The temptation for things like military conquest begins to rise.

If you look back at sort of Hitler's calculus in the 1930s, you

know, a lot of this desire for Lebensraum and kind of conquering

parts of what was then the Russian, the Soviet Union was getting

key resources and commodities for the German people that they couldn't

get through other means. So, I do think that there are two very,

very different futures that we could be headed toward in this block-based

economy. And I certainly hope we're in the former rather than the

latter.

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For me, the best part of my podcasting journey has been the opportunity

to speak to a huge range of extraordinary people from all around

the world. In this series, I have invited one of them, namely

Kevin Koldine, to host a series of in depth conversations

to help uncover and explain new ideas to make you a better investor.

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and the dynamics that shape it so that we can all successfully navigate

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All right, thanks, Niels. And welcome everyone. For me, the best

part of my podcasting journey has been the opportunity to speak

to a huge range of extraordinary people from all around

the world.

Inthis series, I have invited one of them, namely

Kevin Coldiron, to host a series of in-depth conversations

to help uncover and explain new ideas to make you a better investor.

In the series, Kevin will be speaking to authors of new books

and research papers to better understand the global economy and

the dynamics that shape it so that we can all successfully navigate

the challenges within it. And with that, please welcome Kevin Coldiron.

All right, thanks, Niels. And welcome everyone.

So,over the last

25 years the US has come to rely on economic warfare to confront

global crises. The key to that strategy is control over chokepoints,

areas of such vast importance that economies struggle to operate

when access to them is cut off. But what are these chokepoints?

Well,there's the US dollar, there's advanced semiconductor technology,

and there's even things like services that underpin the global

trade in oil. And today, we're going to explore the details of how

this process operates and how the reactions to it are going to

change the world economy.

Andwe're going to base our discussion

around a brand new book called Chokepoints: American Power in the

Age of Economic Warfare. The author and today's guest is Edward

Fishman.

Edwardcurrently teaches at Columbia University School

of International Public Affairs. He's worked in several positions

that put him at the center of the US Effort to essentially weaponize

the world economy. He served on the team at the US State Department

that designed and negotiated Western sanctions against Russia

after it annexed Crimea. And he's advised the Secretary of State.

He's advised the Chairman of the Joint Chiefs of Staff and also

the top sanctions officials at the U.S. Treasury Department. So,

he's the perfect person to help kind of elucidate what's going

on here, help us build our understanding.

EdwardFishman, thanks

so much for joining us and welcome to the show.

Thanks, Kevin. Really great to be here with you today. Sure thing.

So, my story really begins as a college student in the years after

9/11. I was studying history and international relations. And

you know, we learned in all of our classes that the United States

was the most powerful country on earth. You know, we were living

in a unipolar moment. But when I looked at the world, it just seemed

like the United States was struggling to translate that power

into getting what we wanted in the world.

Ithinkthe biggest sort

of examples of that were the wars in Afghanistan and Iraq, which,

you know, quite quickly became these quagmires that were costing

the US untold blood and treasure with very little to show

for it.

Andyou know, this period, sort of in the mid ‘80s,

was sort of when Iran's nuclear program had become really

the top national security problem that the United States was

confronting. And you know, the United States had invaded Iraq to

try to stop Iraq from getting a nuclear weapon. And you know, it

was quickly found out that Iraq didn't even have a nuclear weapons

program, whereas Iran had a real nuclear weapons program.

Andso,

this really presented a pretty serious problem for anyone who wanted

to work in foreign policy. How do you stop Iran from getting a nuclear

weapon? And it was really at this time that, you know, US government

officials started experimenting with novel forms of

sanctions and export controls, what I would classify as economic

warfare, as really the primary vehicle to try to stop Iran from

getting a nuclear weapon.

So,I became really interested in

it and was lucky enough that a week after graduating from college

I moved down to Washington, D.C. to work for the Undersecretary

of the Treasury for Terrorism and Financial Intelligence. So, the

official who oversees the sanctions apparatus at the Treasury

Department. And that wound up being sort of my entree into this

world.

