Shownotes
Our guest on this episode is Edward Fishman, a world expert on the modern art of economic warfare. Edward is author of the new book Chokepoints: American Power In The Age of Economic Warfare. He currently teaches at Columbia University and prior to that advised the US Secretary of State, Joints Chiefs of Staff and Treasury Department on the deployment of economic sanctions. We discuss the details of how the US uses its dominant position in the world’s financial markets and technology software to pressure countries like Iran, Russia and China. Most importantly this episode explains why these tools used to influence these chokepoints are permanent and are starting to form the contours of the new global economy that will persist for the coming decades.
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Episode TimeStamps:
02:14 - Introduction to Edward Fishman
08:24 - The failures of economic warfare
14:04 - What Stuart Levy can teach us about economic
19:26 - Who even want to work at banks nowadays?
22:10 - The most successful sanction in modern times
27:02 - The dangers of sanctions, export controls and tarifs
32:56 - What is a denial order and why is it such a powerful tool?
37:52 - What is the entity list and what is it used for?
38:55 - Technology chokepoints and the challenges they pose
46:08 - The secret to the American success
48:29 - Is the price cap on Russian oil actually working as intended?
53:31 - The oil market is changing
55:17 - Where is the global economy heading?
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Transcripts
The temptation for things like military conquest begins to rise.
Speaker:If you look back at sort of Hitler's calculus in the 1930s, you
Speaker:know, a lot of this desire for Lebensraum and kind of conquering
Speaker:parts of what was then the Russian, the Soviet Union was getting
Speaker:key resources and commodities for the German people that they couldn't
Speaker:get through other means. So, I do think that there are two very,
Speaker:very different futures that we could be headed toward in this block-based
Speaker:economy. And I certainly hope we're in the former rather than the
Speaker:latter.
Speaker:Imagine spending an hour with the world's greatest traders. Imagine
Speaker:learning from their experiences, their successes and
Speaker:their failures. Imagine no more. Welcome to Top Traders Unplugged,
Speaker:the place where you can learn from the best hedge fund managers
Speaker:in the world so you can take your manager diligence or investment
Speaker:career to the next level.
Beforewe begin today's conversation,
Speaker:remember to keep two things in mind. All the discussion we'll have
Speaker:about investment performance is about the past. And past performance
Speaker:does not guarantee or even infer anything about future performance.
Speaker:Also, understand that there's a significant risk of financial loss
Speaker:with all investment strategies. And you need to request
Speaker:and understand the specific risks from the investment manager
Speaker:about their products before you make investment decisions.
Here'syour
Speaker:host, veteran hedge fund manager Niels Kaastrup-Larsen.
Speaker:For me, the best part of my podcasting journey has been the opportunity
Speaker:to speak to a huge range of extraordinary people from all around
Speaker:the world. In this series, I have invited one of them, namely
Speaker:Kevin Koldine, to host a series of in depth conversations
Speaker:to help uncover and explain new ideas to make you a better investor.
Speaker:In the series, Kevin will be speaking to authors of new books
Speaker:and and research papers to better understand the global economy
Speaker:and the dynamics that shape it so that we can all successfully navigate
Speaker:the challenges within it. And with that, please welcome Kevin Coldiron.
Speaker:All right, thanks, Niels. And welcome everyone. For me, the best
Speaker:part of my podcasting journey has been the opportunity to speak
Speaker:to a huge range of extraordinary people from all around
Speaker:the world.
Inthis series, I have invited one of them, namely
Speaker:Kevin Coldiron, to host a series of in-depth conversations
Speaker:to help uncover and explain new ideas to make you a better investor.
Speaker:In the series, Kevin will be speaking to authors of new books
Speaker:and research papers to better understand the global economy and
Speaker:the dynamics that shape it so that we can all successfully navigate
Speaker:the challenges within it. And with that, please welcome Kevin Coldiron.
Speaker:All right, thanks, Niels. And welcome everyone.
So,over the last
Speaker:25 years the US has come to rely on economic warfare to confront
Speaker:global crises. The key to that strategy is control over chokepoints,
Speaker:areas of such vast importance that economies struggle to operate
Speaker:when access to them is cut off. But what are these chokepoints?
Speaker:Well,there's the US dollar, there's advanced semiconductor technology,
Speaker:and there's even things like services that underpin the global
Speaker:trade in oil. And today, we're going to explore the details of how
Speaker:this process operates and how the reactions to it are going to
Speaker:change the world economy.
Andwe're going to base our discussion
Speaker:around a brand new book called Chokepoints: American Power in the
Speaker:Age of Economic Warfare. The author and today's guest is Edward
Speaker:Fishman.
Edwardcurrently teaches at Columbia University School
Speaker:of International Public Affairs. He's worked in several positions
Speaker:that put him at the center of the US Effort to essentially weaponize
Speaker:the world economy. He served on the team at the US State Department
Speaker:that designed and negotiated Western sanctions against Russia
Speaker:after it annexed Crimea. And he's advised the Secretary of State.
Speaker:He's advised the Chairman of the Joint Chiefs of Staff and also
Speaker:the top sanctions officials at the U.S. Treasury Department. So,
Speaker:he's the perfect person to help kind of elucidate what's going
Speaker:on here, help us build our understanding.
EdwardFishman, thanks
Speaker:so much for joining us and welcome to the show.
Speaker:Thanks, Kevin. Really great to be here with you today. Sure thing.
Speaker:So, my story really begins as a college student in the years after
Speaker:9/11. I was studying history and international relations. And
Speaker:you know, we learned in all of our classes that the United States
Speaker:was the most powerful country on earth. You know, we were living
Speaker:in a unipolar moment. But when I looked at the world, it just seemed
Speaker:like the United States was struggling to translate that power
Speaker:into getting what we wanted in the world.
Ithinkthe biggest sort
Speaker:of examples of that were the wars in Afghanistan and Iraq, which,
Speaker:you know, quite quickly became these quagmires that were costing
Speaker:the US untold blood and treasure with very little to show
Speaker:for it.
Andyou know, this period, sort of in the mid ‘80s,
Speaker:was sort of when Iran's nuclear program had become really
Speaker:the top national security problem that the United States was
Speaker:confronting. And you know, the United States had invaded Iraq to
Speaker:try to stop Iraq from getting a nuclear weapon. And you know, it
Speaker:was quickly found out that Iraq didn't even have a nuclear weapons
Speaker:program, whereas Iran had a real nuclear weapons program.
Andso,
Speaker:this really presented a pretty serious problem for anyone who wanted
Speaker:to work in foreign policy. How do you stop Iran from getting a nuclear
Speaker:weapon? And it was really at this time that, you know, US government
Speaker:officials started experimenting with novel forms of
Speaker:sanctions and export controls, what I would classify as economic
Speaker:warfare, as really the primary vehicle to try to stop Iran from
Speaker:getting a nuclear weapon.
