- Anyone who pays even passing attention to world news has heard the term sanctions, but few might understand the power of the weapons developed by the United States to wage economic warfare with devastating effect.

Today's guest explains that power with skill and insight.

He's Edward Fishman this week on "Story in the Public Square."

(bright music) (bright music continues) Hello and welcome to "Story in the Public Square" where storytelling meets public affairs.

I'm Jim Ludes from The Pell Center at Salve Regina University.

And my guest this week is Edward Fishman, senior research scholar at the Center for Global Energy Policy at Columbia University, he's also the author of an important new book, "Chokepoints: American Power in the Age of Economic Warfare."

He's joining us today from New York City.

Eddie, thank you so much for being with us.

- Jim, thanks so much for having me on the program.

- You know, I mentioned this to you when we talked before, but "Chokepoints" taught me a lot of things that I didn't know, and I wanna get into it in some depth.

But before we do, do you wanna just give us a quick overview of the book?

- Sure.

So "Chokepoints" tells the story of how we moved from the global economy that I grew up in in the 1990s where we viewed economic relations between countries as win-win, to today, what I call the age of economic warfare, in which sanctions, tariffs, export controls have become the primary way that countries compete with one another.

Initially, this age of economic warfare came about sort of through contingent circumstances, to try to confront Iran to stop them from building nuclear weapons or to check Russian aggression in Ukraine.

But it's now gotten to the point where economic warfare has become such a pervasive factor in global economic relations and geopolitics writ large, that it's fundamentally reshaping the global economy itself.

So I thought this was an incredibly important story to tell, not just for people who are interested in public policy, but really for anyone living in the world today.

- And I have to tell you, it's a substantial book, but it is one of the quickest reads that I've done.

It's compellingly written, your research is tremendous.

Maybe we'll talk about that a little bit too and I do wanna get into the case studies, but I also thought this was a beautiful tribute to public servants.

There are a cast of characters here who are smart, they're dedicated, they're creative problem solvers, and they're committed to serving the best interests of the United States.

Reflect on that part of the story before we get to the case studies, simply because we're working in an environment now where the current administration does not seem to have quite the same sort of embrace of civil servants.

- Yeah, so, look, I actually think this is a directly important part of the story as well, because the origin of the age of economic warfare is the beginning of the 21st century where the US is already fighting wars in Afghanistan and Iraq, and we don't think we have the appetite for another war in the Middle East.

And beyond that, the wars in Afghanistan and Iraq are not going particularly well.

And so, when new foreign policy challenges come up, like Iran's pursuit of nuclear weapons, which really kicked into high gear in 2005, we kind of feel like we're out of options as a US government.

And thankfully, there are these creative public servants, people like Stuart Levey, the first Under Secretary of the Treasury for Terrorism and Financial Intelligence, who instead of sort of throwing his hands up, thinks about, well, are there creative ways that we can apply pressure to Iran?

And he really is the one who pioneers the modern use of financial sanctions.

And as we get throughout the book, when there are new challenges that come up, whether it's building a coalition to sanction Russia, you have diplomats like Dan Fried, a career foreign service officer, who really creates this new form of alliance-based economic warfare in the wake of Russia's 2014 annexation of Crimea.

And even during the first Trump administration, you know, China and technology experts in the first Trump administration crafting new forms of export controls to impose technological pressure on China.

So really throughout the story, it is these individual innovators in the US government, who sort of almost, you know, through their own hard work and sheer will come across these new strategies to deploy economic pressure on foreign governments.

Final point I wanna make if it's okay is, look, you know, oftentimes, I hear people say, "Well, you know, sanctions are so bad, they cause so much harm in other countries."

I think it's important to note that, oftentimes the alternative to sanctions isn't peace, it's actual military warfare, right?

And so, without these creative innovators, the US probably would be finding itself fighting more wars and less sort of campaigns where you're using nonviolent economic pressure.

- So anybody who's had even a passing interest in international relations for the last 80 years has understood that the US government often reaches for sanctions first when a local crisis threatens blowing up into something bigger.

What were sanctions like before this era that you're describing and these innovations that you describe?

Why were they different and why were they insufficient to the task that you faced?

And let's talk about that first case study, the Iranian development of a nuclear weapon.

- Sure, so I think it's helpful to look at what economic warfare looked like on the brink of this age of economic warfare.

So the age of economic warfare, I roughly date to 2005, 2006 to the present, right?

So it's really just the last 20 years or so.

The sort of most important case of economic warfare right before this modern era is in the 1990s.