Ieventually,as you said, wound up serving at the State

Department, where I was on the Iran sanctions team there, got to

work on implementing the first Iran nuclear deal, the Joint Plan

of Action, in November 2013. And then when Russia annexed Crimea,

a few months later, In March of 2014, I shortly thereafter became

the first Russia Sanctions Lead in the State Department's Sanctions

Office. I was part of the team that designed and negotiated the

sanctions on Russia.

And,you know, what these experiences taught

me was that these tools, like sanctions and export controls and

tariffs, they have really tremendous potential to try to advance

American interests. But we're really just scratching the surface

in terms of their capability, and the US Government is still not

very well positioned to do them strategically.

So,since leaving

government, I really devoted myself to studying these tools, trying

to understand what makes them work when they don't work, how to

reorganize the US Government to fight and win economic wars more

effectively, and really to train the next generation of practitioners

of economic warfare at Columbia, which is what I've been

doing now for the last four years.

So kind of like the West Point of economic warfare.

That's our aspiration. Kevin. I think we're still probably in our

infancy, but that would be a dream.

Do you imagine a potential for you going back and working for the

government again in that capacity?

It's possible. I stay very close with folks in the US Government

on both sides of the aisle. I've often been called in to advise

on various matters of sanctions and economic statecraft.

And it's possible I'd go back into government, but I also live

in New York City. I've got two children. And so, you have to balance

opportunities in public service also with family life as

well.

Right. Okay, well, thanks for that. That's a really good context.

So let me take a step back.

Imean,the first part of the book

is a history, a little bit, of chokepoints. And you say there that,

you know, economic warfare is not new. And, in fact, the failures

of economic warfare kind of are better known than its successes.

So,could you maybe just give us an example of past economic warfare

that failed and maybe, more generally, why we know the failures

better than the successes and then we can kind of use that to move

into the modern age.

Sure, yeah, maybe one thing just to say, off the bat, is I'm

often asked, Kevin, whether sanctions work. And I always find

that to be kind of a strange question because no one ever asks,

you know, does military force work? I mean, sanctions and tools

of economic warfare, they're just tools of statecraft the same

way that military force is. And sometimes they work, sometimes

they don't.

Ithinkthat, inherently, economic tools are weaker

than the use of military force. But they also present a lot

of benefits. You're not necessarily risking human life, and

blood, and treasure. They're usually a lot easier to deploy. They're

sort of a midpoint between diplomacy and the use of military

force.

Butyes, you're right that the failures of economic warfare

are better known than the successes. And in fact, you know,

the very first kind of canonical use of sanctions happened

in the 5th century BC. This was when Athens, you know, Periclean

Athens, during the golden age when Athens was sort of at the height

of its power, imposed this wide ranging trade embargo on a neighboring

city state called Megara. And the goal here really was deterrence.

Itwas to show the rest of the Greek city states, and in particular

Sparta, that Athens, because of its dominant sea power, was so

powerful that it could basically cripple Megara's economy,

and it was not worth ever trying to attack Athens. And the

irony of the situation is that the sanctions really worked.

AndMegara,

you know, I think Aristophanes, the playwright, reports

in one of his plays that the Megarians were basically slowly starving

because of this embargo. But the irony is that it actually encouraged

Sparta to go to war with Athens because I think the Spartans

saw the Athenians as reckless and that basically their power had

to be brought to heel. And this has happened other times in

history.

Ithink,more recently, the US oil embargo on Japan

in the lead up to Pearl Harbor. You know, some people blame

that oil embargo, basically, for incentivizing the Japanese to

attack the United States. And I think probably the lesson here

isn't that economic warfare can't work. It's that it's a really

powerful tool, and you shouldn't use it without being serious

about it. You got to mean it. And you have to realize that it can

be quite aggressive and is part of an escalatory ladder that

sometimes leads to military force.

