How are the US and China weaponizing the global economy?

Paul Diggle: Hello and welcome to Macro Bytes, the economics and politics podcast from Aberdeen. My name is Paul Diggle.

Luke Bartholomew: And I'm Luke Bartholomew.

Paul: Today's guest is Edward Fishman. Eddie is a professor and research scholar at Columbia University where he teaches on economic statecraft. He served in the Obama administration in the State Department, also at the Pentagon and Treasury, where he worked, in particular, on US sanctions policy and his experience runs deep in government, academia, business. He is, as you'll hear, an expert on economics, geopolitics, issues of national security. And importantly for today's conversation, Edward is the author of Chokepoints – How the Global Economy Became a Weapon of War, which is a great book on how the US, and now increasingly China, have weaponised some of the institutional and legal bottlenecks in the global economy, and a financial system, for geopolitical and strategic purposes. So that's what we are going to be delving into today. Edward Fishman, Eddie, welcome to Macro Bytes.

Edward Fishman: Paul, thanks for having me on today. Really appreciate it.

Paul: So Eddie, let's start with the basics. What exactly are chokepoints in the global economy? How do they arise?

Edward: Sure. So historically speaking, when the word chokepoint had come up, it really referred to geographic features. So you think of straits, like the Strait of Hormuz, where one-in-five barrels of oil flows through every single day, or the Bosphorus, which has been this critical artery for global trade all the way dating back to the ancient world and today remains very important for the oil and food trade. But what happened in the wake of hyper-globalization in the 90s, when for the first time the entire world, sort of, became enmeshed in a single financial system that was based on the US dollar, on a single industrial supply chain built on computer chips and other core materials, including what we've all seen recently, rare earths from China. We had the creation of these economic chokepoints, not physical chokepoints. And the way I would define them is that there are parts of the global economy where one country has a dominant position, and there are few, if any, substitutes. And it's not just market share that matters. So, it could be the case that, a country could have 90% market share in furniture manufacturing or clothing manufacturing. But if that country were to cut off the US's access to T-shirts, it would be relatively easy to substitute, right? You could start a T-shirt industry within a few months. But then the key part about chokepoints then isn't just market share, it's also this substitutability element. And we're seeing that right now, where, when China cuts off the world from refined rare earths, and they've refined, I think, something around 90% of all rare earths in the world, it would take many, many years for the United States and other countries to actually substitute that. And the importance of these chokepoints is that historically, when you wanted to impose substantial economic pressure on arrival for some geopolitical motive, you really did need to use the use of military force. You would need to use a naval blockade, for instance, blockading chokepoints like the Bosphorus actually was a key part of economic warfare in the past. Or sieges where you would surround a city and try to prevent food or trade from coming in or out, going back to the ancient world and medieval times. Now, because of these invisible economic chokepoints, governments that control them can simply cut them off through legal measures just by signing documents, in the US case in the Oval Office, and impose devastating economic pressure on foreign countries. And I think what it's done is it's had a similar effect on economic warfare to what the advent of the airplane and air power had on military warfare, where before you had airplanes, if you wanted to inflict significant physical damage on a foreign city, you would need to actually send people in there and you were going to suffer some serious casualties and harm yourself. With air power, you could sort of just fly over and drop bombs, right, which significantly lowered the threshold for the use of force. And I think with the rise of the chokepoints, really in the 90s, we now have a world where you can deploy really substantial economic warfare without really risking very much yourself.

Luke: So as you said, there's nothing new to using economic tools as part of warfare, of economic warfare itself. In the book, you trace it all the way back to the Peloponnesian War, you know, between ancient Athens and Sparta. But as you say, the big distinction there is that still physical kinetic power, if you like, had to be used, whereas modern chokepoints involve these institutional, regulatory architecture. And I guess the acme of that institutional, regulatory, remote system is, of course, the US dollar and the euro dollar system in particular. So can you tell us why the dollar represents such a strategic chokepoint for the US?

