The Rise of the Economic Security State

26:08It's that if you want to have your indigenous production system, you're dependent on China for the technology. And so it's very much like a mirror image of the US use of ASML against China for semiconductors. ASML is the Dutch company that makes the lithography for the semiconductors. It's this key machine tool part for the semiconductor industry. You're now seeing that strategy being run against us, but in the critical mineral sector. And so I think this is where actors are realizing that they can't just find an alternative supply because they need the whole stack of technology, and China has come to dominate that.

26:46So I just wanted to add to that that there's another piece in the same issue of foreign affairs which I think is useful to think about this. This is the piece by Arthur Kroeber and Dan Wang, whose book came out a couple of days ago on Tuesday. And one of the points that I think Dan in particular hammers home again and again and again is the crucial importance of process knowledge. This is something which doesn't really appear very much in the planning of grand strategy because it's very, very difficult for people, say, for example, in the State Department or whatever to get their heads around it.

27:21But the capacity to build up a detailed understanding of manufacturing processes can provide a powerful source of advantage, but also can provide something which is much, much more difficult for the United States or for other actors to manipulate than choke points. So I think when we begin to move to thinking about stacks of technology as well as choke points, we need to pay attention to the ways in which these not just enable choke points, but they also have positive advantages in terms of the capacity to actually produce good stuff at scale. And if we want to look at US-China competition, clearly the fact that China is leaping ahead of the United States in the energy sector and the energy industry and its capacity to do all of these physical things is an extraordinarily powerful source of long-term advantage.

28:12And it is really, really difficult for United States or anybody else to use choke points to try to manipulate this because it has to do with much more informal, much more tacit forms of knowledge, which don't really lend themselves as well to national security tools. You see bits and pieces happening around the semiconductor industry where the United States, under the Biden administration, did look to prevent U.S. persons from engaging with the Chinese manufacturing sector in ways that might be helpful to them. But these are pretty crude instruments and it's pretty tough to do well. Abe Henry alluded earlier to the speech by Secretary of State Rubio, where he talked about just how effectively China had cornered the market, as he put it, for rare earths and how completely American industrial capacity was dependent on Chinese supply chains.

29:01The two of you kind of see a very deliberate effort by the Chinese government to develop these tools over time, really going back to 2013 and the Snowden revelations. Describe that process, describe what the Chinese government did to develop these sources of leverage. And what is the kind of Chinese way of interdependence? I mean, Henry started to allude to this, but China seems to have kind of refined approaches that perhaps started in Washington. I mean, I wanted to start by saying, I think all of this just shows the lack of planning and how important interactions are between great powers. So this is not, from the beginning, some U.S.

29:38plan to dominate global infrastructures. And also, I think we have to be very careful about thinking about China as all seeing, all knowing about how these interactions are going to play out. And at least in our book, one of the things that we are continually just shocked by is how key actors talk about the lack of downstream thinking about what are the consequences of using these tools. So we have this one quote in Underground Empire where an interviewee talks about, what would this button do sanctions? And it's just kind of the lack of thinking about, yes, they can see, would it cut off supplies of key elements to an adversary?

30:18But then what is the adversary going to do in response? And that's in sanctions and export controls, the lack of that. And what we, together with some co-author, Yelling Tan and Mark Dallas, what we show in a paper that was in National Studies Quarterly, we show when the U.S. starts to use coercion, both in surveillance, in the case of the Snowden revelations, and in choke points in the case of Huawei and the ZTE coercive efforts, that what you see in China is a movement in a set of bureaucracies to elevate self-sufficiency. as opposed to kind of interdependence as the kind of strategy in technology spaces.

30:59And I don't think this is rocket science. You know, if you start to say, we're monitoring you and you're not going to get key things and we're going to box you out of key parts of the global economy, of course, China is going to start to try to think about self-sufficiency. And of course, they had already been doing that in other sectors. You know, that's what the China 2025, you know, it's not like they hadn't been thinking about, we need to develop our own economic systems. But you see that really escalating after the U.S. kind of puts the thumb on the scale in these different sectors. And what we described in the most recent piece is really how China is developing dependencies for the U.S.

