely to do a trade deal with anyone. The last big trade deal I guess we did was the USMCA, which Trump himself put forward, and then within I think a week or two of coming back to the White House, he was imposing 25% tariffs on Canada and Mexico. So American politics has made it very challenging for the US to provide the types of economic carrots that we once did. Historically speaking, at least in modern American history, it really has been FTAs, free trade agreements, that have been the biggest inducement that the US can provide to other countries.
Foreign assistance is another, where the US has never been as good, I think, as we could have been. And I think we'll be only worse now that we've had USAID completely gutted. So I think that's a significant problem.
The Biden administration was trying to work on some novel forms of carrots, like supply chain agreements in areas like critical minerals. Shipbuilding is another one where the Biden administration was looking into sector-specific economic agreements, and I think there's some promise there. But I think the challenge for the US is that absent Congressional support for any of these initiatives, there's only so much we can bring to bear. And I think that's been one of the biggest hurdles the US has faced to competing with China in the emerging markets. Whereas China's come to bear with things like the Belt and Road Initiative, and the US still has not really put forward a compelling alternative.
David: For the sake of argument, if Iran has been neutered as a nuclear threat, and Russia is spending themselves into a dangerous fiscal position through their war spending, how do you see the US turning its attention to China?
Edward: Yeah, I'm skeptical on the Iran front. I think Iran is going to wind up consuming more attention as opposed to less in the coming months than it would otherwise, given the US direct military involvement.
With respect to Russia, I mean, the war in Ukraine grinds on. Russia, and Putin in particular, shows no appetite at all to make peace, and I don't think Trump has shown any willingness to actually penalize Putin for violating any number of the red lines that Trump has put forward.
But I think that what this means is that there is attention being sucked away from the US-China competition. And this has been a recurring theme of really almost every presidency of the 21st century, that Obama and Trump during his first term, and Biden have all been wanting to focus more on Asia and China, and they've been pulled back into the Middle East and Europe because of Russia, frankly. So I think that that will continue. I think that were Trump actually to be focused on China competition, I think unfortunately he's going about it exactly the wrong way. Because what he's done is he's picked a trade fight, not just with China, but with also America's allies at the same time.
And I think if you're going to have any hope at all of decoupling from China, the first thing you need to do is to build resilience in the areas where China controls the choke point, not the US. Areas like critical minerals, rare earth minerals, batteries, where we sometimes depend on China for almost all of our imports, if not at the very least a majority of our imports. And the only way to mitigate that in the near term, it's not through autarky, it's through closer supply chain agreements with allies. And so I think the key to a successful China policy is to first build a coalition, to build scale amongst the US and our allies, and then start working to decouple from China through escalating tariffs and other trade restrictions.
David: You did a great job highlighting Matt Pottinger in your book. His latest book, The Boiling Moat, talks a lot about the Chinese threat to Taiwan. How do you see our pivot to the East taking shape if we are to support Taiwan? And I note that without Taiwan the global economy is in a rough spot, given the amount of semiconductors produced by Taiwan Semiconductors.
Edward: Yeah. Look, I think that it is a vital US national interest to prevent a war from breaking out in the Taiwan Strait. And I think that one of the big concerns, at least that I have and I know a number of my colleagues have, is that what Trump has revealed in the last few months, particularly when he escalated tariffs on China to 145%, only to backtrack a few weeks later when China retaliated with export controls on rare earth minerals that threatened to shut down various manufacturing plants in the United States. What that proved, I think, to China is that China may have escalation dominance over the US in some sort of an economic conflict, and that the US probably lacks the stomach for a protracted escalating economic war with China.
And I think if that's the case, if you're Xi Jinping, you've got to ask yourself, what is the US willing to sacrifice to defend Taiwan from China? And if they think that they can get Taiwan without having any significant retaliation by the United States, then I think it significantly increases the likelihood that Xi Jinping is going to go for that, particularly in the next several years while he still has Trump in Washington. So I worry a lot, and I think that building resilience from China is good for a number of reasons, but I think really at the top of the list is showing to the Chinese that they don't have us in a vice grip and that we actually are willing to bring to bear significant punishment on China if they make a move on Taiwan.
David: Harold James wrote extensively about the end of globalization back in 2001 and again in 2008. The book on deglobalization, the earlier one, was about the 1930s really. And in what ways has the rewiring of the financial system—recategorization, really, as a choke point—set the stage for a repudiation of globalization?