Edward: Sure. So oftentimes you hear people say that the dollar is the world's reserve currency. And that's true. If you look at sovereign reserves, so the hard currency and other assets that central banks hold around the world, it's roughly 60% of that that's held in dollars. So the majority of all central bank reserves globally are held in dollars. But when it comes to the dollar's dominance, it really actually expands well beyond that. The way I think about it is the dollar really is the dominant currency across all use cases of money. It's the dominant store of value, the dominant medium of exchange, and the dominant unit of account. So in the store of value side, we've talked about central bank reserves, 60%. But then if you just look at where, not just central banks, but institutional investors around the world are investing their money, there's something like 70% plus of global equity market capitalization and bond markets are also dollar markets, so the US market. And so effectively, even if you were a private entity and you're looking to invest somewhere, something like two-thirds of your asset allocation is going to be exposed to the dollar at the very least. I think from the point of sanctions, though, it's not just the store value element that matters. Arguably, even more important is the medium of exchange and unit of account elements. Because when you think about currency as a medium of exchange and unit of account, it's really about how currencies, sort of, serve as the sort of arteries of the international trading system. They actually facilitate trade between countries because when two countries trade with each other, they have to transact. There has to be some sort of monetary transaction that occurs. And just for honestly the sake of convenience, when you think about it, it wouldn't be very sensible for banks all around the world and however many different currencies there are, well over 100, to hold every single currency that they could possibly encounter. So typically, what banks do is they hold their home currency. So if you are an Indian bank, you obviously need rupees in order to, you know, pay your employees and give loans to businesses and consumers who need them. But then you would also hold dollars as well, usually through a correspondent in New York City, where I live, here. And the reason is that if you're trading with another country, you are going to need to do a foreign exchange transaction. And so, let's say this Indian company is selling rice to a Saudi importer. It's not that that transaction would be settled in rupees. The Saudi importers bank isn't going to hold rupees. They're going to take their riyals, they're going to exchange them for dollars, and then the dollars are going to be exchanged into rupees to pay the Indian company. And so, there's actually multiple foreign exchange transactions that are happening, and they all have the dollar on one side or the other. So I think probably the most illustrative statistic about the dollar's dominant global role is the fact that the foreign exchange market, which is sort of a wonky market in that people don't talk about it very much, but it is actually the largest single financial market with roughly $7 trillion in daily turnover, which is almost hard to imagine. 90% of those transactions have the dollar on one side or the other. And the reason I like that statistic is when you think about the foreign exchange market, part of the reason it's so large is it's partly because there is a lot of speculation and trading that occurs, but also because it encapsulates everything else. It encapsulates all sort of cross-border capital flows and encapsulates trade finance, which oftentimes, as I just mentioned, requires foreign exchange transactions. And when you've got 90% of those transactions that have the dollar on one side or the other, you realize just how essential this is. And what it means is that when the US government, which can cut off foreign banks or foreign companies from the dollar, does that, it can effectively isolate the target from the mainstream global economy.

Luke: Well, let's talk about a couple of case studies then where that has, indeed, occurred, that these tools have been used and exploited. I mean, in the book, you look at Iran, Russia, and China, and China is such a big part of the story. Let's come back to that later, I think. But just for now, I mean, in the case of Iran and Russia, tell us about how the US used its control of chokepoints and how those were able to achieve its objectives.

Edward: Yeah, so Iran, the Iran sanctions that really start in earnest around 2006 and climax in 2012, 2013, right before Hassan Rouhani is elected, really on a platform to trade sanctions relief in exchange for nuclear concessions. So, you know, this is what the sort of the necessary precondition for the Iran nuclear deal. That really is the beginning of what I call the age of economic warfare, because that's how the US sort of first identifies that it can use the dollar as this chokepoint and pioneers a new way of pressuring other countries economically. Just a few years before that, in the 1990s, there was another country that the US was trying to stop from developing nuclear weapons. That was Iraq, right, the country right next to Iran. It's a smaller country than Iran, but a relatively similar economy in that they were selling oil on the global marketplace, and that was powering effectively the entire rest of the economy. And so, after Saddam Hussein invaded Kuwait in 1990, the US and the international community imposed an oil embargo on Iraq. The way that they actually went about that embargo was through, sort of, the old school style of economic warfare that we talked about earlier, through a multinational naval blockade. They had ships patrolling the Persian Gulf 24-7 from 1990 to 2003, inspecting every single tanker coming in and out of Iraq's ports. And when they were suspicious that one of these tankers was carrying illicit Iraqi oil, they would actually take samples of it to send it to laboratories for testing, to confirm where the oil was from. With Iran, in 2005, when they elect a populist hardliner, Mahmoud Ahmadinejad, as president, who immediately restarts uranium enrichment, it puts the US, in particular George W. Bush, in a very awkward position because he just launched this big war against Iraq to try to get rid of its nuclear program. It was discovered that Iraq actually wasn't really building nuclear weapons, but the country right next door, which is bigger and more powerful, did actually have an industrial scale nuclear program. And yet there was zero appetite in the United States for yet another war in the Middle East. And so, there's this sort of quagmire where we don't want to fight Iran. We don't think sanctions are a good option because we don't have unity in the United Nations the way we had with Saddam Hussein. And even beyond that, blockading Iranian ports would require substantial naval power and could start a war in and of itself. Iran had missiles that it could potentially shoot at US naval forces, and that might start a war even if we didn't want to be fighting Iran. So the Bush administration was sort of all out of ideas. And it really wasn't until this guy named Stuart Levey, who's arguably the most important character in this story, who is the Treasury Department's first Undersecretary for Terrorism and Financial Intelligence. He's a lawyer by background. One day when he's in Bahrain in 2005, is flipping through the Financial Times when he comes across an article about a Swiss bank that has cut ties with Iran of its own volition. And he has this sort of ‘a-ha’ moment where he realizes that he doesn't need to get unity at the UN. He doesn't need to persuade the Russian government or the British government or the French government to actually support sanctions against Iran. He can literally go to London and Paris and Frankfurt and Shanghai, bring with him declassified intelligence, showing them how their banks in these countries are oftentimes unwittingly being used by Iran to funnel money into its nuclear program, and persuade nine out of 10 of them of their own volition, just for fear of reputational harm, to cut ties with Iran. And for the handful of banks that aren't scared off by the reputational damage, he can threaten to actually cut them off from this dollar-based system. And that campaign that Stuart Levey pioneers successfully isolates Iran from the global economy. And to take it even a step further, when Iran is fully isolated, and really the only thing left it has is oil sales, the US then goes ahead and uses financial chokepoints to coerce banks in places like China, India and Turkey to only hold Iran's oil payments in escrow accounts so that Iran cannot use its oil proceeds again to fund its nuclear program and also persuades refineries in those countries to dramatically reduce their purchases of Iranian oil. And so, we would not have gotten a massive recession in Iran. We would have not have gotten the political change in Iran we got in 2013. And critically, we would have not gotten the Iran nuclear deal without this whole new form of economic warfare that Stuart Levey pioneered.