Ithinkthe biggest change

though, Kevin, between all of these historical examples of economic

warfare all the way back to Athens in the 5th century BC to the

US oil embargo on Japan in the 1940s, is that they always required

the use of military force to implement. So, Athens was able to

blockade Megara because of its navy, and the same was true of the

US Navy in the 1940s.

Whathas changed, really, only in the last

20, 25 years is that because of this hyperglobalization we saw

in the 1990s and the creation of the chokepoints you mentioned

before, coupled with the really extensive reach of the American

regulatory state, we now have a situation where an official in

OFAC, which is the Treasury Department agency that oversees sanctions,

can effectively sign a document in an office in Washington,

D.C. and employ sanctions and embargoes that are even more powerful

than the ones that were implemented throughout history using

naval blockades and UN sort of mandates.

Andso, I think that's

the thing that's really new about today's economic warfare, is

that it can be done through the stroke of a pen and doesn't actually

require sending out the US Navy to implement it.

You talk about that in the book in the sense of how really how

recent a development that truly is. There's a character, one

of the main characters in the book is Stuart, is it Stuart Levey?

Stuart Levey, yeah, exactly.

Stuart Levey. Stuart Levey, yeah. And there's a great quote from

him where he says, well, when I started my job, in 2004, I don't

think the National Security Advisor would have even taken my

call. By the time I left, I could get the President to sign an

executive order within four hours of deciding it was worth doing.

Ithinkhe was there for less than a decade, and he accumulated

kind of enormous influence. I was wondering maybe if we could use

his experience as a way to talk about the evolution of the power

of sanctions. Can you tell us about him and what were his insights

that he had that other people hadn't in terms of the use of economic

power?

Yeah, Stuart Levey is kind of, I would say he's the through-line

of the book. He's right there at the beginning and there all the

way to the end. I call him the Zelig of the age of economic Warfare.

I'd like that reference, by the way.

Yeah, he appears in all these different guises. So, I hope readers

of the book don't think that that's an exaggeration.

So,look,

Stuart Levey was a young lawyer at the Justice Department

on 9/11. He was in his 30s, went to Harvard Law School and was

very, very smart and sort of had developed this understanding,

I think, of how the private sector viewed risk. He was really

sort of more of a inter-regulation as opposed to a

foreign policy/national security type of a person. And, you

know, after 9/11, he started working on terrorist financing cases

at the Department of Justice.

Andwhen this new sort of Treasury

Department organization, the Office of Terrorism and Financial

Intelligence, was created in sort of the aftermath of 9 /1, Levey

was asked to become the first head of it. And so, he was given

this job sort of at the tail end of Bush's first term. So, this

is in 2004.

Ithinkhe accepted it largely because he wasn't

even sure Bush was going to be reelected. So, he said he might as

well take a flyer on a startup and see how it goes. And so, he assumes

this job. Of course, Bush gets reelected. And really shortly after

Bush was reelected, I think In December of 2004, he's asked about

Iran because by then everyone is really focused on Iran's nuclear

program. And Bush gives this comment saying, sanctions, we've

tried sanctions against Iran, but they haven't worked and we've

sanctioned ourselves out of influence with Iran.

Andthere's

Stuart Levey, a young lawyer, just taking over this new group at

the Treasury Department who kind of takes this as a challenge

from the President and says, well, let's see if we can make sanctions

work against Iran.

Andwhat he really comes up with is sort of using

some of this knowledge he had developed as a lawyer, both in private

practice and the Department of Justice, which is that banks around

the world make risk-based decisions in terms of who their clients

are, who they do business with. I think up until really Levey

's time, whenever the US was trying to get other countries on

board with sanctions, it was always through diplomacy. It was

going to the UN Security Council. And government, the Bush

administration, was always frustrated that it could never get

the UN Security Council to agree to really aggressive sanctions

on Iran.

WhatLevey realized is, you know, he could short circuit

that process and go directly and talk to banks around the world.