31:38and Europe in key sectors, most specifically energy, in which there really is an asymmetric dependence on these technology stacks. And that that is, I think, very clearly being done intentionally. The government is sponsoring those types of efforts. And what we're very worried about is that US efforts to respond to that are being kneecapped right now. So you basically see the entire renewable sector, batteries, EVs, those areas, the government support that had been put in place is being eviscerated. And so we are basically at the same time that China is pursuing a very clear strategy, we are kind of left without anybody at the wheel.

32:20So one way to think about this is to get back to your earlier question about the earlier vision of liberalism that, in a sense, we began by criticizing and talking about the ways in which this paradoxically worked in favor of U.S. power and U.S. strategy in ways that would not have been possible had it been a deliberate strategy. That is people bought into U.S. systems because they seemed attractive. They bought into the internet. They bought into all of these platforms, which have turned out to be problematic in a variety of ways, because this seemed to be the way forward, because the United States seemed to be offering a positive vision of the world in which everybody was going to do well.

33:00So I think that paradoxically, the weaponization that we described would never have become nearly as possible as it was if the United States have been thinking about this strategically in ways that almost inevitably would have leaked out. And so I think we see two versions of why this is so much more problematic at the moment. One is the remarks from the US administration, which suggested that the reason why the United States was providing China with access to chips again for training AI was because they wanted more or less to keep China hooked. And this turned out to be a particularly unfortunate statement given the history of the 19th century and the opium wars and what the United Kingdom did.

33:41But even without that, I think this is not exactly how you get people to buy into your technology by saying, we want you to buy in in order to create dependence. And I think the other side of what Abe and I are saying in the longer term is, if the United States wants to restore genuine strategic advantage in the global economy, it cannot just do this by keeping on building choke point after choke point after choke point. It has to figure out ways to provide a genuinely attractive vision of how people can work together. And probably given all of the stuff that has gone down over the last couple of decades, it needs to figure out ways to actually build in some actual external forces, which would allow it effectively to credibly commit that it is not going to use these to screw over powers and other countries that become dependent on the United States.

34:33Of course, we don't have a specific strategy for how to do this. This is an extraordinarily difficult challenge to meet. Nonetheless, I think if the United States wants to re-establish itself, it cannot just think about how can we retaliate against China. It has to think about what it can do to make itself more attractive than China or other powers in a world where other countries, I think, increasingly are going to have choices. The Donald Trump approach has been to assume that they don't and that they can be manipulated and coerced without any blowback, I think that over the next couple of years, we're going to start seeing some very stark limits to that assumption.

35:13And the US is going to have to start thinking differently. Abe, you wrote a piece, not with Henry, but with another co-author shortly after the November election last year, arguing that Europe needed to get much more serious about building up its economic security state, its ability to use some of these tools. That does not really seem to have happened. I mean, it developed tools, but it hasn't really used them. And I imagine there are lots of other players out there right now. India comes to mind as it faces these somewhat surprising, really draconian economic penalties from the Trump administration.

35:44Other actors who probably wish that they had an ability to play this game as effectively as the US and China did. Does it strike you that others are, in fact, developing the ability to do this? Or is this really just kind of a tool that will be used by the two great powers and others will have very little leverage for the ability to influence them. Yeah. I mean, I think there is a glass half full. I'm a very optimistic person. I like to be an optimistic person. And on the one hand, Europe has made a radical transformation in about five years in the sense that its whole DNA was the old vision of globalization.

36:19It's, you know, the Treaty of Rome. It's based on the freedoms of movement, of labor, of capital, of finance, of goods. It's all about openness. It's about, you know, peace through trade. So it is a big step to say, you know, we are actually in a world where this is creating vulnerabilities. And whether it's the president of the commission, Ursula von der Leyen, former vice president, Vestager, you know, multiple actors in the EU have said, we're in a world of weaponized interdependence, and we need to prepare. So that I think is quite dramatic, and we shouldn't underestimate that. That being said, you know, know, the piece that I wrote with Agathe de Marais was basically saying, it's not enough to recognize this world.

37:03You have to, A, create the institutions to protect yourself, like we were talking about with the Chinese. You know, in Europe, it's like, just take sanctions. Like, there's no work chart that, like, if you're in Germany, who do you call to enforce sanctions in Malta or Cyprus or Poland? or there's no clear coordination mechanism in these very, just very basic parts of the economic security landscape. And then at the same time, what is the strategy in terms of your interests? And that, I think, is another place where for too long, Europe has just been willing to defer to the United States. And again and again, we're seeing the United States and EU diverging.