Paul: And in the Russian case, the really innovative aspect, or the way that the US exploited chokepoints were, I think, one, in the use of the maritime insurance market chokepoint, cutting Russia off from that. And then secondly, the thing that really took them by surprise was the central bank asset confiscation, again, a leveraging of the euro dollar system. But I want to ask you, Eddie, how you think about success in those cases, in Iran and in Russia. I mean, in Iran's case, of course, it, as you said, pushed Iran into the nuclear deal, but then once Trump withdrew and we were back to maximum pressure sanctions, of course, they did not force Iran to accept a better nuclear deal, abandon enrichment, and eventually kinetic force was used. In Russia's case, of course, it did not prevent, let alone end, the invasion of Ukraine. So how do you think about success of the use of chokepoints in those instances?

Edward: Yeah, I think whenever you're sizing up sanctions or any type of coercive economic force, you really need to ask yourself what the goal is. Because oftentimes, it's portrayed as behavior change, what you're seeking, right? You're trying to effectively do a bank shot where you hurt another country's economy, and then you translate that economic pain into political change. The US is quite good at that first step, right, because of the systemic significance of these chokepoints, most importantly the US dollar, there's really no country in the world that the US couldn't drive into a recession just by imposing a suite of sanctions on, which is sort of a frightening power when you think about it. What the US is less good at, and frankly what other countries are less good at too, is then taking that economic pain and actually translating it into a political outcome. With Iran, I think it's a tragic story because the Iran nuclear deal, in my view, was a tremendously successful example of how economic warfare should work. It required some luck, by the way, I think is what I'd say, because Iran, when they did fall into this massive recession in 2012, 2013, it just so happened to align with the date that Ahmadinejad, the hardliner that I mentioned earlier, was term limited. And so he was done. He couldn't run for re-election in 2013. And so there was an open election in which it created space for Rouhani to come out and say: ‘I am running on a platform of trading away the nuclear program in exchange for economic relief’. And by the way, he actually comes out and says that just two weeks before the election. It's total surprise. It's a nationally televised debate. And Rouhani was sort of like an afterthought in this election. And within two weeks of the election, he says this, and on election day, he wins 52% of the vote in a seven-candidate race. So it just goes to show, in some of these authoritarian countries, you never really can size up how the people are thinking, but when they have, things can change quite quickly. And I think the tragedy of the Iran nuclear deal is, if you look at the debate in the United States politically after it was signed in 2015, the Democrats and President Obama said that, sanctions were the key to getting the nuclear deal, which, is patently true. And the Republican criticism was that sanctions were working so well that we should only have done more sanctions and Iran would have given up even more. I was never particularly sympathetic to that latter argument. I was implementing sanctions. And so I think when you're implementing something, you also, you see its strengths, but you also see its limitations. And I was skeptical that you could ever use economic pressure to achieve full capitulation, that you could use economic pressure to get regime change in Iran or get Iran to completely change, you know, the fact that it's supporting Islamist groups like Hamas and Hezbollah. I always thought that was beyond, sort of, the reach of what you could accomplish by economic warfare. And Trump made a bet, right? Trump said: ‘I agree with that Republican position. So I'm going to tear up the nuclear deal, impose maximum pressure, and I will get a better deal. I will get a deal that's not just about Iran's nuclear program, but it's about everything else. Their missiles, their support for terrorist proxies’. And so in 2018, he reimposes sanctions. They also drive Iran into a recession, which I think is quite interesting because there's this narrative that existed pre-nuclear deal that it was multilateral because the Europeans eventually got on board. And part of the reason the sanctions were so successful is because the EU and the US and even China was sort of supportive of the sanctions. But then Trump comes in 2018. He imposes these sanctions unilaterally. Not only do the Europeans not go along with it, they actively try to circumvent it by creating a mechanism called INSTEX to continue processing payments with Iran. And guess what? Iran's economy still falls into a dramatic recession. So I think what that demonstrates is that the US really does have frightening unilateral power over the global economy. But what it also shows is that Trump was wrong, because neither he nor Joe Biden could actually get a better nuclear deal with Iran. What they actually did was they weakened the political narrative in Iran that Rouhani had, which is that we should negotiate with the West, because that will, you know, that will then lead to economic relief, right? They did negotiate with the West. They complied with the nuclear deal, as the IAEA repeatedly said, and they still got shellacked with sanctions again. And so the fact that this eventually did turn into kinetic force in 2025, and I think a very uncertain prospect for Iran's nuclear program moving forward, where clearly there's been significant infrastructural damage, but there's also something like 1,000 pounds of highly enriched uranium that no one knows where it is right now. It's probably somewhere buried in an underground tunnel. leaves me quite sad about this and also worried, because I do think that this is not a problem that's been solved. It's one that's likely just to get worse in the coming years. I think with Russia, it's always been different, in that Russia, coercion, trying to force Russia to leave Ukraine, to me was always quite a bit of a stretch, particularly after they did the big invasion in 2022, when Putin really went for sort of the whole enchilada trying to conquer Ukraine. And that's why really after deterrence failed, after the US and G7 threat failed and Putin invaded anyway, I came out right away and said, this is a tool of attrition. We are using economic warfare not to try to change Putin's mind, simply to try to weaken Russia, because Russia is an adversary, and anything we can do to throw sand in the gears of their military-industrial complex is worthwhile. And to that, if you're using that as the standard for success for sanctions, it's clear to me that sanctions have been a huge policy success. If you were to remove the sanctions and not have done sanctions in 2022, Russia would be in a much stronger position economically, and frankly, would probably be significantly further on the battlefield than it is today.