Edward: So when I got to the end of writing Chokepoints, and for those listeners who haven't read it yet, it is a narrative history. So it really takes you inside the room to see how these decisions were made, the actual individuals, a number of whom we've talked about on this podcast. So I very much take seriously the fact that individuals are shaping history. And yet when I got to the end of writing the book, I couldn't help but concede that there had been this secular trend cutting across the entire story, where each US president in the 21st century had been imposing sanctions and other restrictive measures at effectively twice the rate of their predecessor. So there's been this doubling effect where you just see an exponential increase in sanctions in the United States over the last 25 years.
And I tried to search for explanations. I came up with what I call the Geoeconomic Impossible Trinity, in which you have economic interdependence, economic security, and geopolitical competition. Three factors in which only two can coexist at the same time.
So just to explain. During the Cold War, of course you've got geopolitical competition between the West and the Soviet Union, but you have very little economic interdependence. And so as a result, both sides still feel like they have a sense of economic security. But then when the Cold War ends, you no longer have any sense of geopolitical competition. The US is the unparalleled unipolar hegemon, and China and Russia look more like potential friends than serious rivals.
And so in the 1990s, this period of hyper globalization, the world is free to embrace economic interdependence without losing its sense of economic security because there's no geopolitical competition anymore. But then what happens in the 2010s and up to the present day is that geopolitical competition comes roaring back as Putin seeks to redraw the map of Europe by force, as China militarizes the South China Sea and threatens its neighbors.
So geopolitical competition comes roaring back, but economic interdependence persists. And so what you have today is that really none of the major powers, not the United States, not China, not Europe, not Japan, not Russia, no one feels economically secure. And so what you have right now is this almost quest for economic security, this race in which companies, countries are trying to insulate themselves from potential rivals that could weaponize their economic advantages over us. And so I do think that we are moving toward an unraveling of economic interdependence because I do think that ultimately states will take significant steps to reclaim their sense of economic security.
And I worry that instead of a clean break that some have been hypothesizing, where you'll have a US-led Bloc and a Chinese-led Bloc, in some mirror image of the Cold War, that you could have something that's much more chaotic in which every nation is for itself, where the US almost sleepwalks into a quasi-form of autarchy. And we have much slower economic growth, higher inflation, and worst of all, an incentive for military conquest and imperialism. And that's the thing I fear the most. And I do think, unfortunately, that the 1930s, there are a lot of echoes between that period and the present moment.
David: So integrated markets and supply chains were supposed to make conflict between states obsolete. You make note of that in the book. And now we have what you describe as the impossible trinity, as you mentioned, economic independence, economic security, geopolitical competition. What then is the basis for peaceful coexistence in this current age of economic warfare?
Edward: Yeah, it's a great question. And I think that there is a world that I can imagine in which achieving some level of economic security between the US and China, the US and Russia, decoupling, will actually make both sides feel more secure and as a result have less of a fear of the other. I think that's very viable. But it's also possible that without any economic interdependence and without the ability to channel our conflict with China into the economic realm, without being able to respond to Chinese provocations with sanctions or export controls, that we'll be left with military force.
And I think that one thing that sometimes frustrates me when I hear criticisms of sanctions and economic warfare is that there's often this assumption that the alternative to sanctions or export controls is peace and diplomacy. Well, the reality is that sanctions and export controls, they're coercive forms of statecraft. They're not meant to be things that you use as an alternative to diplomacy, they're used to support achieving diplomatic outcomes to achieve policy outcomes. And oftentimes, the real alternative isn't peace, it's actually military force. Military force is the other big coercive tool of statecraft. And so that is a serious concern as well.
David: Well, thank you for joining us and adding to the conversation. Chokepoints: American Power in the Age of Economic Warfare, narrative history, looking at Iran, Russia, China, the world we live in, and how we can better understand the policy choices ahead. I really appreciate your contribution.
Edward: Yeah, Dave, thanks so much for having me on the show.
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Well, you've been listening to the McAlvany Weekly Commentary. I'm Kevin Orrick along with David McAlvany and our guest today, Edward Fishman, author of Chokepoints. You can find us at McAlvany.com, and you can call us at 800-525-9556.
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