37:44So take the threats basically daily against EU digital policy. This isn't going to be solved by some deal, negotiation. This is a fundamental difference in values about how you should run your political system, where the Trump administration is saying, you know, if you try to regulate social media, we're going to threaten you with coercion. So in that case, Europe has to realize that they need the institutions and also a strategy that they're willing to back up. And too often, they basically go short-termist and say, well, how can we keep our head down, get a deal, stop any kind of long-term change.

38:23But the reality is we are at a once-in-a-generation transformation in world order where that system, that post-war system is basically over, and Europe is really in a bind because they were so embedded in that order. Henry, I want to go back to this idea of the tech stacks and that being the really important tool here, important question here. You're, of course, relatively pessimistic about what Trump's use of these weapons means for American power over the long term. But when you look at the American technology sector, it looks pretty strong. The stack looks pretty good. Is that too optimistic?

38:57So I think it depends on what you think the stack is going to do. So here, I think that if you look at the United States, I think that there is a doubling down on a small set of technologies in the assumption that these are going to be transformative. And here, AI is the obvious example of this, where I think that the United States, there has been a general bipartisan agreement, in part promoted, I think, by the AI labs, by people like OpenAI, by people like Anthropic, which I think sort of centers on two fundamental assumptions. One is that we are right around the corner from artificial general intelligence, or AGI, or even artificial superintelligence, and that once you get there, whoever gets there first is going to be able to reap profound advantages.

39:46And secondly, that this then means that this is a fundamental question of geostrategic competition, that if the United States gets there first, it will be able to create a new American century. The idea here is that once artificial intelligence gets sufficiently powerful, Once it gets past human capacities, it can improve itself in an iterating process where it builds very quickly an absolutely insurmountable technological lead, which provides a kind of cornucopia of other technologies, some sort of military technologies, health technologies, other things that will flow from that. And I think that this is a really tricky bet to make.

40:25Myself and a few co-authors have a piece that came out in Science a few months ago where we suggest that this is simply not compatible with how large language models work, which is, of course, the form of intelligence that most people are doubling down their bets on. And so I think we might end up in a world where some of the U.S. advantages will still remain, but they won't turn out to be nearly as much of a game changer as people expect. The consequences of AI, as it becomes generalized, are going to be much messier, much less predictable, and much less easily converted into a military and strategic advantage than people expect.

41:05And the other big bet that the United States is making at the moment, which is getting much less attention, is the bet on stablecoin. So I think that if you look at how the United States thinks about currencies, it is now effectively looking to integrate stablecoin into the US dollar system. On the assumption that this is a particular kind of cryptocurrency, which is usually very closely associated with US dollar, on the assumption this is going to create new forms of payment channels that are going to effectively magnify US power and become deeply integrated into the financial system of other countries.

41:41And here again, this is the kind of thing which would have worked much better a couple of decades ago at a time when the United States was not as overtly looking to secure strategic advantage. The European Union is looking to rapidly accelerate progress on its digital euro. China is obviously looking to try and figure out its options. It has a more complicated set of options for a variety of reasons. And other countries aren't necessarily going to want to buy into a system which both promises the risk of greater instability and also promises the possibility of increased U.S. coercion. And here, this goes together with all of the stuff that is happening over about the U.S.

42:24Fed. If we're in a world where the U.S. Fed is effectively having its power watered down, and also a lot of the action is moving to much less controllable cryptocurrencies, which actually do hold significant amounts of Fed reserves at the moment, we could see a rapid destabilization, which could turn out to be extremely problematic for long-term US power. So I think that you can take the over on the bet or you could take the under. I am most emphatically taking the under. I think that this is going to be, at best, much more complex and messy and difficult, and at worst could actually fundamentally damage the foundations of US power if we are not quite lucky.

43:05Let's broaden that question to world order. As Abe, you alluded to this earlier. What is a world order that is driven by weaponized interdependence used by all actors? And as you think about what that order might look like, what the kind of key questions we should be asking now are as we understand that order, what are you focused on? I want to maybe just pick up on what Henry was just talking about and connect the two, which is I think a lot of people focus on overuse of these tools by the US or by China, that that will lead to this backlash. But I want to just emphasize that in much of our work, the thing that we point to as a thing that will really undermine US power in the system is the demise of the rule of law in the United States.