Paul: One of the, sort of, ideas or questions you're grappling with in the book is how durable chokepoints are, or to what extent their use incentivizes the development of workarounds, or sort of like a paradox of use whereby if you over exploit them, perhaps you weaken them in the longer run. And in the Russian case, oil sanctions, you see overland pipes to China, you see the development of the shadow fleet operating without Western insurance markets. So they sort of discovered or invented these workarounds. In the case of the dollar chokepoint, how do you think about the durability of that chokepoint and whether the US can still be using it 10, 20 years from now?

Edward: Sure. So first of all, Paul, I totally agree with the sort of logic chain you just laid out, which is the way chokepoints work is that they're built usually on trust, right? It's not that a government comes out and says: ‘I'd like to build a choke point to weaponize against you’, and then every other country raises their hand and says: ‘sure, I'll sign up for that’. No, they're built because there's some economic benefit to them, and that countries don't fear that they're going to be used against them, right? When China and Russia started joining the dollar-based system, I don't think they were worried that all of a sudden, one day their central bank reserves might be frozen by the United States. And it's the same with US companies that have become reliant on rare earth magnets from China. And so, I do think there's sort of the sort of the logical extension of that is when chokepoints are weaponized, it does destroy that trust and lead to a political motive to break the chokepoint. And that's, I think, a large part of what we see in terms of the rise of industrial policy as a macro story over the last several years, is about breaking chokepoints. It's about China trying to break chokepoints like in the semiconductor industry and now the West on critical minerals and other materials from China. The dollar as I said earlier, is the most important chokepoint in the global economy. In 2014, when Russia first invaded Ukraine, the US and the European Union, when the UK at the time was part of the European Union, imposed some financial sanctions on Russia. They were not nearly as severe as the Iran sanctions, but they were still quite impactful, particularly when oil prices fell in the second half of 2014, the combination of cutting off Russia's biggest banks and energy companies from Western capital markets, with the massive decline in oil prices, sent Russia into a massive economic crisis in the winter of 2014, 2015. And in the wake of this, of course, Russia became quite worried about its reliance on the dollar. But beyond that, China did too, because China said, well, if the US can do this to Russia, they could do it to anybody, us too. And maybe one day China might take military action against Taiwan. And what does that mean for China? And so it's actually in the wake of Russia's 2014 invasion of Ukraine that China really started trying to create parallel infrastructure to the dollar-based system. It created CIPS, C-I-P-S, the Cross-Border Interbank Payment System, as an alternative to the Western infrastructure for payment messaging and processing. So that's SWIFT, the Belgian Institution, as well as CHIPS and Fedwire, which are the two US institutions for large value dollar transactions. Later, it also created a digital RMB, which is their central bank digital currency that they launched in 2020. And more recently, and arguably most importantly, with support from the Bank of International Settlements, they created something called mBridge, which is this multi-CBDC settlement platform that could be used to clear cross-border payments between countries without using the correspondent banking system at all, without traversing New York at all. And so, China clearly has had a massive political motive to get off the dollar for over a decade now. Yet the thing that I find astounding, and probably my other favorite statistic, beyond the 90% of foreign exchange transactions use the dollar, and by the way, that's been very durable, that has not changed at all in recent years, is that China is the world's largest trading power by far. They're the leading trading partner for 120 of the world's countries, which is a dramatic and almost shocking statistic. And yet, despite its best efforts, only 30% of its own trade is settled in RMB. And they've been trying to boost that up for the last 10 years. It's gone from 15% to 30%. So you've got, you know, the rate of growth has been doubled, you know, which is impressive. But still, that's quite low given the fact that you would think that if they're selling by far the most amount of stuff, they could at least persuade their buyers to start using the RMB more. But they have not succeeded in that because the RMB just is not as useful as the dollar for a lot of reasons we can go into. That's all to say that I think the dollar will be a very difficult chokepoint to break because, again, it is not just dominant across one of these things. It's not just the dominant medium of exchange or unit of account, but also the dominant store of value. I think in each of those dimensions, what we're seeing is parallel infrastructure and alternatives that are creeping up. So if you look at store value, clearly we all would have been better off if we could go back in a time machine three or four years ago and put a lot more money into gold. I think that's a phenomenon driven by central banks, sovereigns, looking for alternatives to the dollar. We also wish we could go back in a time machine and put a lot more money into Bitcoin for the same reason. This is not just sovereigns, but institutions that are looking for a hedge against the dollar. When you look at medium of exchange, it's been a lot less fruitful in terms of some of these alternatives. China, as I said, has made some progress, but there’s still really isn't a great alternative to the dollar. I think the real question today, and the thing that sort of I wonder is, you know, what's the black swan that potentially could, you know, reduce the dollar's value as a chokepoint? Really comes down to, is the US government's bet on stablecoins the right one? Because I do believe that technologically, we are going to see a massive shift in terms of how cross-border payments work in the coming five to 10 years. I don't think we are going to have the slow, correspondent banking system style cross-border payments. And so the US has said: ‘well, you know what? It's going to be based on dollars. It's going to be privately issued stablecoins’. I'm sure eventually, you know, all the banks here in New York are going to have their own stablecoin, or maybe they'll have a consortium where they launch one. You know, Stripe and other technology companies have come together to form their own consortium for, you know, for stablecoin infrastructure. So I think there will be US alternatives, but you've got to remember the other big financial powers, including the EU and China are betting on sovereign alternatives, right, on central bank digital currencies, be it the digital RMB or the digital euro. So if the US bet winds up being a bad one, and one thing I'll add for listeners who don't know, the US under the Trump administration has actually banned the Federal Reserve from issuing a digital dollar. So there will not be even a wholesale US central bank digital currency, at least for the coming several years. If this is a bad bet, if it's the case that, you know, privately issued stable coins are inherently unstable, because you don't exactly know enough about who's issuing them to have full faith and credit. Maybe this could be something that upsets the dollar's dominance.