So in August of 1990, Saddam Hussein, then the leader of Iraq, invades the neighboring country of Kuwait and annexes it.

Within 72 hours of that military campaign in August of 1990, the US and the rest of the United Nations imposes a full fledged embargo on Iraq.

And the goal really was to stop Iraq from selling oil on the global marketplace.

And, ultimately, the embargo doesn't work to actually get Saddam out of Kuwait.

So you wind up having Operation Desert Storm in the Gulf War that does that.

But even after that war in 1991, the embargo stays in place, basically as a way to try to prevent Saddam from building weapons of mass destruction.

The way that the US and its international partners set about stopping Iraq from selling oil on the global marketplace was through a multinational naval blockade.

For that entire period, so from August of 1990, all the way up until 2003, when George W. Bush launches the second bigger invasion of Iraq, 24/7, you had ships from over 20 different countries patrolling the Persian Gulf.

And anytime an oil tanker crossed by where they were suspicious they might be carrying Iraqi oil, they would dispatch commando teams by a helicopter to board the ship and inspect it and even send oil samples out for laboratory testing.

So as recently as the 1990s, when you had this oil embargo on Iraq, you really needed two things to make that work.

You needed the support of the entire United Nations, which in some ways was quite lucky, in that it's right at the end of the Cold War and you had unity amongst, you know, Russia and China, the US and Britain and France for the first time.

But then, even more importantly, you need the use of military force, this was an embargo that wasn't executed by the Treasury Department or the State Department, it was executed by the Pentagon.

It was the military that was trying to stop Iraq from selling oil.

And, of course, the problem with that is that a naval blockade is just another form of warfare and it's very easy to get from a naval blockade to actual kinetic strikes to get to a full fledged war.

The advent of modern sanctions in the 1990s, you get hyperglobalization, the creation of these choke points in the global economy, the dollar-based financial system, where Russia, China, those types of countries had not been part of it during the Cold War.

They enter in the '90s, and so, today, when the US government wants to impose significant economic pressure on a country like Iran, you don't need a naval blockade, you can literally just threaten Iran's trading partners with being cut off from the dollar and deploy completely nonviolent forms of economic pressure.

So it's created a system where the threshold for deploying hard hitting economic weapons has gone significantly down 'cause no longer do you have to put American troops in harm's way, whereas the impact has gone significantly up.

And that's why it's proven to be this irresistible lever for every US president of the 21st century.

- Yeah, if I remember correctly too, there was also some criticism of those broad sanctions against Iraq in the 1990s that the impact on civilians in Iraq was a level that seemed disproportionate to what the United States was trying to achieve at that point.

But in the case of the Iranian nuclear program in this century, what specifically were the sanctions designed to do and how were they developed?

- Sure, so I think it's helpful to go back to the mid '00s, right after George W. Bush is reelected in 2004.

At the time, we're already fighting a war in Afghanistan and one in Iraq, the war in Iraq in particular was quite controversial because right when Bush was reelected in 2004, the Iraq Survey Group comes out with its report showing that Saddam Hussein did not have weapons of mass destruction.

So the US had just invaded Iraq to try to get rid of a nuclear program that didn't exist.

And yet, simultaneously, the country right next to Iraq, namely Iran, which was multiple times larger than Iraq, more powerful than Iraq, was actually building an industrial scale nuclear program.

And, in 2005, the Iranians elect a populous hardliner as president, Mahmoud Ahmadinejad, whose completely committed to building out this nuclear program.

So it puts George W. Bush in a very awkward position because he doesn't have the political capital to fight another war in the Middle East.

Sanctions don't feel like a good option because you don't have unity at the UN for the type of embargo that was opposed on Saddam.

And if you were to do a naval blockade in the Persian Gulf against Iran, that's probably a prelude to war.

What happens then if the Iranians fire on those ships?

You could very easily wind up seeing how that becomes an even bigger war in the Middle East.

And so, the Bush administration kind of feels like they're out of options, and President Bush says as much, he basically says, "We're out of options."

And it's at that moment when this guy I was mentioning earlier, Stuart Levey, the Under Secretary of the Treasury for Terrorism and Financial Intelligence, kind of takes Bush's frustration as a personal challenge and says, "I need to offer the President economic leverage that he doesn't have."

And he winds up having this epiphany one day when he's in Bahrain, flipping through the Financial Times, when he reads an article about a Swiss bank that has cut ties with Iran of its own volition.

And it clicks for him that maybe it's okay if the US can't persuade the other members of the UN Security Council, like the Chinese government, to support sanctions on Iran.