So,I became really interested in
Speaker:it and was lucky enough that a week after graduating from college
Speaker:I moved down to Washington, D.C. to work for the Undersecretary
Speaker:of the Treasury for Terrorism and Financial Intelligence. So, the
Speaker:official who oversees the sanctions apparatus at the Treasury
Speaker:Department. And that wound up being sort of my entree into this
Speaker:world.
Ieventually,as you said, wound up serving at the State
Speaker:Department, where I was on the Iran sanctions team there, got to
Speaker:work on implementing the first Iran nuclear deal, the Joint Plan
Speaker:of Action, in November 2013. And then when Russia annexed Crimea,
Speaker:a few months later, In March of 2014, I shortly thereafter became
Speaker:the first Russia Sanctions Lead in the State Department's Sanctions
Speaker:Office. I was part of the team that designed and negotiated the
Speaker:sanctions on Russia.
And,you know, what these experiences taught
Speaker:me was that these tools, like sanctions and export controls and
Speaker:tariffs, they have really tremendous potential to try to advance
Speaker:American interests. But we're really just scratching the surface
Speaker:in terms of their capability, and the US Government is still not
Speaker:very well positioned to do them strategically.
So,since leaving
Speaker:government, I really devoted myself to studying these tools, trying
Speaker:to understand what makes them work when they don't work, how to
Speaker:reorganize the US Government to fight and win economic wars more
Speaker:effectively, and really to train the next generation of practitioners
Speaker:of economic warfare at Columbia, which is what I've been
Speaker:doing now for the last four years.
Speaker:So kind of like the West Point of economic warfare.
Speaker:That's our aspiration. Kevin. I think we're still probably in our
Speaker:infancy, but that would be a dream.
Speaker:Do you imagine a potential for you going back and working for the
Speaker:government again in that capacity?
Speaker:It's possible. I stay very close with folks in the US Government
Speaker:on both sides of the aisle. I've often been called in to advise
Speaker:on various matters of sanctions and economic statecraft.
Speaker:And it's possible I'd go back into government, but I also live
Speaker:in New York City. I've got two children. And so, you have to balance
Speaker:opportunities in public service also with family life as
Speaker:well.
Speaker:Right. Okay, well, thanks for that. That's a really good context.
Speaker:So let me take a step back.
Imean,the first part of the book
Speaker:is a history, a little bit, of chokepoints. And you say there that,
Speaker:you know, economic warfare is not new. And, in fact, the failures
Speaker:of economic warfare kind of are better known than its successes.
Speaker:So,could you maybe just give us an example of past economic warfare
Speaker:that failed and maybe, more generally, why we know the failures
Speaker:better than the successes and then we can kind of use that to move
Speaker:into the modern age.
Speaker:Sure, yeah, maybe one thing just to say, off the bat, is I'm
Speaker:often asked, Kevin, whether sanctions work. And I always find
Speaker:that to be kind of a strange question because no one ever asks,
Speaker:you know, does military force work? I mean, sanctions and tools
Speaker:of economic warfare, they're just tools of statecraft the same
Speaker:way that military force is. And sometimes they work, sometimes
Speaker:they don't.
Ithinkthat, inherently, economic tools are weaker
Speaker:than the use of military force. But they also present a lot
Speaker:of benefits. You're not necessarily risking human life, and
Speaker:blood, and treasure. They're usually a lot easier to deploy. They're
Speaker:sort of a midpoint between diplomacy and the use of military
Speaker:force.
Butyes, you're right that the failures of economic warfare
Speaker:are better known than the successes. And in fact, you know,
Speaker:the very first kind of canonical use of sanctions happened
Speaker:in the 5th century BC. This was when Athens, you know, Periclean
Speaker:Athens, during the golden age when Athens was sort of at the height
Speaker:of its power, imposed this wide ranging trade embargo on a neighboring
Speaker:city state called Megara. And the goal here really was deterrence.
Speaker:Itwas to show the rest of the Greek city states, and in particular
Speaker:Sparta, that Athens, because of its dominant sea power, was so
Speaker:powerful that it could basically cripple Megara's economy,
Speaker:and it was not worth ever trying to attack Athens. And the
Speaker:irony of the situation is that the sanctions really worked.
AndMegara,
Speaker:you know, I think Aristophanes, the playwright, reports
Speaker:in one of his plays that the Megarians were basically slowly starving
Speaker:because of this embargo. But the irony is that it actually encouraged
Speaker:Sparta to go to war with Athens because I think the Spartans
Speaker:saw the Athenians as reckless and that basically their power had
Speaker:to be brought to heel. And this has happened other times in
Speaker:history.
Ithink,more recently, the US oil embargo on Japan
Speaker:in the lead up to Pearl Harbor. You know, some people blame
Speaker:that oil embargo, basically, for incentivizing the Japanese to
Speaker:attack the United States. And I think probably the lesson here
Speaker:isn't that economic warfare can't work. It's that it's a really
Speaker:powerful tool, and you shouldn't use it without being serious
Speaker:about it. You got to mean it. And you have to realize that it can
Speaker:be quite aggressive and is part of an escalatory ladder that
Speaker:sometimes leads to military force.
Ithinkthe biggest change
Speaker:though, Kevin, between all of these historical examples of economic
Speaker:warfare all the way back to Athens in the 5th century BC to the
Speaker:US oil embargo on Japan in the 1940s, is that they always required
Speaker:the use of military force to implement. So, Athens was able to
Speaker:blockade Megara because of its navy, and the same was true of the
Speaker:US Navy in the 1940s.
Whathas changed, really, only in the last
Speaker:20, 25 years is that because of this hyperglobalization we saw
Speaker:in the 1990s and the creation of the chokepoints you mentioned
Speaker:before, coupled with the really extensive reach of the American
Speaker:regulatory state, we now have a situation where an official in
Speaker:OFAC, which is the Treasury Department agency that oversees sanctions,
Speaker:can effectively sign a document in an office in Washington,
Speaker:D.C. and employ sanctions and embargoes that are even more powerful
Speaker:than the ones that were implemented throughout history using
Speaker:naval blockades and UN sort of mandates.
Andso, I think that's
Speaker:the thing that's really new about today's economic warfare, is
Speaker:that it can be done through the stroke of a pen and doesn't actually
Speaker:require sending out the US Navy to implement it.
Speaker:You talk about that in the book in the sense of how really how
Speaker:recent a development that truly is. There's a character, one
Speaker:of the main characters in the book is Stuart, is it Stuart Levey?
Speaker:Stuart Levey, yeah, exactly.
Speaker:Stuart Levey. Stuart Levey, yeah. And there's a great quote from
Speaker:him where he says, well, when I started my job, in 2004, I don't
Speaker:think the National Security Advisor would have even taken my
Speaker:call. By the time I left, I could get the President to sign an
Speaker:executive order within four hours of deciding it was worth doing.
Speaker:Ithinkhe was there for less than a decade, and he accumulated
Speaker:kind of enormous influence. I was wondering maybe if we could use
Speaker:his experience as a way to talk about the evolution of the power
Speaker:of sanctions. Can you tell us about him and what were his insights
Speaker:that he had that other people hadn't in terms of the use of economic
Speaker:power?