Not just banks in the US, because the US had an embargo on

Iran, but going to talk to banks in London, and Frankfurt, and

Tokyo, and Hong Kong, and Dubai.

Andso, what Levey does is

he basically creates this roadshow. He travels around, meets

with hundreds of different banking CEOs and compliance executives,

chief legal officers, all around the world. And what he does

is he comes bearing these sort of like dossiers of declassified

intelligence that shows exactly how Iran is using the international

financial system to evade sanctions and also primarily to fund

its nuclear weapons program, as well as its support for terrorist

proxies like Hamas and Hezbollah.

Andthese banks, in the

aftermath of 9/11, the last thing they want is a front page article

in the Wall Street Journal saying that, HSBC is involved in

funding Iran's nuclear program, or BNP Paribas is involved

in supporting Al Qaeda. And so, from just a sheer perspective

of reputational hazard, a lot of these banks decide it's not worth

doing any business with Iran after meeting with Levey. But then

as this is happening, there's also sort of an increased effort

to actually enforce these sanctions.

Andso, some of the banks,

of course, I think many of them do sort of get out of Iran,

but some of them continue to do business with Iran. And what we

wind up seeing is, you know, the scale of penalties for sanctions

violations just goes up by an order of magnitude.

Andso, banks,

I think, up until really the late ‘80s, I think, viewed sanctions

violations kind of as a cost of doing business. You know, maybe

they'd get slapped on the wrist, but it was worth it. But then

you start seeing fines in the hundreds of millions of dollars.

And then, by 2012, in the billions of dollars. You see a $2

billion fine on HSBC, and then kind of this epic $9 billion fine

on BNP Paribas in 2014.

Andso, by that point, banks really,

they can't just sort of write off sanctions violations as a cost

of doing business. They have to take it seriously. And basically

what Levey does, I think if you just look at it from a macro

level, is he conscripts the international banking system to be

these frontline infantry officers in American economic wars.

And so, what he does, you know, it works. Iran is really the

focus of his efforts.

Butas we see throughout the course of this

book, and over the last 15 years or so, this sort of these infantry

can work, whether it's Iran or Russia or China, you know, it really

doesn't matter. They're now conditioned based basically, the

international financial system, to implement American sanctions.

This is maybe going a little bit off piece, but as I was reading

that section of the book and just listening to you make that description,

I started thinking like, well, what type of person wants to end

up as head of a bank now? Because you're almost, at some level,

they're semi-state actors.

It'salmost like I'm wondering if

your students are more likely to be running banks than, you know,

people coming out of, I don't know, the Haas Business School, where

I teach. People rise up through banks because of their skill

in finance. But, you know, when you get to the very top now,

your skill as… or I don't know if skill's the right word, but you're

having to deal with these kind of much bigger geopolitical issues

that have nothing to do really with core banking.

I think that's right. I think that, you know, what we've seen,

and I think, another macro story of the book is, it's sort of

an ironic story, a lot of these chokepoints are created through

financial deregulation and neoliberalism. A lot of them are

created in the wake of the deregulatory push of the 1980s under

Reagan and Clinton, in the ‘90s and WTO, et cetera.

Butthen

what happens is that, after these chokepoints are created, it's

the story of kind of the resurgence of state power - the state

kind of reclaiming the central role over the global economy and

saying that, you know, yes, we want banks to make money, but really,

national security comes first and they have to be complying with

these laws.

Andlook, you know, I called Stuart Levey the zelig

of the age of economic warfare. After he leaves his job

at Treasury, he does become the chief legal officer of HSBC,

the largest bank in Britain, and is really kind of the number

two there, where he winds up building this massive sanctions compliance

apparatus that becomes a gold standard that other banks emulate,

I think with over a thousand people there.

So,I think you're

right that geopolitics compliance with sanctions has become

incredibly central to the banking system. And I think the story

that we're probably going to see now, over the next five to 10

years, is that that's going to become true in other sectors too,

as in the technology sector. We've already seen the semiconductor

industry taking these issues really seriously. But yeah, I think

the banking sector is probably, you know, the tip of the

iceberg.