Maybe it's okay if you don't wanna do a naval blockade against Iran.

If you can just persuade banks around the world, in places like London and Singapore and Frankfurt and Dubai to cut ties with Iran of their own volition, which you can do by showing them how their banks oftentimes unwittingly are being used by the Iranian regime to funnel money into their nuclear program or to support militant proxies, like Hamas and Hezbollah, you can persuade most of these banks to cut ties with Iran just out of sheer reputational concern.

And for any bank that maybe says, "You know what?

I'm willing to take that reputational risk, I'm gonna keep doing business with Iran," you can threaten to cut off their access to the dollar.

This all important choke point in the global economy if they don't comply.

And so, he really pioneers this new form of diplomacy, of government to business diplomacy that's incredibly successful at isolating Iran from the international financial system.

- So, you know, we could go a million meters deep on this, but I'd like you to say just a little bit more about, how do you actually cut off access to the dollar and why is that so important in the global economy?

- Yeah, so the dollar most people know is the global reserve currency, which, you know, technically means that most central banks around the world hold their reserves in dollars.

It's true, 60% of all global central bank reserves are held in dollars.

But that actually understates the dollar's importance, it's actually the default currency for all international trade and finance.

It's the number one store of value, medium of exchange, and unit of account.

And probably the best statistic to encapsulate that is the biggest financial market of them all, which is the foreign exchange market 'cause that captures every single time one currency is exchanged for another, $7 trillion in transactions on a daily basis.

90% of those transactions have the dollar on one side or the other, because the dollar is used in cross-border payments, it's used in cross-border capital flows.

And so, the way that the US government can police this is they can tell US banks that they cannot transact with certain individuals, companies, or even full countries, right?

If you're the US government, you can say, "It is illegal for you to transact with the National Iranian Oil Company."

And all of a sudden, if you're a Chinese refinery and you're trying to pay the National Iranian Oil Company for their oil, you cannot do that transaction.

And so, it gives the US government tremendous power.

The one sort of addendum I would add to that is, and I think it's what makes economic warfare so interesting is that the US government is the one setting the policies, or if it's China or Russia, it's the Chinese government or Russia government setting the policies, but it's actually individual businesses who are implementing it, right?

It's banks themselves who are freezing dollar transactions and blocking access to the dollar.

It's not like there's a button, there's no button in the US Treasury Department to cut off someone's access to the dollar.

You're literally just putting out a list, it's called this list of specially designated nationals that shows sort of the foreign companies and businesses who are off limits.

And then, it's up to banks themselves to police it themselves.

- It's a remarkable innovation.

In this particular case, it was pioneered in the Bush administration, but an example of bipartisanship, it's really taken to the next level it seems, by the Obama administration.

What does the Obama administration do?

And what does it ultimately achieve in this economic warfare against Iran?

- I'm glad you brought up bipartisanship because it's not a word you hear thrown around the US these days very often.

But Stuart Levey, you know, who is this Republican lawyer, who's a very senior Bush administration official, is actually reappointed by President Obama when he comes in in 2009 'cause Obama realizes, "This is working extremely well, I want to continue building economic leverage on Iran 'cause I want to be able to get rid of their nuclear program without firing a shot, right?

Without fighting a war."

And so, Levey carries forward this campaign throughout the Obama administration.

He eventually hands it over to a successor, a guy named David Cohen in 2011.

And we get to the point in 2012 where the one sort of remaining part of Iran's economy that still has connectivity is the oil sector.

That's because Iran is selling two and a half million barrels of oil on the global market every single day, and there's fear that if you were to cut that off immediately, you would cause a giant spike in global prices.

Well, what happens is the Obama administration comes to an agreement with the US Congress at the end of 2011 that they'll impose sanctions on anyone buying Iranian oil, but they will give them an exception, they can continue to buy this oil if they significantly reduce their purchases every six months.

So if you're a Chinese oil refinery or an Indian oil refinery, you can keep buying Iranian oil without fear of losing access to the dollar, if you can prove that every six months, you've decreased your purchases by, you know, 15, 20, 25%.

And so, what that does is it creates kind of this stable off ramp for Iran's oil sales to decline gradually over time, which then also sends a signal, a market signal to shale producers in the United States, including my home state of Pennsylvania, including, you know, the parts of the Midwest and the Gulf in the United States to drill for more oil.

And so, basically, they create a system in which Iran's oil sales fall by about 60% in a year and a half.

And at that same time, the US oil production compensates for the loss, so you don't have this catastrophic spike in prices.