Luke: Yeah, it could be that the US ends up inadvertently undermining the chokepoint that comes from the dollar there. You know, obviously they're pursuing it for strategic reasons, stablecoins, around debt management, source of profitability for US firms. But maybe new tools are going to be needed to extract leverage over that system as well, because of course the euro-dollar system sits in banks, right, and those have to interact with the US through correspondent banks. Or, as famously stablecoins don't sit in banks, they're on the chain, and maybe that creates more difficulties for US policymakers to find points of leverage in that system. So, you could certainly see that as potentially being an inadvertent undermining of the of the system there.

Edward: Yeah, Luke, on that point, I think that is sort of the, sort of, base case view. And even when you talk to experts in this area who are working in the payments industry, and including many of my former colleagues who know both, sort of, payments very well, but have worked in sanctions and anti-money laundering, financial crime, they are worried about the rise of digital currencies, even stablecoins, right? I mean, you look at, Tether, which I think there's a lot of concerns that it's possible that that has been used to a certain degree for sanctions evasion. I'd also mention that the biggest sanctions violation fine that the US government has issued since sort of the famous or infamous, depending on which side you stand on, BNP Paribas fine of 2014, where their entire net income for the year was wiped out with a $9 billion fine, was actually a couple years ago when the US fined Binance something like $4 billion and put their CEO in prison for violating sanctions. Of course, the guy was just pardoned by Trump a week ago after he'd served his term. But I think what that shows is that there are still ways for the US to exert leverage over the crypto ecosystem, right? This was the single biggest crypto exchange in the world, kind of probably CZ was the superstar of the crypto industry, which, were ultimately failed by sanctions, problems with sanctions evasion. So look, do I think that stablecoins and digital currencies challenge the paradigm for US sanctions implementation? For sure. But it's possible that it could also even make it easier to implement sanctions. Because the flip side of the chain, as you guys know, is that it is an immutable ledger where if you know whose wallet is whose, you can't really do secret transactions, right? And there are increasingly ways that companies are finding to basically do analytics across the blockchain and figure out who's who. And then in terms of just infrastructural chokepoints, another point that I think is important is there are many chokepoints in the global economy that exist, including some under US control, Chinese control, that have not really yet been weaponized. And one of the most basic ones that the US controls is the cloud, right? I mean, cloud service providers, something like 70% of global market share, from the United States. And so there is a, if the US wants to find a nexus, a legal nexus, to prosecute sanctions violations that are being used through digital currencies, I do not worry about the ability to find that, because I think it's quite hard probably, even if you're a crypto company, to be doing your business without touching US cloud service providers.