I think that's absolutely right. And that points to a world

where it's a different form of capitalism. I don't know if we have

a great name for it. Some people call it national capitalism.

We'll find out.

Thereare two points I really want to focus on

with Iran. First, I wonder if you could explain to the listeners

one of the key tools that I think Levey used, which was these

escrow accounts. So basically, I think the insight was, hey, we

can allow Iran to continue to sell oil and earn money from it,

but we're going to prevent them from actually using the money.

That's exactly right, yeah, look, I think this is probably the

most single successful sanction we've seen in modern times.

And what winds up happening, this is actually a few years after

Levey leaves. I think he leaves the Treasury Department in

2011.

Bythe time he leaves, there's this interesting dynamic

that develops in Washington where Congress, there’s a bipartisan

super majority in Congress for really aggressive sanctions on Iran.

So, you have people like Mark Kirk, who's the senator from Illinois,

Bob Menendez, a Democratic senator from New Jersey, who are

pushing basically any, as aggressive sanctions as they possibly

can against Iran.

Andso, folks in the Obama administration,

the people who many of whom Levey had trained and cultivated

at the Treasury Department, start realizing, look, we need to

figure out a way to turn up the heat on Iran even faster. And

the one area that Levey never really gets to touch during his tenure

is Iran's oil sales. And that's because there's always this

fear that Iran is a massive oil producer. They export two and

a half million barrels of oil on global markets each day, at the

time.

Ifyou try to take this oil off the market, first of all,

you probably couldn't. But even if you could, you'd cause a

spike in oil prices that would damage the world economy, which is

then really at the beginning of recovering from the global financial

crisis of 2008.

Whatwinds up happening is Congress is saying you

have to do something about oil. And so some of Levey 's successors

at Treasury, including Adam Szubin, who was his protege and became

the head of OFAC, as well as David Cohen, who succeeded him as

the head of TFI, come up with this strategy which is, we can go

around to banks in places like Tokyo, and in various Chinese cities,

in Seoul and South Korea and say, look, if you are helping process

a payment for Iranian oil, so if a refinery in China is buying

a cargo of Iranian oil, you can pay for that oil, but only if

it's into a Central bank of Iran account in your home country.

Andso, what it does is it sort of forces Iran to set up these

bank accounts in places like China, and India, and Japan, and

basically say, okay, well, we can accumulate our oil proceeds in

these countries, but we can't repatriate them to Iran. We can only

use them for bilateral trade in non-sanctioned goods. So theoretically,

they could use all of those oil proceeds if they really wanted

to import, I don't know, millions of toasters from China,

but they couldn't actually use them to buy whatever they wanted

around the world.

Whatwinds up happening is, because Iran honestly

cannot find ways to spend all of its oil proceeds in these countries,

within 18 months you have roughly $100 billion of Iran's oil

proceeds that have accumulated in these overseas escrow accounts.

It's really remarkable, I think, because if you think about

it, you know, it's a unilateral sanction.

Thisis not

something where the UN has backed it. The EU has not backed

the same sanctions. This is something that is just being done,

you know, at the behest of the US Congress and the Treasury Department.

And it's working to effectively change the way that Iran

is getting paid for its oil.

AndI think the reason that the sanction

is so successful is a few of them. One is that it doesn't actually

require Iran to stop selling oil. They continue selling oil. So,

you don't have the market disruption that I mentioned earlier.

ButI think more to the point, once you get into nuclear negotiations

with Iran, the US Government has the ability to basically sign

a document and repatriate money to Iran and say, okay, Iran,

you freeze your nuclear program? Okay, take $5 billion of

your frozen oil funds, and you can have access to them. And that's

how the original Iran nuclear deal happens in November of 2013.

The US agrees to unfreeze, I think roughly, around $5 billion

of those oil proceeds. And Iran agrees to freeze its nuclear

weapons program.