What that ultimately leads to is a situation where Iran's economy is in free fall, they elect a new president, Hassan Rouhani in 2013, who explicitly campaigns on the premise of trading parts of the nuclear program away in exchange for economic relief.

And within a few months of Rouhani being inaugurated in the summer of 2013, we get the first nuclear deal with Iran that freezes their program.

And so, I think, in some ways, and I was in the US government at the time, so I remember this very well, it really felt almost magical that the US government, just by basically using legal tools, by signing regulations, not by putting any troops in the Persian Gulf or anything like this, had dealt with this vexing problem of Iran's nuclear program that had been at the very top of the national security agenda for almost a decade.

- It's remarkable, it's a remarkable example of policy innovation and success.

Why do you call it economic warfare?

- Because I think that, sometimes, when we use terms like sanctions or export controls, they're almost euphemistic, right?

Those are levers, right?

The same way that, you know, bombs or aircraft carriers or bullets are parts of military warfare.

And I think that it's important not to undersell what we're doing.

You mentioned earlier that the Iraq sanctions in the 1990s caused a lot of civilian harm.

The truth is, anytime that you're doing full-fledged economic pressure campaigns, including even when you don't use naval blockades, like the sanctions I just mentioned against Iran, you are causing civilian harm, right?

It's very difficult to impose precise pressure on a foreign leader, right?

It's, I think, frankly, impossible to use sanctions to impoverish someone like Vladimir Putin or Xi Jinping.

So, generally speaking, the way that sanctions work is you impose broad-based macroeconomic harm, oftentimes, that is felt by everyday people, frankly, more than it is by governments and elites.

Those everyday people start questioning, "Well, why is it that my government is so intent on building a nuclear program?

Why is it that my government thinks it's so important for us to colonize Ukraine and rebuild the Russian Empire of the 19th century?"

And they start saying, "Well, wouldn't it be better if I had my livelihood back?"

And so, it winds up being pressure from below.

I think when you use the term economic warfare, it raises to the level of seriousness that you say, "We should only be using these tools when they're absolutely necessary."

We should not be using them frivolously, we should not be using them when we don't have a clear goal in mind.

And I think that it raises the level of seriousness and the threshold, hopefully, for the use of these tools in the US government.

- So you described in the book subsequent cases where the US government turns to these tools, Russia's invasion and seizure of Crimea in 2014, the shootdown of MH17, the Malaysian airliners shot down by Russians separatist forces over Ukraine.

Also China's effort to sort of corner a portion of the global market on technology.

The question that I pondered as I read this, and I think you just hinted at it a little bit is, is there a potential for blowback?

That if this is such a successful and powerful tool in America's hands, do America's adversaries then begin to think of this as something that they need to counter, that they need to build systems that are gonna move outside of American control to void the choke points that you write about?

- Yes, for sure.

There is sort of, for every action, there's an equal and opposite reaction.

And I think when you use these tools, at the very least, whoever you're using it against is going to hedge against you, right?

So, of course, once you start sanctioning Iran, they're not gonna be using the dollar anymore, they can't, right?

- Yeah.

- Ditto for Russia.

The thing that's interesting though is even after the US first imposes sanctions on Russia in 2014, which is when they invade Ukraine for the first time and annex Crimea, in 2014, the Chinese government and Xi Jinping sees what happens to Russia and says, "This could happen to us."

And so, it's actually in 2014 that they start building alternatives to the US-based financial infrastructure.

They build something called the Cross-Border Interbank Payment System or CIPS, which is an alternative to Swift, which is the system that's used to clear and settle dollar transactions around the world.

And so, even countries that aren't directly targeted, if they feel like they could be next, that they could be in the firing line one day, they then will try to insulate themselves.

And by the way, you're seeing this happen now, even with the US right?

In the last year, the Chinese government has very successfully weaponized their choke point, which is rare earth minerals over the United States government.

Well, what's happening, the US government now is pouring billions of dollars into building our own domestic self-sufficient supply chain for rare earth.

We're trying to break China's choke point the way that China's trying to break our choke point in the dollar or advanced semiconductors.

So I think that the proliferation of economic warfare has really caused two phenomena that are really kind of equally reshaping the global economy today.

One is what I would call an economic arms race in which other countries see what the US is doing and see if they can adapt that to their system, if they have choke points that they can exploit for economic warfare.

And then the other phenomenon is what I call a scramble for economic security, in which governments around the world see the vulnerabilities they have to external pressure and then invest in reducing that vulnerability.