Speaker:Yeah, Stuart Levey is kind of, I would say he's the through-line
Speaker:of the book. He's right there at the beginning and there all the
Speaker:way to the end. I call him the Zelig of the age of economic Warfare.
Speaker:I'd like that reference, by the way.
Speaker:Yeah, he appears in all these different guises. So, I hope readers
Speaker:of the book don't think that that's an exaggeration.
So,look,
Speaker:Stuart Levey was a young lawyer at the Justice Department
Speaker:on 9/11. He was in his 30s, went to Harvard Law School and was
Speaker:very, very smart and sort of had developed this understanding,
Speaker:I think, of how the private sector viewed risk. He was really
Speaker:sort of more of a inter-regulation as opposed to a
Speaker:foreign policy/national security type of a person. And, you
Speaker:know, after 9/11, he started working on terrorist financing cases
Speaker:at the Department of Justice.
Andwhen this new sort of Treasury
Speaker:Department organization, the Office of Terrorism and Financial
Speaker:Intelligence, was created in sort of the aftermath of 9 /1, Levey
Speaker:was asked to become the first head of it. And so, he was given
Speaker:this job sort of at the tail end of Bush's first term. So, this
Speaker:is in 2004.
Ithinkhe accepted it largely because he wasn't
Speaker:even sure Bush was going to be reelected. So, he said he might as
Speaker:well take a flyer on a startup and see how it goes. And so, he assumes
Speaker:this job. Of course, Bush gets reelected. And really shortly after
Speaker:Bush was reelected, I think In December of 2004, he's asked about
Speaker:Iran because by then everyone is really focused on Iran's nuclear
Speaker:program. And Bush gives this comment saying, sanctions, we've
Speaker:tried sanctions against Iran, but they haven't worked and we've
Speaker:sanctioned ourselves out of influence with Iran.
Andthere's
Speaker:Stuart Levey, a young lawyer, just taking over this new group at
Speaker:the Treasury Department who kind of takes this as a challenge
Speaker:from the President and says, well, let's see if we can make sanctions
Speaker:work against Iran.
Andwhat he really comes up with is sort of using
Speaker:some of this knowledge he had developed as a lawyer, both in private
Speaker:practice and the Department of Justice, which is that banks around
Speaker:the world make risk-based decisions in terms of who their clients
Speaker:are, who they do business with. I think up until really Levey
Speaker:'s time, whenever the US was trying to get other countries on
Speaker:board with sanctions, it was always through diplomacy. It was
Speaker:going to the UN Security Council. And government, the Bush
Speaker:administration, was always frustrated that it could never get
Speaker:the UN Security Council to agree to really aggressive sanctions
Speaker:on Iran.
WhatLevey realized is, you know, he could short circuit
Speaker:that process and go directly and talk to banks around the world.
Speaker:Not just banks in the US, because the US had an embargo on
Speaker:Iran, but going to talk to banks in London, and Frankfurt, and
Speaker:Tokyo, and Hong Kong, and Dubai.
Andso, what Levey does is
Speaker:he basically creates this roadshow. He travels around, meets
Speaker:with hundreds of different banking CEOs and compliance executives,
Speaker:chief legal officers, all around the world. And what he does
Speaker:is he comes bearing these sort of like dossiers of declassified
Speaker:intelligence that shows exactly how Iran is using the international
Speaker:financial system to evade sanctions and also primarily to fund
Speaker:its nuclear weapons program, as well as its support for terrorist
Speaker:proxies like Hamas and Hezbollah.
Andthese banks, in the
Speaker:aftermath of 9/11, the last thing they want is a front page article
Speaker:in the Wall Street Journal saying that, HSBC is involved in
Speaker:funding Iran's nuclear program, or BNP Paribas is involved
Speaker:in supporting Al Qaeda. And so, from just a sheer perspective
Speaker:of reputational hazard, a lot of these banks decide it's not worth
Speaker:doing any business with Iran after meeting with Levey. But then
Speaker:as this is happening, there's also sort of an increased effort
Speaker:to actually enforce these sanctions.
Andso, some of the banks,
Speaker:of course, I think many of them do sort of get out of Iran,
Speaker:but some of them continue to do business with Iran. And what we
Speaker:wind up seeing is, you know, the scale of penalties for sanctions
Speaker:violations just goes up by an order of magnitude.
Andso, banks,
Speaker:I think, up until really the late ‘80s, I think, viewed sanctions
Speaker:violations kind of as a cost of doing business. You know, maybe
Speaker:they'd get slapped on the wrist, but it was worth it. But then
Speaker:you start seeing fines in the hundreds of millions of dollars.
Speaker:And then, by 2012, in the billions of dollars. You see a $2
Speaker:billion fine on HSBC, and then kind of this epic $9 billion fine
Speaker:on BNP Paribas in 2014.
Andso, by that point, banks really,
Speaker:they can't just sort of write off sanctions violations as a cost
Speaker:of doing business. They have to take it seriously. And basically
Speaker:what Levey does, I think if you just look at it from a macro
Speaker:level, is he conscripts the international banking system to be
Speaker:these frontline infantry officers in American economic wars.
Speaker:And so, what he does, you know, it works. Iran is really the
Speaker:focus of his efforts.
Butas we see throughout the course of this
Speaker:book, and over the last 15 years or so, this sort of these infantry
Speaker:can work, whether it's Iran or Russia or China, you know, it really
Speaker:doesn't matter. They're now conditioned based basically, the
Speaker:international financial system, to implement American sanctions.
Speaker:This is maybe going a little bit off piece, but as I was reading
Speaker:that section of the book and just listening to you make that description,
Speaker:I started thinking like, well, what type of person wants to end
Speaker:up as head of a bank now? Because you're almost, at some level,
Speaker:they're semi-state actors.
It'salmost like I'm wondering if
Speaker:your students are more likely to be running banks than, you know,
Speaker:people coming out of, I don't know, the Haas Business School, where
Speaker:I teach. People rise up through banks because of their skill
Speaker:in finance. But, you know, when you get to the very top now,
Speaker:your skill as… or I don't know if skill's the right word, but you're
Speaker:having to deal with these kind of much bigger geopolitical issues
Speaker:that have nothing to do really with core banking.
Speaker:I think that's right. I think that, you know, what we've seen,
Speaker:and I think, another macro story of the book is, it's sort of
Speaker:an ironic story, a lot of these chokepoints are created through
Speaker:financial deregulation and neoliberalism. A lot of them are
Speaker:created in the wake of the deregulatory push of the 1980s under
Speaker:Reagan and Clinton, in the ‘90s and WTO, et cetera.
Butthen
Speaker:what happens is that, after these chokepoints are created, it's
Speaker:the story of kind of the resurgence of state power - the state
Speaker:kind of reclaiming the central role over the global economy and
Speaker:saying that, you know, yes, we want banks to make money, but really,
Speaker:national security comes first and they have to be complying with
Speaker:these laws.