Andso, it's pretty remarkable. It's like you're

almost taking another country's export revenue hostage

and then getting them to stop their nuclear program in order to

get some of it back.

Yeah, and I want to follow up on that, because you do a good job

of saying, at some point, it was like, okay, hey, we've reached

the point of maximum pain with these escrow accounts. There's not

much more squeezing we can do. So, now let's use these sanctions

as a tool in a negotiating position.

Andso, we want them to

end their nuclear weapons program, and we can kind of dangle

this ending the financial sanctions, freeing up the escrow

accounts as part of that. And that becomes a key aspect of the

Iran nuclear deal. But then Trump comes in and basically says,

well, the deal is off the table. And so, there's a kind of…

Mythinking was, well, hold on. If the real value of these tools

is that they can be used in the negotiation to say, okay, we'll

switch off the sanctions if you agree to do what we want, but

if those deals can then be quickly undone, doesn't that actually

undermine their value in the first place? Because why should I

trust that you can deliver on what you've agreed?

Yeah, that's a really important point, Kevin. And I think

that Trump's decision, in 2018, to unilaterally pull out of

the nuclear deal, and by the way, this is while the International

Atomic Energy Agency has verified that Iran is complying with

the deal. Where the other parties of the deal, so that's Germany,

the United Kingdom, France, China, Russia, have all said that

Iran is complying with the deal. They're not pulling out. It

does very significant damage, I think, to a paradigm of US sanctions.

Theparadigm is that sanctions are a tool of behavior change. That

basically we impose sanctions on a country, and those sanctions

are kind of unnatural, and they're only in place until we get

what we want. And then once we get what we want, we remove them.

And that really had been kind of the model for sanctions up until

2018.

Ithinkthat after Trump kind of unilaterally pulls out of

the JCPOA, it makes it really hard for the US to credibly put forward

sanctions as a tool of behavior change. And you do see the

Iranian government, shortly thereafter… Well, first of all, the

President Rouhani, who had been elected basically to deliver

the JCPOA, is discredited, and they wind up electing a hardliner

to replace him a couple years later.

ButI think more importantly,

from the perspective of US national security, Iran quickly reconstitutes

its nuclear program and builds back its program to an even greater

extent than it had been before the nuclear deal. So, I think in

retrospect, Trump's pull out of the JCPOA was a real, I think,

serious foreign policy blunder. I think even hardliners

in places like Israel, who I think had supported it at the time,

have now come out and said that it was a big mistake.

Ithinkwhat's

happened in the years since, Kevin, which, you know, touches on

your point about national capitalism or what kind of new global

economy are we moving toward, is that sanctions have become less

a tool of behavior change and more, honestly, a tool of remaking

the global economy itself. And I think what you're seeing today

is sanctions on countries like Iran, Russia, China, there's not

really a behavioralist calculus behind them. It's not clear

what China could do to get export controls removed, or what

Russia or Iran could do to fully be reintegrated back into the

world economy.

Andso, we're really seeing is a lot of these tools

like sanctions and tariffs and export controls, they're really building

the foundations of a new economic order. One that is much

less globalized, much more focused on geopolitics and national

security. And I don't think we fully appreciated that. But I do

think that 2018 and Trump's pullout of the Iran nuclear deal

was a major turning point in that story.

That's interesting. I mean, that seems to be like an extraordinarily

important point, because what you're saying is we can examine the

export controls of the sanctions, and they're kind of like

the gray contours of what the world economy is going to look like

over the next 5 to 10 years. It's like you're building a house

and you're starting to put up the studs, and you can kind of see

what the house is going to look like.

Yes, I think that's exactly right. And if you think about it,

I mean it's kind of a strange way to… You’ve got really do some

mental gymnastics to get to this vision.

Butif you think about

the ‘90s, building the globalized world economy, it was

built really through these trade agreements like NAFTA, the

WTO, giving China permanent normal trade relations with the US.

It was really through bringing down barriers.