Luke: As I promised, I wanted to talk a little bit more about that US-China relationship and the way that both sides have been trying to exploit chokepoints in that relationship. And obviously, at the moment, semiconductor chip design and manufacturing is a US chokepoint, or certainly the design stage, maybe manufacturing is more Dutch, Japanese, most famously, Taiwanese, but these are all US allies of one sort or another. So tell us about how the US has been trying to use that choke point both under the Biden and the Trump presidency.

Edward: Yeah. So I mentioned earlier that the dollar as a chokepoint, the US sort of stumbled upon it, right? It was almost luck that, Stuart Levey realized that this could be done and he sort of did it and it worked. And, you know, the US sort of learned as it was going along. The same is true for semiconductors. You know, going back to the first Trump administration, there wasn't some grand strategy where the Trump administration looked across the global economic system and said, we have this chokepoint over China, let's use it. It was actually kind of random where ZTE, the second biggest telecommunications equipment maker in China, sort of the rival to Huawei, was caught violating US sanctions, actually buying equipment … from the US and reselling it to Iran and ultimately was fined by the US government $2 billion and entered into a settlement right at the very beginning of the first Trump administration, so the beginning of 2017. A year later, it turns out that they'd violated a lot of the key terms of the settlement. Some of the executives that they were, they had said that they were going to censure or punish or even fire as part of the settlement, wound up getting bonuses and being promoted. And this drove Trump's first Commerce Secretary, Wilbur Ross, quite mad, because he was saying: ‘who do these guys guys think they are?’ And so he basically just told his staff, what's the worst thing we can do to ZTE? And they said, well, we could put them on the denied persons list. The Commerce Department in the US doesn't do financial sanctions. They do export controls. And export controls have been sort of a backwater, honestly, of US national security policy up until then. Wasn't something we thought about much in the Iran or Russia context when I was in government. But, you know, this was Wilbur Ross who was responsible for the ZTE file. So he said, what's the worst thing you do? They said, put them on the denied persons list. Lo and behold, ZTE was running a just-in-time supply chain. They needed chips from Qualcomm. They needed other materials from US tech companies. I think something like 10 to 20% of the bill of materials of some of their key products were coming from the United States. And so within a few weeks, the company came out with a statement saying that they had ceased production. They basically were about to go out of business. And Xi Jinping was so concerned that he got on the phone with Donald Trump in May of 2018 and begged him to take ZTE off the denied persons list. And ultimately, Trump capitulated, which, by the way, I think is not all that different from the pattern we've been seeing in the second term where, you know, when Xi asks Trump to pull something back, he does it. It drove the China hawks in the first Trump administration, like Bob Lighthizer and Matt Pottinger, mad that Trump sort of backed down. But it also was this a-ha moment for them, that they could take down major Chinese industrial companies just by cutting them off from access to US chips. And so this eventually becomes the weapon that's used against Huawei in the next two years during the Trump administration, which works quite well because Huawei as well is dependent on US materials. And more to the point, they were dependent on chips made by TSMC. And TSMC was dependent on US technologies, US chip making equipment from companies like Applied Materials. And so, the US was able to tell TSMC, you could either buy kit from the United States or sell chips to Huawei, but you can't do both. And ultimately, TSMC, Samsung, all the big sort of Asian players in the semiconductor space ultimately chose the US. The Biden administration then took that concept, which is known as the Foreign Direct Product Rule, or FDBR, and expanded it to the entire Chinese economy. And so, it takes what had been really a chip war focused on one major Chinese company, Huawei, and expands it to everyone. And that happens actually in October of 2022 and really has been only getting stronger up until the last few months, where it seems that there is a contingent within the current Trump administration who's made the case that we're actually better off potentially having China dependent on US chips. So maybe we should be selling them chips. And this has led to a muddled policy. My own perspective on it is that we still don't know exactly where the Trump administration stands. There are clearly two factions within the administration. And we probably won't have a clear policy for a number of years on this issue.

Paul: So China's obviously now strongly incentivized to play catch up in chip design and manufacturing. It looks like Huawei now is designing the domestic foundry. SMIC is fabbing 7 nanometer chips. So seven or eight years behind what TSMC, Nvidia's [xxx] TSMC is making at the two nanometer sort of stage. But crucially, as you said earlier, Eddie, the big risk scenario everyone worries about is a Chinese blockade or old school naval blockade or even invasion of Taiwan. And suddenly chips flip from being, well, at least chip manufacturing, fabbing, flip from being a US and its allies-controlled chokepoint to a China-controlled chokepoint. So how do you think about that sort of extreme tail risk scenario through this chokepoint lens?