Andlook, you know, I called Stuart Levey the zelig
Speaker:of the age of economic warfare. After he leaves his job
Speaker:at Treasury, he does become the chief legal officer of HSBC,
Speaker:the largest bank in Britain, and is really kind of the number
Speaker:two there, where he winds up building this massive sanctions compliance
Speaker:apparatus that becomes a gold standard that other banks emulate,
Speaker:I think with over a thousand people there.
So,I think you're
Speaker:right that geopolitics compliance with sanctions has become
Speaker:incredibly central to the banking system. And I think the story
Speaker:that we're probably going to see now, over the next five to 10
Speaker:years, is that that's going to become true in other sectors too,
Speaker:as in the technology sector. We've already seen the semiconductor
Speaker:industry taking these issues really seriously. But yeah, I think
Speaker:the banking sector is probably, you know, the tip of the
Speaker:iceberg.
Speaker:I think that's absolutely right. And that points to a world
Speaker:where it's a different form of capitalism. I don't know if we have
Speaker:a great name for it. Some people call it national capitalism.
Speaker:We'll find out.
Thereare two points I really want to focus on
Speaker:with Iran. First, I wonder if you could explain to the listeners
Speaker:one of the key tools that I think Levey used, which was these
Speaker:escrow accounts. So basically, I think the insight was, hey, we
Speaker:can allow Iran to continue to sell oil and earn money from it,
Speaker:but we're going to prevent them from actually using the money.
Speaker:That's exactly right, yeah, look, I think this is probably the
Speaker:most single successful sanction we've seen in modern times.
Speaker:And what winds up happening, this is actually a few years after
Speaker:Levey leaves. I think he leaves the Treasury Department in
Speaker:2011.
Bythe time he leaves, there's this interesting dynamic
Speaker:that develops in Washington where Congress, there’s a bipartisan
Speaker:super majority in Congress for really aggressive sanctions on Iran.
Speaker:So, you have people like Mark Kirk, who's the senator from Illinois,
Speaker:Bob Menendez, a Democratic senator from New Jersey, who are
Speaker:pushing basically any, as aggressive sanctions as they possibly
Speaker:can against Iran.
Andso, folks in the Obama administration,
Speaker:the people who many of whom Levey had trained and cultivated
Speaker:at the Treasury Department, start realizing, look, we need to
Speaker:figure out a way to turn up the heat on Iran even faster. And
Speaker:the one area that Levey never really gets to touch during his tenure
Speaker:is Iran's oil sales. And that's because there's always this
Speaker:fear that Iran is a massive oil producer. They export two and
Speaker:a half million barrels of oil on global markets each day, at the
Speaker:time.
Ifyou try to take this oil off the market, first of all,
Speaker:you probably couldn't. But even if you could, you'd cause a
Speaker:spike in oil prices that would damage the world economy, which is
Speaker:then really at the beginning of recovering from the global financial
Speaker:crisis of 2008.
Whatwinds up happening is Congress is saying you
Speaker:have to do something about oil. And so some of Levey 's successors
Speaker:at Treasury, including Adam Szubin, who was his protege and became
Speaker:the head of OFAC, as well as David Cohen, who succeeded him as
Speaker:the head of TFI, come up with this strategy which is, we can go
Speaker:around to banks in places like Tokyo, and in various Chinese cities,
Speaker:in Seoul and South Korea and say, look, if you are helping process
Speaker:a payment for Iranian oil, so if a refinery in China is buying
Speaker:a cargo of Iranian oil, you can pay for that oil, but only if
Speaker:it's into a Central bank of Iran account in your home country.
Speaker:Andso, what it does is it sort of forces Iran to set up these
Speaker:bank accounts in places like China, and India, and Japan, and
Speaker:basically say, okay, well, we can accumulate our oil proceeds in
Speaker:these countries, but we can't repatriate them to Iran. We can only
Speaker:use them for bilateral trade in non-sanctioned goods. So theoretically,
Speaker:they could use all of those oil proceeds if they really wanted
Speaker:to import, I don't know, millions of toasters from China,
Speaker:but they couldn't actually use them to buy whatever they wanted
Speaker:around the world.
Whatwinds up happening is, because Iran honestly
Speaker:cannot find ways to spend all of its oil proceeds in these countries,
Speaker:within 18 months you have roughly $100 billion of Iran's oil
Speaker:proceeds that have accumulated in these overseas escrow accounts.
Speaker:It's really remarkable, I think, because if you think about
Speaker:it, you know, it's a unilateral sanction.
Thisis not
Speaker:something where the UN has backed it. The EU has not backed
Speaker:the same sanctions. This is something that is just being done,
Speaker:you know, at the behest of the US Congress and the Treasury Department.
Speaker:And it's working to effectively change the way that Iran
Speaker:is getting paid for its oil.
AndI think the reason that the sanction
Speaker:is so successful is a few of them. One is that it doesn't actually
Speaker:require Iran to stop selling oil. They continue selling oil. So,
Speaker:you don't have the market disruption that I mentioned earlier.
Speaker:ButI think more to the point, once you get into nuclear negotiations
Speaker:with Iran, the US Government has the ability to basically sign
Speaker:a document and repatriate money to Iran and say, okay, Iran,
Speaker:you freeze your nuclear program? Okay, take $5 billion of
Speaker:your frozen oil funds, and you can have access to them. And that's
Speaker:how the original Iran nuclear deal happens in November of 2013.
Speaker:The US agrees to unfreeze, I think roughly, around $5 billion
Speaker:of those oil proceeds. And Iran agrees to freeze its nuclear
Speaker:weapons program.
Andso, it's pretty remarkable. It's like you're
Speaker:almost taking another country's export revenue hostage
Speaker:and then getting them to stop their nuclear program in order to
Speaker:get some of it back.
Speaker:Yeah, and I want to follow up on that, because you do a good job
Speaker:of saying, at some point, it was like, okay, hey, we've reached
Speaker:the point of maximum pain with these escrow accounts. There's not
Speaker:much more squeezing we can do. So, now let's use these sanctions
Speaker:as a tool in a negotiating position.
Andso, we want them to
Speaker:end their nuclear weapons program, and we can kind of dangle
Speaker:this ending the financial sanctions, freeing up the escrow
Speaker:accounts as part of that. And that becomes a key aspect of the
Speaker:Iran nuclear deal. But then Trump comes in and basically says,
Speaker:well, the deal is off the table. And so, there's a kind of…
Speaker:Mythinking was, well, hold on. If the real value of these tools
Speaker:is that they can be used in the negotiation to say, okay, we'll
Speaker:switch off the sanctions if you agree to do what we want, but
Speaker:if those deals can then be quickly undone, doesn't that actually
Speaker:undermine their value in the first place? Because why should I
Speaker:trust that you can deliver on what you've agreed?