Nowthe new global

economy, which I don't think we have a name for yet, that's being

built is really being built through tools like sanctions and

export controls and tariffs. It's being built through barriers.

You know, it's sort of a different process than the process

we saw in the ‘90s.

Andwhile the materials that we're using to

build the house that you mentioned are different, I think

we can't deny that's what's happening right now.

I'd like to talk a little bit. We did sort of both alluded to the

export controls on China and there's a couple, in the same way

that the escrow account was an important kind of game changing tool

on the financial side, there's a couple of other tools that the

US has used more kind of on the physical trade side that are

illustrated in your section on China.

So,you know, you tell the

story of Huawei and ZTE which we actually had Chris Miller on this

show. And so, we've talked through the importance of TSMC and

Huawei and you talk about the CFO of ZTE. So, both Huawei and ZTE

are telecoms equipment makers, broadly speaking. And the CFO of

ZTE was caught with a plot to buy US Tech and then kind of resell

it to Iran.

Andthey were fined, but then they were later found

violating the settlement and they were hit with a “denial order”

which almost bankrupted them within a matter of weeks. So, I was

wondering if you could explain to the listeners what a denial order

is and why that is such a powerful tool.

Sure. So, up until now in our conversation, Kevin, we've been talking

about primarily financial sanctions which the Treasury Department

and the State Department really are the ones who are administering

it. You know, the chokepoint that's being used there is the dollar,

right?

It'sthe fact that the US dollar is used as kind of this

way station in all major international transactions, or at

least a very significant percentage of them. It's very hard

to operate in the global economy without the dollar.

Adenialorder

is done by the Commerce Department, and it's not focused

on finance, it's focused on trade. And basically, what a denial

order does, like the one on ZTE from 2018, is it tells US exporters

that they can't sell anything to ZTE.

Andsome of the things that

US exporters might sell to ZTE are trivial. It could be a company

that's selling tables to ZTE for their office space, which may

not be so painful for a company like ZTE.

Butthen there

are other products like semiconductors, which ZTE totally

relies on, or at the time, something like the Android operating

system, which, if that is cut off from a phone maker or telecom

equipment maker like ZTE, it can be really, really serious. And

I think at the time, ZTE was really dependent on American microelectronics

from companies like Qualcomm. And as a result, you know, they did

almost go out of business in a matter of weeks. And they would have,

I think, had it not been for Xi Jinping placing a phone call to

Donald Trump and basically saying, you know, you really need

to give ZTE a reprieve, and really kind of doing everything he

can to get Trump to cave.

Andmy understanding, from talking

to several people who were part of that conversation, is that

Trump agreed to it because he thought Xi Jinping might owe him

one down the road. And so eventually, you know, pretty quickly

after this call, Trump instructs Wilbur Ross, the Commerce

Secretary, basically, to come to a deal that allows ZTE to survive.

Andso, for a lot of folks, China hawks in the first Trump administration,

they viewed this as incredibly frustrating because it felt like

that Xi Jinping maybe had cajoled Trump in a way that wasn't

justified.

ButI think, on the flip side of that, these China hawks

and the Trump administration realized that, wow, some of these

major Chinese industrial companies that are reliant on American

semiconductors, we can really hurt them if we cut them off from

US products. And this was really important because I think

sanctions, financial sanctions against China, have always been seen

as a very significant action, something that so far, we haven't

seen - major financial sanctions against China. But I think

these export controls were sort of seen as, okay, well, here's

another really aggressive tool we can use.

Andso the ZTE case,

while it winds up being short lived, I think it provides A clue

to people like Matt Pottinger, who was overseeing China policy at

the Trump NSC, that this is a tool they can use to kind of spearhead

the more competitive strategy that they wanted vis a vis China.

And then there's another tool called the Entity List, which I think

is kind of one level down. Can you just explain that? Because that's

also been used.