43:52Because the credible use of these tools and the legitimacy of these tools rely on the idea that this is not just a king forcing people to bend the knee. It is a system that is based on transparency, accountability, and predictability. And that's why people continue to use the economic markets that create that structure I talked about earlier, those hierarchical points. Weaponized interdependence, the whole vision is that globalization creates a topography of economic interaction and that that creates chances for power. If you destroy the rule of law, you were going to transform those markets, those markets will no longer be the center of economic exchange because people will not be able to rely on them.

44:36If there's just rampant government taking of economic activity, then people will decentralize because they see that that is not safe. I mean, it's, you know, go back to the glorious revolution. I mean, this is a story as old as time, cue the Disney princess song. You know, like we need to think about how the order that we have just come to understand, it really relies on basically rule of law and democracy. So that's the first thing I just want to say. The next point I think is if we want to create a stable order in this world, because I think Henry and I both believe you can't go back. We're not going to go back to the kind of neoliberal heyday.

45:14And so we're going to be in a world where economic interaction creates coercion. First, we have to create a some level of norms, principles of how to use these tools. Like as we talked about earlier, so much of the actions have been the fog of war of people just using these without really thinking about consequences. So you need to have kind of an understanding of what is legitimate use of economic coercion in the system. So Elena Chaco and I, she's a law professor at Berkeley. We have a piece coming out that's kind of looking at that. Well, how could you think about the norms of economic coercion?

45:48What is responsible use? And it goes back to in the piece that we just published in Foreign Affairs, kind of drawing out the nuclear weapons analogy. When nuclear weapons comes on the scene, there's no rulebook. We don't have mutually assured destruction, all these kinds of ideas that we have, escalation scenarios. Those have to be created by these kinds of conversations. So I think the first order of business is just saying, in this world, how do you create equilibrium that are more stable than not? And right now, actors aren't even thinking about that. And then the last point I just want to make is what Henry and I have always been emphasizing.

46:22people need to study, think about direct policy in a way where economic and security issues are linked. Because for too long, they've been siloed from each other, and you're never going to get an international order, a stable order, if people keep doing that, because it's just they're so intertwined in this world that we currently live in. One super quick point I'd want to add to that is that increasingly, the things that Abe and I are concerned about are not just being applied in international politics, but in domestic politics too. So here, if you think about our fundamental initial intuition that led us to this was how it is that the apparently boring infrastructural parts of the global economy are being weaponized, that is happening domestically a lot.

47:04And the ways in which it is happening are very often linked to national security justifications of one sort or another for doing things that really are aimed, I think, much more directly and much more crudely at securing particular advantage in political fights. And the more that this happens, the more that the rule of law questions that Abe and I are concerned about are going to be increasingly damaging to the capacity of the United States to actually get things done. Let me linger on the nuclear weapons analogy that is in some ways at the center of the new essay. If you look back at the history of nuclear weapons, it took almost two decades to get from their initial development to real frameworks governing their use and in some ways took not just developing real expertise and scholars and policymakers who understood the connection between nuclear weapons and geopolitics more generally and policy more generally, but also a really serious nuclear crisis, the Cuban Missile Crisis, which was the kind of beginning of an effort to get really serious about arms control and strategic stability and everything else.

48:08What would a Cuban Missile Crisis look like that might get us to the kind of agreements that, Abe, you were referring to recently? Abe, since you conceded to being the optimist, we'll start with you here, and then, Henry, I'll cast you as the pessimist, and you can close. I think in some ways we've already seen those moments. So in Underground Empire, we describe the way that the Libra initiative, the meta-led stablecoin initiative, really was a moment like that for China. They started to see where dependency on such infrastructures that were going to be formed would get them in a place where they would be dependent, and that that pushed them to really think differently about how infrastructures and power were linked.

48:46At the same time, my concern is that these conversations keep getting back-ended because the crisis isn't as transparent as a mushroom cloud going off in a city, but they are just as consequential in terms of the economic and security ramifications for the system. And so it is easy to collapse that 40-point thoughtful strategy on how to use sanctions responsibly to a few basic principles that become voluntary. And so what I'm very just worried about is short-termism by policymakers of looking for the easy answer. And usually that's, in this case, coercion, rather than thinking about creating a sustainable policy environment.