Speaker:Yeah, that's a really important point, Kevin. And I think
Speaker:that Trump's decision, in 2018, to unilaterally pull out of
Speaker:the nuclear deal, and by the way, this is while the International
Speaker:Atomic Energy Agency has verified that Iran is complying with
Speaker:the deal. Where the other parties of the deal, so that's Germany,
Speaker:the United Kingdom, France, China, Russia, have all said that
Speaker:Iran is complying with the deal. They're not pulling out. It
Speaker:does very significant damage, I think, to a paradigm of US sanctions.
Speaker:Theparadigm is that sanctions are a tool of behavior change. That
Speaker:basically we impose sanctions on a country, and those sanctions
Speaker:are kind of unnatural, and they're only in place until we get
Speaker:what we want. And then once we get what we want, we remove them.
Speaker:And that really had been kind of the model for sanctions up until
Speaker:2018.
Ithinkthat after Trump kind of unilaterally pulls out of
Speaker:the JCPOA, it makes it really hard for the US to credibly put forward
Speaker:sanctions as a tool of behavior change. And you do see the
Speaker:Iranian government, shortly thereafter… Well, first of all, the
Speaker:President Rouhani, who had been elected basically to deliver
Speaker:the JCPOA, is discredited, and they wind up electing a hardliner
Speaker:to replace him a couple years later.
ButI think more importantly,
Speaker:from the perspective of US national security, Iran quickly reconstitutes
Speaker:its nuclear program and builds back its program to an even greater
Speaker:extent than it had been before the nuclear deal. So, I think in
Speaker:retrospect, Trump's pull out of the JCPOA was a real, I think,
Speaker:serious foreign policy blunder. I think even hardliners
Speaker:in places like Israel, who I think had supported it at the time,
Speaker:have now come out and said that it was a big mistake.
Ithinkwhat's
Speaker:happened in the years since, Kevin, which, you know, touches on
Speaker:your point about national capitalism or what kind of new global
Speaker:economy are we moving toward, is that sanctions have become less
Speaker:a tool of behavior change and more, honestly, a tool of remaking
Speaker:the global economy itself. And I think what you're seeing today
Speaker:is sanctions on countries like Iran, Russia, China, there's not
Speaker:really a behavioralist calculus behind them. It's not clear
Speaker:what China could do to get export controls removed, or what
Speaker:Russia or Iran could do to fully be reintegrated back into the
Speaker:world economy.
Andso, we're really seeing is a lot of these tools
Speaker:like sanctions and tariffs and export controls, they're really building
Speaker:the foundations of a new economic order. One that is much
Speaker:less globalized, much more focused on geopolitics and national
Speaker:security. And I don't think we fully appreciated that. But I do
Speaker:think that 2018 and Trump's pullout of the Iran nuclear deal
Speaker:was a major turning point in that story.
Speaker:That's interesting. I mean, that seems to be like an extraordinarily
Speaker:important point, because what you're saying is we can examine the
Speaker:export controls of the sanctions, and they're kind of like
Speaker:the gray contours of what the world economy is going to look like
Speaker:over the next 5 to 10 years. It's like you're building a house
Speaker:and you're starting to put up the studs, and you can kind of see
Speaker:what the house is going to look like.
Speaker:Yes, I think that's exactly right. And if you think about it,
Speaker:I mean it's kind of a strange way to… You’ve got really do some
Speaker:mental gymnastics to get to this vision.
Butif you think about
Speaker:the ‘90s, building the globalized world economy, it was
Speaker:built really through these trade agreements like NAFTA, the
Speaker:WTO, giving China permanent normal trade relations with the US.
Speaker:It was really through bringing down barriers.
Nowthe new global
Speaker:economy, which I don't think we have a name for yet, that's being
Speaker:built is really being built through tools like sanctions and
Speaker:export controls and tariffs. It's being built through barriers.
Speaker:You know, it's sort of a different process than the process
Speaker:we saw in the ‘90s.
Andwhile the materials that we're using to
Speaker:build the house that you mentioned are different, I think
Speaker:we can't deny that's what's happening right now.
Speaker:I'd like to talk a little bit. We did sort of both alluded to the
Speaker:export controls on China and there's a couple, in the same way
Speaker:that the escrow account was an important kind of game changing tool
Speaker:on the financial side, there's a couple of other tools that the
Speaker:US has used more kind of on the physical trade side that are
Speaker:illustrated in your section on China.
So,you know, you tell the
Speaker:story of Huawei and ZTE which we actually had Chris Miller on this
Speaker:show. And so, we've talked through the importance of TSMC and
Speaker:Huawei and you talk about the CFO of ZTE. So, both Huawei and ZTE
Speaker:are telecoms equipment makers, broadly speaking. And the CFO of
Speaker:ZTE was caught with a plot to buy US Tech and then kind of resell
Speaker:it to Iran.
Andthey were fined, but then they were later found
Speaker:violating the settlement and they were hit with a “denial order”
Speaker:which almost bankrupted them within a matter of weeks. So, I was
Speaker:wondering if you could explain to the listeners what a denial order
Speaker:is and why that is such a powerful tool.
Speaker:Sure. So, up until now in our conversation, Kevin, we've been talking
Speaker:about primarily financial sanctions which the Treasury Department
Speaker:and the State Department really are the ones who are administering
Speaker:it. You know, the chokepoint that's being used there is the dollar,
Speaker:right?
It'sthe fact that the US dollar is used as kind of this
Speaker:way station in all major international transactions, or at
Speaker:least a very significant percentage of them. It's very hard
Speaker:to operate in the global economy without the dollar.
Adenialorder
Speaker:is done by the Commerce Department, and it's not focused
Speaker:on finance, it's focused on trade. And basically, what a denial
Speaker:order does, like the one on ZTE from 2018, is it tells US exporters
Speaker:that they can't sell anything to ZTE.
Andsome of the things that
Speaker:US exporters might sell to ZTE are trivial. It could be a company
Speaker:that's selling tables to ZTE for their office space, which may
Speaker:not be so painful for a company like ZTE.
Butthen there
Speaker:are other products like semiconductors, which ZTE totally
Speaker:relies on, or at the time, something like the Android operating
Speaker:system, which, if that is cut off from a phone maker or telecom
Speaker:equipment maker like ZTE, it can be really, really serious. And
Speaker:I think at the time, ZTE was really dependent on American microelectronics
Speaker:from companies like Qualcomm. And as a result, you know, they did
Speaker:almost go out of business in a matter of weeks. And they would have,
Speaker:I think, had it not been for Xi Jinping placing a phone call to
Speaker:Donald Trump and basically saying, you know, you really need
Speaker:to give ZTE a reprieve, and really kind of doing everything he
Speaker:can to get Trump to cave.
Andmy understanding, from talking
Speaker:to several people who were part of that conversation, is that
Speaker:Trump agreed to it because he thought Xi Jinping might owe him
Speaker:one down the road. And so eventually, you know, pretty quickly
Speaker:after this call, Trump instructs Wilbur Ross, the Commerce
Speaker:Secretary, basically, to come to a deal that allows ZTE to survive.
Speaker:Andso, for a lot of folks, China hawks in the first Trump administration,
Speaker:they viewed this as incredibly frustrating because it felt like
Speaker:that Xi Jinping maybe had cajoled Trump in a way that wasn't
Speaker:justified.