Edward: Yeah, I think it's highly worrying because I think that the key shift in the US-China relationship since January, since Trump's inauguration, is that China has achieved escalation dominance over the United States in economic warfare. So from this entire sort of period I mentioned, from Trump's first export controls on ZTE, through the export controls and FDPR on Huawei, which were in the end of the first Trump administration, to Biden's dramatic expansion of export controls on China, the US has always had the initiative, right? The US has been gradually choking off China's access to high-end semiconductors, and it's been trying to stop foundries like SMIC from being able to fabricate advanced chips designed by HiSilicon, you know, the Huawei subsidiary. And China's retaliated a few times, but there was never any doubt that the US really was sort of driving, had the initiative. Trump came in in 2025, the beginning of this year, and started immediately hitting China with very big tariffs, right? First, fentanyl tariffs of 20%, and then layering on additional tariffs on Liberation Day in April. And China retaliated not just with tariffs of its own, but more importantly, by cutting off the US's access to rare earth minerals from China. And what happened in the weeks following that in April, it was actually not dissimilar from what happened to ZTE in the weeks following the denial order in 2018, which is that you had a handful of US factories say that we actually have to stop production, including critically Ford, an auto plant in the United States. And so, the US since then, really since this spring, has just been trying to find ways to gracefully backpedal from the economic war with China, because China has demonstrated that this chokepoint over rare earths threatens huge parts of the US and global economy. And so, the reason I bring that up is that that sword of Damocles that now hangs over the United States makes it significantly likelier, in my view, that China could make a move on Taiwan in the coming years. Because the concern China always would have is, well, what happens if we make some sort of move on Taiwan? We don't achieve immediate success, and this leads to a massive military and economic confrontation with the United States, where the US is going sort of full throttle Iran-style sanctions on us, plus fighting us in the East and South China Seas. I am concerned that the likelier scenario now, if you're just playing it out, is that China could threaten to effectively tank the entire United States economy, arguably the global economy, by completely shutting off access to rare earths and say: ‘if you guys intervene, if you intervene in Taiwan, you know, we're going to keep this in place, but if you don't, we're going to allow the rare earths to flow’. And so I worry that the scenario now in which China is sort of like on the high ground in economic warfare, it makes it likelier that a Taiwan invasion could happen. And you're 100% right, Paul, that if China were to successfully integrate Taiwan into the political control of the mainland, it would even strengthen China's economic capability significantly, because all of a sudden they would have the TSMC foundries.

Paul: So let's talk about that China-controlled critical mineral chokepoint then. And one of the things that everyone says about critical minerals or rare earths is… not rare, but it is the processing, the dirty polluting processing that is rare and very much in China's control. And because they are so critical now to a whole range of technological and military uses, they represent very much a chokepoint, as you've described them. But the most recent news, as you were hinting at previously, Eddie, is this temporary truce in, supposed truce, in the US-China trade war, part of which involves a one-year moratorium on Chinese export controls of critical minerals. To what extent is that a window of opportunity for the US and its allies to build alternatives to loosen this chokepoint? And is a year, time enough to do that? Is it even possible to loosen that chokepoint and therefore reduce some of that leverage and power that you describe China as having?

Edward: It is a window of opportunity. And I think that it's really incumbent upon, not just the United States but also Europe and other allies in the Indo-Pacific, to seize the opportunity. I don't think a year is enough time. And I think going back to the earlier in our conversation, a critical element of chokepoints is that they're difficult to substitute. One of the reasons that maritime services with a Russian price cap weren't such an effective chokepoint is that Russia was able to substitute for the global tanker fleet and, you know, British-based insurance within, you know, six to 12 months, right? I don't think rare earths are like that. I think it'll take at least, you know, three to five years to really build up sizable alternatives to China. So I think what that means is two things. One, we don't have any time to waste. We need an all-hands-on-deck approach. The US so far has actually been pouring a lot of money into this in the last few months. The Trump administration bought 15% of the equity of MP Materials, which is the one sort of rare earth mine in the United States in Mountain Pass, California. They also provided 10 years' worth of advanced purchase agreements and price floors, basically doing everything they possibly can to de-risk not only the production of rare earths, but also the setting up of magnet production. They're really trying to build an integrated, a vertically integrated rare earth magnet producer out of MP Materials. I think the challenge with that is it's, you know, [a] picking winners strategy, right? You're putting all your eggs in one basket, into one company that, you know, doesn't really have much of a track record. I think to actually successfully break this chokepoint in short order, or at least as short order as possible, you need an approach that takes advantage of all the resources at your disposal, not just in the United States, but also critically, in allied countries. So working with countries like Australia, other countries in Southeast Asia and the Indo-Pacific, as well as Europe, to really figure out, can we sort of divide and conquer? Where are the actual minerals that we can source? Where can we build these refineries as quickly as possible? We honestly need a strategy similar to what the Trump administration's most successful policy was during its first term, Operation Warp Speed, where within a year we tested and brought COVID vaccines to market. Critically, of course, that wasn't all domestic, right? I mean, the Pfizer COVID vaccine was the first one, I think, that was approved in the United States, was intellectual property that came out of Germany, right? It was BioNTech. And there's a deeply integrated European-US collaboration that occurred from these vaccines, of course, driven by American industrial policy. So I think we need something similar to that. On Trump's Asia trip, there were some positive signs that some of these sort of alliances around critical minerals are being built. But as you guys know, as well as I do, trust for the Trump administration is quite low, even in allied countries now, because a lot of them have been hit by Trump tariffs and other economic pressure, and we're sort of forced into these lopsided trade agreements. So I'm hopeful that Trump can sort of keep his eye on the ball and realize that this is the most important priority right now, but there is going to be some trust that needs to be rebuilt amongst allies.