And I think these two sort of phenomenon that are playing out are the core forces today that are shaping the geo-economic reality that we live in.

- You know, Eddie, there's so much there that, you know, how does this trickle down to American consumers?

How do we begin to feel the impact of these moves that China's making or frankly even that the Trump administration is making in the world of tariffs that I would imagine have to have some impact on the kind of choke points that you're talking about?

- Oh, for sure.

Look, I think that this is a moment of significant risk for the global economy.

If you didn't have geopolitical competition, right?

If the US completely trusted China and vice versa, and we completely trusted Russia and vice versa, the optimal economic system is globalization, right?

It's one where we can actually produce things in the optimal location, irrespective of whether that's China or Vietnam or Mexico or the United States.

The problem is we have geopolitical competition and there's no putting that genie back in the bottle, at least not in the immediate future.

And so, what that means is we're gonna have a new global economy.

I think there are really two paths we could take.

One is what I would call a block-based global economy where the US retains significant economic interdependence with a lot of the world, with countries in North America, like Canada and Mexico, with our European allies, our Indo-Pacific allies, with countries like India and Brazil.

You would retain a lot of the benefits of interdependence at the same time as reducing our vulnerability to clear geopolitical rivals, like Russia and China.

So I think that's one possibility, but there's another future and it's frankly the one that I'm a little bit more worried about today, where if every country is just pursuing economic warfare without any coordination, if it's all unilateral, you're going to get something that looks more like autarchy, where US businesses feel like the only place that they can invest viably is in the United States.

And while that might sound good to some people, the problem is you wind up getting significantly slower economic growth, higher consumer prices, which we already see, and higher unemployment, which I think you're already starting to see in some of the numbers.

So I think that there's real risk to autarchy.

I think beyond the basic economic concerns that all of us in the United States might feel, I actually think there's a bigger risk because, as a student of history, I can say that every time that autarchy has been the mentality, every time that governments around the world feel like the only way they can access foreign markets and resources is not through open trade, that they can't secure critical minerals from a place like Greenland through open trade, they're incentivized to do things like imperialism and conquest.

Territory starts feeling like it's more valuable.

So I'm worried that if the global economy moves into a more autarchic mindset, maybe not immediately, but over time, it significantly raises the risk of great power of war.

- You know, you should come speak to my students in my class because we spent a lot of time talking about that period at the end of the Second World War, where, you know, the giants of the mid 20th century designed a system specifically to avoid the kind of outcome that you're describing now.

Do we have an appreciation for how rolling back globalization, it's been a boogeyman in American politics for a number of years now, but it did create this moment with great American strength, economically, politically, militarily.

Does the rolling back of globalization and the rise of economic nationalism make us less safe?

- It's a good question, and I don't think the answer is definitively yes, because, like I said, the underlying factor driving the proliferation of economic warfare, it's not individual personalities, it's not the fact that, you know, Donald Trump and Barack Obama disagree on every issue, except for the fact that sanctions are great, right?

There's an underlying structural force, which is the global economy is designed for the benign geopolitical environment of the 1990s, where we didn't have any geopolitical competition to speak of, but we're living in a period of intensifying geopolitical rivalry.

So there's this structural mismatch between a global economy that no longer suits the geopolitical rivalry of today.

So I think that if we were to sort of put our head in the sand and say, "We're gonna continue embracing globalization despite the fact that we are deeply, deeply at odds with China and Russia and some other countries on a lot of issues," that would put us at unacceptable risk, right?

I mean, is it okay to live in a world where the Chinese government can shut down factories in the Midwest within weeks just by imposing an export control on critical minerals?

I don't think so, that's not a world I wanna live in, right?

Do we wanna live in a world where I won't be able to access my pharmaceuticals that I need, or my grandmother can't access her pharmaceuticals she needs if China decides that she can't have that?

No, I don't wanna live in that world either.

So I think we need to rethink what the global economy looks like.

I think what I'm saying is, if we allow this to occur haphazardly, if we don't have a strategy for some sort of retaining interdependence with our close allies, if it's just every country for itself, then we do run into the risks I mentioned earlier, like slower economic growth, higher unemployment, higher inflation, and ultimately, a bigger risk of great power of war.

- Eddie Fishman, the book is "Chokepoints," it's an important read.

Thank you so much for spending some time with us this week.

That is all the time we have.

But if you wanna know more about the "Story in the Public Square," you can find us on social media or visit salve.edu/pellcenter, where you can always catch up on previous episodes.

I'm Jim Ludes, asking you to join us again next time for more "Story in the Public Square."

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