ButI think, on the flip side of that, these China hawks
Speaker:and the Trump administration realized that, wow, some of these
Speaker:major Chinese industrial companies that are reliant on American
Speaker:semiconductors, we can really hurt them if we cut them off from
Speaker:US products. And this was really important because I think
Speaker:sanctions, financial sanctions against China, have always been seen
Speaker:as a very significant action, something that so far, we haven't
Speaker:seen - major financial sanctions against China. But I think
Speaker:these export controls were sort of seen as, okay, well, here's
Speaker:another really aggressive tool we can use.
Andso the ZTE case,
Speaker:while it winds up being short lived, I think it provides A clue
Speaker:to people like Matt Pottinger, who was overseeing China policy at
Speaker:the Trump NSC, that this is a tool they can use to kind of spearhead
Speaker:the more competitive strategy that they wanted vis a vis China.
Speaker:And then there's another tool called the Entity List, which I think
Speaker:is kind of one level down. Can you just explain that? Because that's
Speaker:also been used.
Speaker:Yeah, that's right. The Entity List is one level down. It's also
Speaker:administered by the Commerce Department, by the Bureau of Industry
Speaker:and Security there. And what the Entity List says is that you
Speaker:can export… An example here, is that Huawei eventually is put
Speaker:on the Entity List in 2019. And what that says is you can export
Speaker:things to Huawei, but you have to seek a license first. So, It puts
Speaker:a regulatory barrier and gives… So, at the very least, it
Speaker:slows down trade with the target. But usually, the Entity List
Speaker:also comes with a presumption of denial.
So,unless there's sort
Speaker:of clear exemptions written in, it's pretty close to being as
Speaker:aggressive as a denial order. It's just less black and white. You
Speaker:know, it gives more flexibility to the Commerce Department
Speaker:to allow some licenses to be granted if they think that they're
Speaker:warranted.
Speaker:One of the things that was kind of shocking in this section
Speaker:was kind of the relationship between the US And Europe. And so,
Speaker:there's TSMC, which is the semiconductor manufacturing company,
Speaker:but of course, TSMC can't really operate without machines from
Speaker:ASML, which is the Dutch manufacturing firm that makes lithography
Speaker:machines that basically carve the chips. And it's the only company
Speaker:in the world that can make these ultra-advanced lithography
Speaker:machines. So, they themselves have become a chokepoint.
Andat
Speaker:one stage there was, I think this is in 2020, ASML was going to
Speaker:sell one of their machines to a Chinese chip maker. And there was
Speaker:actually discussions in the US that they should send the Navy to
Speaker:block the shipments.
Speaker:Yes, yeah, this is, I think, the ASML lithography machine, I think
Speaker:it's one of the best examples you can find of a chokepoint that
Speaker:exists in the sort of physical world, because you really cannot
Speaker:produce advanced chips without access to these EUV machines that
Speaker:are only made by this one Dutch company. And so, what the Trump
Speaker:administration, I think, realizes, as I mentioned just a few
Speaker:moments ago, they put the Huawei on the entity list in 2019.
Speaker:Andwhile that does do quite a bit of damage to Huawei, the company
Speaker:recovers. And they say, oh, well, we actually can continue sourcing
Speaker:chips from places like TSMC, because if you think what TSMC is
Speaker:doing, TSMC is a foundry. So, Huawei, their high silicon unit,
Speaker:is designing chips that are then are being manufactured by TSMC
Speaker:and being sent to China.
Andso, in an ideal world, the US
Speaker:Government would just get Taiwan, and the Netherlands, and
Speaker:all these other countries to agree to the same export controls
Speaker:that they have. But that's really, really hard to do. For the
Speaker:same reasons it was hard for the US to get the UN Security Council
Speaker:to back really aggressive sanctions against Iran in the early
Speaker:2000s. And so, the Trump administration kind of starts looking
Speaker:for ways that they could do this unilaterally.
Kindof similar
Speaker:to, again, Stuart Levey trying to think about how could he isolate
Speaker:Iran without getting every country in the world to agree to
Speaker:it. And what they come up with in May of 2020 is this tool called
Speaker:the Foreign Direct Product Rule or the FTPR. And what that says
Speaker:is that, you know, it's not just sort of US Companies that can't
Speaker:sell things directly to Huawei. It's if you're a foreign
Speaker:company and you're selling chips, for instance, to Huawei, you
Speaker:cannot buy products from the United States and then sell chips
Speaker:to Huawei. So, it basically gives companies like TSMC a choice.
Speaker:You can either make products for Huawei or you can buy products
Speaker:from the United States.
Andby and large, the major chip makers,
Speaker:be it TSMC, or SK hynix, or Samsung, after the Foreign Direct
Speaker:Product Rule comes out in the summer of 2020, they comply. And
Speaker:so, this winds up becoming the Trump administration's version of
Speaker:secondary sanctions. They're using the unilateral power of the
Speaker:American regulatory state and our control over technology chokepoints
Speaker:to really cripple Huawei's access to frontier technologies.
Speaker:With ASML, we could apply the FTPR to ASML.
Whathas happened,
Speaker:I think, is the company came to a gentleman's agreement with the
Speaker:Trump administration in 2020, so they didn't have to send the US
Speaker:Navy, thankfully, after the shipment. And then I think what happened
Speaker:in the Biden administration is they actually got agreement with
Speaker:the Dutch government, in 2023, to impose export controls and not
Speaker:approve the licenses for those EUV machines to be shipped to China.
Speaker:So,what kind of started as very aggressive unilateral policy
Speaker:was turned into a more sort of alliance based diplomatic policy
Speaker:under the Biden administration.
Speaker:I mean, it really underscores the fact that the US needs to have
Speaker:technological products that these other countries and companies
Speaker:need for these sanctions to be effective.
Speaker:Yes, that is very clear. I think maybe one of the dangers that
Speaker:we face, if we are moving to a world in which it's more of a state
Speaker:capitalist model (the reason that the US possesses these chokepoints),
Speaker:it's not just because of the US government, it's because of private
Speaker:industry. It's because of technological innovation. It's because
Speaker:of financial innovation, that created things like the SWIFT Network
Speaker:which was created by a consortium of banks in the 1970s,
Speaker:or the correspondent banking system was created by American banks.
Speaker:Andso, I think that in order for the US to maintain control over
Speaker:the most valuable chokepoints, we need US companies to stay at the
Speaker:frontier of innovation. And I think that applies not only to physical
Speaker:technology, like semiconductors, but also financial
Speaker:technology.
Andthat's something I explore toward the end
Speaker:of the book. We are seeing new mechanisms come up to settle cross
Speaker:border payments without using the dollar, using things like central
Speaker:bank digital currencies. And I think, you know, I'm concerned that
Speaker:the US is a laggard in some of these areas and we're not on the
Speaker:frontier the way that we were in the past.
Andso, you know, that's
Speaker:one of the challenges, I think, about where we are today.