49:32But it is amazing in just five or six years how the conversation about economic security, about weaponized interdependence has gained traction. I mean, when Henry and I started working on these things, people thought we were just so weird. You know, like this was like such a marginal set of conversations for most people. And we've been working on this for almost 20 years. And for the first half, like we were sidelined at basically every, you know, intellectual conversation because people just couldn't see how this was such a critical set of issues. And today, there is an explosion of people thinking about these very questions about responsible use, about downstream consequences, about how countries will react to create their own hubs of Bayesian.

50:20And so I'm very optimistic. Now, whether it'll happen in time is a very different question, but that there's an effort happening, it's clear to see that that's the case. So, Henry, if that's what passes for optimism, what worries you as you look forward? Okay, so let me give the bear case for this. First of all, I don't know where the crisis is going to happen. I feel like the world system is like there's a famous XKCD cartoon, if you're a tech person, which shows that this is basically there's some hugely important technological system. And it's all maintained. There's one crucial support, which is some random dude in Utah who's doing it in his spare time.

50:58I sometimes feel like the global financial system and infrastructural system is a little bit like that. That is, there are many, many different pieces, which if the wrong one is pulled out, the whole thing collapses like a badly constructed toy tower. And I do worry that we are going to see that happening, but I don't know which particular piece it is that is going to be pulled. And if that happens, I think it's going to be really much more difficult in some important ways than it was back in the 1960s after the Cuban Missile Crisis to put things together. Because if you read, and I think you're absolutely right, the Cold War system really begins after the Cuban Missile Crisis, because this is the moment at which you begin to get the USSR and the United States constructing telephone lines.

51:41they begin to get their various generals and their nuclear scientists to meet together to try and figure out informal understandings, which involves, as far as I can tell from people who've looked at this, like Emmanuel Adler, getting drunk a lot together and, you know, sort of figuring out how each other work. Now the problem is that this is not just about generals and nuclear scientists. This is about a huge swathes of the commercial sector. You know, this is about AI. This is about semiconductors. This is about a multitude of different economic sectors, all of which are outside of the ambit of the state, all of which involve their own very difficult and complicated internal politics.

52:22And so really trying to do this at scale involves trying to pull these people together, these various quarreling groups, into some kind of minimal form of agreement. I don't think that this is impossible, but trying to figure out even how you begin to do that is, at the moment, for me, at least something I just don't see how you begin to take those first steps. Henry, let me try to pull you into optimism to close. If you look at the June framework agreement between the US and China that the two of you focus on in the piece, and you look at the ongoing diplomacy between Xi and Donald Trump, two leaders who have a degree of control over the private sectors in their country that we have not seen in the recent past, is this, in fact, a formula to getting to that kind of agreement?

53:03Okay, I'm going to take the second part of this because I was actually thinking about this as you were posing the question, which is we are seeing a fundamental transformation, possibly, of the United States economy. That is, we're seeing the government being much more willing to take stakes in Intel. We're seeing Lutnik talking about how Lockheed Martin and other companies need to be partially nationalized. And how much of this stuff actually happens, I don't know. And it's also interesting to see people like Adam Tooze, who are perhaps not entirely averse on the left to seeing these big steps happening because they think that we do need some kind of coordination to happen.

53:43So if you want to take the optimistic bet on this, and it is a form of optimism which is salted with so much pessimism that I don't know it's even palatable, I think that you could say that at the same time as these are more complex threats are emerging, We are seeing increased hierarchy in the economy, which can have all sorts of other terrible consequences. But if you are focused on this very specific question of how you get agreement across the board, might be capable of doing so in ways that might have been impossible in a world of a decade or 15 years ago, where we saw, for example, a much more direct hostility and unwillingness to coordinate between the tech sector, for example, and the government.

54:27How this is going to work, I think you would need a ton of optimism that this is not going to have disastrous consequences the short term. Perhaps in the longer term, there might be some extremely qualified optimism. Let's close there before we take a pessimistic turn. Henry, Abe, thank you so much for the fantastic recent essay on Foreign Affairs and the series of pieces you've done over the last decade or so. And thanks so much for joining me today. Thanks, Dan. Thank you so much.

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