The new economic arms race

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0:36This is The Indicator from Planet Money. I'm Adrian Ma. And I'm Julia Ritchie. Okay, Adrian, pop quiz. Okay. This is fill in the blank, straight of blank. Horseshoes. No, of course, I meant to say Hormuz, the straight of Hormuz. Yes, yes. Ding, ding, ding. The answer is straight of Hormuz. who by now does not know the name of this narrow stretch off the Persian Gulf, the key shipping lane through which 20 % of the world's oil and liquid natural gas flowed. The Strait of Hormuz is a perfect example of how modern wars are increasingly fought not just with drones and bombs, but with what Edward Fishman calls economic choke points.

1:16Edward Fishman:So choke points are parts of the global economy where one country or a coalition of close allies holds a dominant position and there are few, if any, substitutes. Edward is director of the Center for Geoeconomics at the Council on Foreign Relations. He also worked at the State Department during the Obama administration. I left government concerned that we were in an age of economic warfare. And yet, even at the heart of power in Washington, even in the Situation Room, there wasn't enough understanding about how economic warfare works. Which is why he wrote a book about it called Choke Points, American Power in the Age of Economic Warfare.

1:52Today on the show, Edward says the U.S. pioneered this new type of economic warfare and explains how it sparked a new economic arms race.

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3:24Learn more at AmazonBusiness.com. Economic warfare is not totally a new thing. In fact, Edward Fishman says one of the earliest examples of economic warfare can be traced back to ancient Greece. It was the year 432 BC.

3:39Edward Fishman:On the eve of the Peloponnesian War between Athens and Sparta, Athens imposes a trade embargo on one of Sparta's allies, a country called Megara. The way that Athens affected that embargo, though, was through a naval blockade. They parked their navy outside of Megara's ports and said, you know, thou shalt not pass. You know, no ships in, no ships out. That's how we fought economic wars all the way up until the 21st century. For centuries, economic warfare meant taking control of geographic choke points. and controlling geographic choke points required military and naval power. But then in the 1990s, something started to change.

4:13The world economy became hyper-globalized. The U.S. dollar solidified its standing as the main currency for doing business. Companies increasingly sourced materials and manufactured their products in multiple countries.

4:25Edward Fishman:In the 90s, we embraced globalization, right? We assumed that economic interdependence was the best way for us to organize ourselves economically and politically. Well, those same bonds of economic interdependence are the choke points that countries are weaponizing. We get the creation of these economic choke points that have many of the same characteristics of physical choke points, but exist just in financial markets and supply chains. So a prime example of a financial choke point is the U.S. dollar. It's involved in roughly 90 percent of all foreign exchange transactions. I say that, you know, trying to do business around the world without access to the dollar is kind of like traveling without a passport.

5:05Edward Fishman:It's effectively impossible. If the U.S. wants to put pressure on another country's government, it can cut off their access to the dollar by blocking them from doing business with U.S. banks and banks in other countries. That's what the U.S. did with Russia after its full-scale invasion of Ukraine. And then there are supply chain choke points. That's where a country controls production of a precious resource or technology, and it blocks its adversaries from getting them. Edward points to AI semiconductors as an example, a market that the U.S. currently dominates. Starting in the first Trump administration, the United States has been progressively constraining China's access to these AI chips designed by companies like NVIDIA.

5:43Edward says one huge advantage to these financial and supply chain choke points is that they don't require military power to enforce them.

5:51Edward Fishman:All the U.S. president has to do is pick up his pen and sign a document, and it's done. No longer did you need to use naval blockades or sieges to impose economic pain on another country. And that's why I call the last 20 years really the age of economic warfare. It has been a revolution in terms of how economic wars are fought. Edwards says the U.S. may have started this revolution, but other countries have learned to use these same economic weapons. For instance, when the Trump administration imposed massive new tariffs on China last year, China retaliated by cutting off U.S. access to rare earth elements, a market that it dominates.

6:28Edward Fishman:These elements are essential to produce electric vehicles, batteries, to produce motors. They're essential to produce drones and missiles. And within a few weeks of China imposing this embargo on rare earths, Ford actually had to shut down one of its factories for the Explorer SUV. And Raytheon, the huge defense company, had to sort of scour the globe for alternative sources of rare earths for its missile systems. And so China showed that it had a choke point that could inflict grave damage on the U.S. economy, and that was sufficient to get Donald Trump to back down. And really, ever since China came out with those rare earth export controls last spring, the United States has been backpedaling from its hawkish position on China.

7:10And this is what Edward means when he says there's an economic arms race happening. Countries are increasingly willing to use economic choke points to their advantage.

7:20Edward Fishman:We're in a new period right now, a mutual vulnerability, right, where we're not just waging economic war, but we're also defending against other countries. As geopolitics nerds like to say, we used to live in a unipolar world, a world where the U.S. held most of the power, the weapons, and had no direct threats. And obviously, those days are long gone. There is a temptation to look at economic warfare and say, this is terrible. Shouldn't we just try diplomacy instead? And I can say economic war is not a friendly business. You know, taking away people's livelihoods, causing inflation. I mean, this is not nice stuff.

7:58Edward Fishman:It's not things that we should be doing arbitrarily or capriciously. At the same time, I think what we've seen is that more often than not, the alternative to economic war is not peace. It's not diplomacy. It's actually military force. So I think it's incumbent upon U.S. officials to wage economic war effectively. That includes thinking defensively about the choke points adversaries could use against us. The Strait of Hormuz is one glaring example, but Edwards says most of the other choke points he's concerned about stem from China, which the U.S. and its allies rely on for rare earths, solar panels, and pharmaceutical ingredients.

8:34So to reduce its vulnerability, Edwards says the U.S. needs to work with its allies.

8:40Edward Fishman:What I would want to see is the United States form a big block of allies, including in North America, in Asia, in Europe, India, sort of forming an economic zone of the free world, while we progressively reduce the choke points that China has over us. Basically, we go into a block-based economy from a global economy. Edwards says this would also allow the U.S. to more effectively use its economic leverage when it needs to, without wreaking havoc on our allies. Although, I mean, this has arguably not been a huge priority for the Trump administration recently. I mean, pretty much the opposite, in fact.

9:16True. In fact, Edward argues Congress should place limits on a president's ability to use things like economic sanctions. Because if there are no guardrails and the U.S. decides to go it alone, there's a risk that every other country does the same.

9:30Edward Fishman:If you have uncontrolled weaponization of economic choke points, not only are you going to break bonds between countries, you run the risk of a chaotic breakdown of the global economy. And what we saw in the 1930s is that when countries in a disjointed fashion throw up tariffs, impose sanctions, export controls, industrial policy, basically try to shut off their economies from the rest of the world in an uncoordinated fashion, what happens is you actually get a higher risk of war. because if you just think about it logically, if you don't feel confident that you can buy the resources you need on an open market, you don't feel confident that you can secure the investments you need on an open exchange, you may be tempted to seize them by force.

10:13Edward Fishman:That is what inspires imperialism and conquest. And that's the risk of kind of an unconstrained economic war of all against all. And in that kind of economic arms race, there are arguably no winners. This episode was produced by Corey Bridges and engineered by Robert Rodriguez. It was fact-checked by Sierra Juarez. Cake & Cannon is our editor, and the indicators are production of NPR.

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