Speaker:As we've put national security more at the foreground of our economic
Speaker:policy, we also run the risk of kind of losing control of some
Speaker:of these chokepoints over time if we're not innovating fast enough
Speaker:and getting our adversaries, frankly, hooked on our products.
Speaker:Yeah, we had Richard Holden on the show a couple months ago who's
Speaker:you know, talked about the digital currencies and how the US
Speaker:was definitely falling behind and China was on the lead there.
Speaker:But it points to this sort of irony in the sense that it was the
Speaker:kind of hyper competition of the globalized economy that led the
Speaker:US to have these world leading technology companies.
Chipmanufacturers
Speaker:moved from the integrated model to kind of offshoring or outsourcing
Speaker:production to places like TSMC, and then focusing on chip design.
Speaker:And people said that well, we were losing our manufacturing capability,
Speaker:which is true to some extent. But then the flip side is that we’ve
Speaker:got Nvidia, and Nvidia becomes one of the most important companies
Speaker:in the world.
So,it's like when you remove that hyper competition
Speaker:of globalization, are we still going to be able to develop these
Speaker:technologies that give us the power in the first place? I suppose
Speaker:it's a question we'll find out the answer to.
Speaker:Yeah, look, I think the United States has always thrived when we've
Speaker:competed with the rest of the world. You know, and I think that's
Speaker:been a big secret to American success. People ask, why do we not
Speaker:have an industrial policy? Or why are our tariffs so much lower
Speaker:than even European tariffs? You know, forget about the Chinese.
Speaker:Andin some sense, I think we have had blind spots on our policy.
Speaker:We've allowed our defense industrial base, for instance, to
Speaker:atrophy, I think, and that has been a serious problem. But I think
Speaker:outside of a very sort of select group of technologies that
Speaker:are fundamental to national security and war fighting, America
Speaker:has always done better when we have opened up our economy, when
Speaker:we've competed with the rest of the world, and frankly, when we've
Speaker:allowed our companies to set international standards.
Ithinkthat's
Speaker:really critical because the reason we can use these tools as
Speaker:a coercive mechanism against foreign countries is because foreign
Speaker:businesses rely on American finance. They rely on American technology.
Speaker:Andif we provide an incentive for these foreign countries not to
Speaker:rely on us, or worse, if we fall behind and our products aren't
Speaker:the best in breed anymore, that's a real problem. And I think,
Speaker:to kind of go back to the Huawei example, part of the reason
Speaker:that Huawei was such a psychological shock to the American
Speaker:national security establishment is that the reason
Speaker:it was winning market share across the world wasn't because China
Speaker:was holding a gun to foreign government's heads and saying, buy
Speaker:Huawei or else. It was because Huawei's technology had become best-in-class.
Speaker:They had the best-in-class 5G kit that was being sold for 30% less
Speaker:than the competition.
Andso, we see this now in things like clean
Speaker:energy technology, where China very clearly has the lead, and their
Speaker:lead has become such a significant problem for the United
Speaker:States that the Biden administration saw fit to impose
Speaker:100% tariffs on the import of Chinese electric vehicles into the
Speaker:United States. And so, I think we need to be really careful about
Speaker:remembering that innovation, our technological capacity, our financial
Speaker:capacity really is what underpins American power both in
Speaker:economic warfare and more broadly.
Speaker:I know we're kind of running out of time here. And, you know,
Speaker:a lot of the book is focused on the US relationship with Russia,
Speaker:both in reaction to the annexation of Crimea and then the
Speaker:invasion of Ukraine. And one of the, I guess, innovations, if
Speaker:you want to call it that, that happened after the invasion of Ukraine
Speaker:was, I think you call it the service plus cap model.
Andthat's
Speaker:not something that I fully appreciated, but it seemed to have
Speaker:been extraordinarily effective and kind of a backdoor way to get
Speaker:people involved who normally wouldn't want to come out and support
Speaker:sanctions on Russia. So, I'm wondering, because it's so important,
Speaker:if you could just explain what that is and why it's been so effective.
Speaker:Yeah. So, after Russia's full-scale invasion of Ukraine in
Speaker:February of 2022, the US and the rest of the G7 were intent on
Speaker:imposing really aggressive sanctions on Russia. And I think
Speaker:one of the challenges they had was honestly similar to the challenge
Speaker:that policymakers faced toward Iran in the early 2010s which is,
Speaker:you know, that Russia was a massive oil producer, five million
Speaker:barrels of crude oil and another two and a half million barrels
Speaker:of petroleum products each day. And so there was, really, a
Speaker:limit probably to how much pressure you could put on Russia
Speaker:without going after its oil sales.
AndI think quite quickly
Speaker:the US and the G7 hit that limit. They imposed sanctions on
Speaker:Sberbank and VTB, which are the two largest banks in Russia.
Speaker:Theyimpose the foreign Direct Product Rule on Russia. So, the same
Speaker:technology and semiconductor export controls that we talked about
Speaker:with Huawei are imposed on Russia as a whole. And so, over the
Speaker:course of 2022, you know, Russia's economy is definitely struggling
Speaker:under these sanctions and export controls. But the war is going
Speaker:on. And so, it's quite clear that something needs to be done about
Speaker:Russian oil.
Andso, what the US and its allies come up with is
Speaker:this idea of a price cap, which is that you can continue buying
Speaker:Russian oil. So, if you're a Chinese or Indian refinery, you can
Speaker:import Russian oil. But if you use services from companies based
Speaker:in the G7, so, for instance, if you use Greek shipping, or British
Speaker:insurance, or American trade finance, then you can only buy that
Speaker:Russian oil for a price below $60 a barrel. So, it effectively
Speaker:imposes a cap on the price of Russian oil.
Andthe reason that
Speaker:the US and its allies think that this might work is because of
Speaker:these chokepoints that exist in energy supply chains, in particular,
Speaker:the shipping sector, which, you know, is really dominated by
Speaker:Greece and several other European countries. The maritime
Speaker:insurance sector, I think 95% of all oil cargoes are covered by
Speaker:the International P&I Club, which is based in London, and then
Speaker:of course, US Dollar and trade finance.
Buteven when this price
Speaker:cap is imposed, I think there's still some anxiety that if
Speaker:it's done too aggressively that you could see some Russian oil
Speaker:come off the market and you could cause a spike in oil prices,
Speaker:which is something the Biden administration is petrified about
Speaker:because of inflation running at 40-year highs and gasoline prices
Speaker:pretty high.
Andso, what we see is really for the first six to
Speaker:12 months of this policy being in effect, it works really tremendously
Speaker:well, and it cuts Russian oil revenues very substantially. But
Speaker:sort of in the vein of the conversation we had just before about
Speaker:where is this headed in the long term, it also creates a structural
Speaker:incentive for Russia to build its own end-to-end oil supply chain,
Speaker:to buy old tankers that it can use basically as a substitute for
Speaker:the Greek shipping companies it used to use, or do sovereign guarantees
Speaker:instead of using British insurance. And so, what happens is,
Speaker:over time Russia does find ways around this price gap by effectively
Speaker:indigenizing its energy supply chain.