Luke: So one of the distinctions you made at the start was between, sort of, the old way of thinking about chokepoints, that they were physical and geographical, and then this new way of thinking of chokepoints, that they are institutional, structural to the global economy. But I wonder, is there a steel man version of some of what Trump is doing in foreign policy, and shall we say, his strategic interest in Panama and Greenland. That this is also about chokepoints, and it's a strategic bet that physical chokepoints will remain an extremely important part of competition with China, and it's about either exerting control over physical chokepoints that are significant now or might be significant in the future, or at least denying that those chokepoints could come under the control of an adversary. So, is the Trump administration thinking in those strategic terms, do you think?

Edward: I do think so. One thing I seek to do in my book is explain this phenomenon of just a secular rise in the use of economic warfare, where the US is imposing sanctions, tariffs, export controls exponentially more year on year. And now that trend has gone global, in which it's evident in the Chinese data and the European data and the British data, where each of these countries and governments is using sanctions and other restrictive economic measures more and more. The framework I propose in the book is what I call the ‘Geoeconomic Impossible Trinity’, where you have these three factors, economic interdependence, economic security, and geopolitical competition, in which governments really can only maximize two of three at the same time. So for instance, during the Cold War, obviously the West and the Soviet Union have deep geopolitical competition, but they don't have any economic interdependence. And so both blocs are able to feel a sense of economic security. You know, we're not too worried about Russia shutting off our access to rubles, and Russia's actually not too worried about us shutting off their access to dollars. In the 90s, the hyper-globalization period we talked about earlier, we no longer have any meaningful geopolitical competition. The US and Europe viewed China and Russia more as potential friends than rivals. And so, we feel free to embrace economic interdependence with the Chinas and Russias of the world without losing our sense of economic security. As discussed earlier, when we decided that we were going to rely on China for key parts of our supply chain, we weren't thinking that they were going to be weaponized against us. And when China started dollarizing large parts of its economy, they weren't thinking that it was going to be weaponized against them. But the phenomenon we have today, and that's really played out over the last decade or so, with really the acceleration of the age of economic warfare, is that geopolitical competition has come roaring back as economic interdependence persists. And so, every major economy in the world has lost its sense of security, lost its sense of economic security. That's why economic security is a watchword in every capital. Certainly in Washington, in Brussels, in Beijing, in London. This is sort of on everybody's lips. Even the Japanese have created a full-time government minister for economic security. And I know one of the European commissioners now is a, they have a commissioner who does economic security. So that's what's happening out, happening now. So my own view is, you know, it's politically impossible for these governments to feel like they don't have economic security. So I think over the next 10 years, you've got to resolve this. It's going to happen through a reduction in economic interdependence. I think that's, sort of, the part of the trinity that's going to fall. What does that mean? I think there's two possible outcomes. One is you get a bloc-based global economy where the US, Europe, Britain, Japan, Australia, India, sort of come together in even deeper interdependence than they have today, but then they simultaneously lessen their interdependence with the Chinas and Russias of the world. And you probably have a similar phenomenon play out across the authoritarian powers. I think that's probably where we were headed if you had sort of a traditionalist president like Joe Biden in the US. I think Trump, his perspective really isn't that of a bloc. I really think that when push comes to shove, his mentality is that of autarky. It's that of: we don't feel secure unless we physically control the resources that we need. And by the way, that's not a mindset that's that abnormal. That is the mindset that underpinned European imperialism in the 19th century, where in order to have access to resources, it wasn't, you know, let's cut a trade deal with India. It was, you know, let's colonize India and control them, you know, physically. And so, I do think when you look at Trump's, just his commentary on Greenland, you know, we need Green… we need to, Greenland needs to be part of the United States because we need the critical minerals. Historically, you would have thought presidents say, well, Greenland has all these minerals, let's cut a trade deal with the EU, because Greenland's part of Denmark, and we will then, have access to these minerals without having to pay tariffs, and we can, invest in them, and that's just as good as having Greenland as part of the United States. I think when you have the mindset of autarky, you don't feel confident that you have those minerals unless you actually plant the American flag, you know, above the mines. And so, I do worry that that mindset of autarky, maybe not imminently, I don't necessarily think we're going to have the 82nd Airborne land on Greenland tomorrow. But I do think if we are heading toward a global economy that is more autarkic in its sort of mentality, obviously you might not fully get there, but one where every country is sort of seeking self-sufficiency in these chokepoints, you're not just going to get slower economic growth, but you are going to get a higher temptation for imperialism and military conquest.

Luke: All right, I think that is all we have time for this week. So as ever, please forgive me if I remind you to like and subscribe wherever it is that you get podcasts. And then all that remains is for me first, to thank Edward, Eddie, Fishman for joining us. Today his book is Chokepoints. It is a fantastic read. I cannot recommend it strongly enough, both as a pleasure to read, but also its insights to understand the global economy. So thank you, Eddie, and thank you all for listening. Speak again soon.

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