AndI think where we are now
Speaker:is we're at sort of an impasse because the price cap is still in
Speaker:effect. Russia has, I think, successfully built workarounds to
Speaker:it and the Biden administration never tightened it,
Speaker:I think, to the extent that it could be effective in the long term.
Speaker:And so, I think one of the first big decisions the Trump administration
Speaker:is going to have to make on Russia is what to do about this policy.
Speaker:Youknow, they could, could strengthen it pretty significantly
Speaker:by using some of the tools we talked about with respect to Iran,
Speaker:like the escrow accounts, I think could work very well against
Speaker:Russia. But you know, a lot of that will come down to the prioritization
Speaker:and whether they're going to take a risk in terms of energy prices.
Speaker:Yeah. And you know, it's, it's led to a kind of a bifurcation in
Speaker:the oil market, which was, for a long time, kind of the ultimate
Speaker:globally traded commodity with a single price. And now we have multiple
Speaker:prices. And I just was wondering if you think that is what
Speaker:we're going to see with, with other markets around the world.
Speaker:I think that's right. I think that you sort of hit the nail on
Speaker:the head where a barrel of oil was roughly the same price, whether
Speaker:it was coming from the Gulf of Mexico, or Saudi Arabia, or Russia,
Speaker:up until 2022. And now you're starting to see really two oil markets.
Speaker:Yousee a market for regular oil and a market for sanctioned oil.
Speaker:And a part of the reason that countries like India and China have
Speaker:bought so much Russian oil is that they're getting it at a significant
Speaker:discount to Brent, which is the international benchmark.
AndI
Speaker:do think that, to go back to our conversation about kind of building
Speaker:this new global economy that comes after globalization, I do think
Speaker:a hallmark of it is going to be that some of these markets that
Speaker:used to look like a global commodified market become really
Speaker:geopoliticized, where there are markets for Russian commodities
Speaker:that sell for discounts, and can only go to countries that don't
Speaker:support sanctions, and then markets for commodities from countries
Speaker:that sell probably for a higher price but have a lower risk
Speaker:of incurring sanctions.
So,I do think that in many ways the oil
Speaker:market, by kind of coming under this grip of the national security
Speaker:state, points the way forward for what we're going to see in a
Speaker:lot of other markets in the years to come.
Speaker:So do you… Is your… I mean, this is kind of an unfair question,
Speaker:I guess, but I'll ask it anyway. Is your vision or view of
Speaker:the... I don't know if endgame is the right term, for where we end
Speaker:up that kind of mirrors the Cold War, where we go into like an
Speaker:Orwellian world where there's kind of three big powers that don't
Speaker:really interact very much economically? Is that where we're
Speaker:headed? I mean, you know, that's one argument, but then the
Speaker:data says that global trade has actually held up remarkably well.
Speaker:So, I don't know, where do you think we are in 10 years?
Speaker:Yeah, it's a, it's a really good question. I think that almost
Speaker:certainly we are going to see some level of kind of blocks that
Speaker:form in the global economy. I think that there are different versions
Speaker:of that future and, and we're not exactly sure where it's going
Speaker:to be.
Ithinkin the optimistic version of that future,
Speaker:you know, you really see blocks that are formed really only
Speaker:around very strategic technologies and commodities. So,
Speaker:maybe there's a semiconductor supply chain or supply chain for
Speaker:advanced semiconductors and military technology that exists only
Speaker:with the US and its allies. So, this is kind of the friendshoring
Speaker:model. And then maybe another supply chain that China and Russia
Speaker:and some of, you know, what I would call the authoritarian axis
Speaker:has.
Andmaybe in that world you wind up, actually, with a more
Speaker:stable global economy because you don't have necessarily the ability
Speaker:to coerce other countries through economic warfare and you
Speaker:feel a little bit more secure. I think part of the reason you've
Speaker:seen such, I think, hawkishness on China in the US, both
Speaker:in the Democratic and Republican side of the aisle in recent
Speaker:years, is that there's a real sense of vulnerability that we're
Speaker:reliant on China for really strategic products that we can't
Speaker:get in a crisis. And I think we felt that viscerally during the
Speaker:worst part of COVID when we couldn't even get masks because China
Speaker:kind of had produced, was producing all the world's masks.
Speaker:Ithinkthe bleaker version of that future, and it's the one that
Speaker:I'm particularly worried about with the Trump administration, if
Speaker:they do sort of go into this direction of not only sanctions and
Speaker:tariffs against China, but also against Europe and Mexico and
Speaker:Canada and other close US allies and partners, is that you
Speaker:have just a much more disorderly kind of breakdown of the
Speaker:global economy that probably doesn't happen overnight just because
Speaker:the US and China still have what, $600 billion almost in bilateral
Speaker:trade a year.
Youcan't go from that to zero overnight, but
Speaker:you start to see more shortages, more inflation. That just
Speaker:kind of becomes more of a regular part of our daily life. And
Speaker:then of course, at the end of that, where are we left? We're left
Speaker:in a situation in which countries may not be able to get
Speaker:the critical resources they need through trade. They may not
Speaker:be able to get the things they need through for sort of peaceful
Speaker:commerce.
Andwhat has happened, when that has happened
Speaker:historically is the temptation for things like military conquest
Speaker:begins to rise. You look back at sort of Hitler's calculus in the
Speaker:1930s, his desire for Lebensraum and kind of conquering
Speaker:parts of what was then the Soviet Union was getting key resources
Speaker:and commodities for the German people that they couldn't get through
Speaker:other means. So, I do think that there are two very, very different
Speaker:futures that we could be headed toward in this block-based
Speaker:economy. And I certainly hope we're in, in the former rather than
Speaker:the latter.
Speaker:Well, thanks for that. I appreciate you taking the challenge
Speaker:of answering that question. I know it's impossible to answer, but
Speaker:I think these are things we should all be thinking about. And
Speaker:the book is a great kind of entree into just a deeper understanding,
Speaker:as we said, of the contours of the new world economy that are being
Speaker:built.
Yousay, toward the end of the book, that trust once lost
Speaker:is not easily regained, and the scramble for economic security
Speaker:is underway, and we're not going back to where we were in the
Speaker:past.
So,Edward, thanks so much for writing the book and for
Speaker:taking the time to talk about your ideas with us on the show. We
Speaker:really appreciate it.
Speaker:Thanks so much for having me on, Kevin. I really enjoyed our conversation.
Speaker:Okay. The book is called Chokepoints: American Power in the
Speaker:Age of Economic Warfare. And please go out and get a copy of Edward's
Speaker:book and make sure you follow his work because I think, as you
Speaker:can tell from our conversation today, a lot of these ideas are not
Speaker:being discussed enough on mainstream media. For all of us here
Speaker:at Top Traders Unplugged, thanks for listening and we'll see
Speaker:you soon.
Speaker:Thanks for listening to Top Traders Unplugged. If you feel you
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