Yeah, that's right. The Entity List is one level down. It's also

administered by the Commerce Department, by the Bureau of Industry

and Security there. And what the Entity List says is that you

can export… An example here, is that Huawei eventually is put

on the Entity List in 2019. And what that says is you can export

things to Huawei, but you have to seek a license first. So, It puts

a regulatory barrier and gives… So, at the very least, it

slows down trade with the target. But usually, the Entity List

also comes with a presumption of denial.

So,unless there's sort

of clear exemptions written in, it's pretty close to being as

aggressive as a denial order. It's just less black and white. You

know, it gives more flexibility to the Commerce Department

to allow some licenses to be granted if they think that they're

warranted.

One of the things that was kind of shocking in this section

was kind of the relationship between the US And Europe. And so,

there's TSMC, which is the semiconductor manufacturing company,

but of course, TSMC can't really operate without machines from

ASML, which is the Dutch manufacturing firm that makes lithography

machines that basically carve the chips. And it's the only company

in the world that can make these ultra-advanced lithography

machines. So, they themselves have become a chokepoint.

Andat

one stage there was, I think this is in 2020, ASML was going to

sell one of their machines to a Chinese chip maker. And there was

actually discussions in the US that they should send the Navy to

block the shipments.

Yes, yeah, this is, I think, the ASML lithography machine, I think

it's one of the best examples you can find of a chokepoint that

exists in the sort of physical world, because you really cannot

produce advanced chips without access to these EUV machines that

are only made by this one Dutch company. And so, what the Trump

administration, I think, realizes, as I mentioned just a few

moments ago, they put the Huawei on the entity list in 2019.

Andwhile that does do quite a bit of damage to Huawei, the company

recovers. And they say, oh, well, we actually can continue sourcing

chips from places like TSMC, because if you think what TSMC is

doing, TSMC is a foundry. So, Huawei, their high silicon unit,

is designing chips that are then are being manufactured by TSMC

and being sent to China.

Andso, in an ideal world, the US

Government would just get Taiwan, and the Netherlands, and

all these other countries to agree to the same export controls

that they have. But that's really, really hard to do. For the

same reasons it was hard for the US to get the UN Security Council

to back really aggressive sanctions against Iran in the early

2000s. And so, the Trump administration kind of starts looking

for ways that they could do this unilaterally.

Kindof similar

to, again, Stuart Levey trying to think about how could he isolate

Iran without getting every country in the world to agree to

it. And what they come up with in May of 2020 is this tool called

the Foreign Direct Product Rule or the FTPR. And what that says

is that, you know, it's not just sort of US Companies that can't

sell things directly to Huawei. It's if you're a foreign

company and you're selling chips, for instance, to Huawei, you

cannot buy products from the United States and then sell chips

to Huawei. So, it basically gives companies like TSMC a choice.

You can either make products for Huawei or you can buy products

from the United States.

Andby and large, the major chip makers,

be it TSMC, or SK hynix, or Samsung, after the Foreign Direct

Product Rule comes out in the summer of 2020, they comply. And

so, this winds up becoming the Trump administration's version of

secondary sanctions. They're using the unilateral power of the

American regulatory state and our control over technology chokepoints

to really cripple Huawei's access to frontier technologies.

With ASML, we could apply the FTPR to ASML.

Whathas happened,

I think, is the company came to a gentleman's agreement with the

Trump administration in 2020, so they didn't have to send the US

Navy, thankfully, after the shipment. And then I think what happened

in the Biden administration is they actually got agreement with

the Dutch government, in 2023, to impose export controls and not

approve the licenses for those EUV machines to be shipped to China.

So,what kind of started as very aggressive unilateral policy

was turned into a more sort of alliance based diplomatic policy

under the Biden administration.

I mean, it really underscores the fact that the US needs to have

technological products that these other countries and companies

need for these sanctions to be effective.

Yes, that is very clear. I think maybe one of the dangers that

we face, if we are moving to a world in which it's more of a state

capitalist model (the reason that the US possesses these chokepoints),

it's not just because of the US government, it's because of private

industry. It's because of technological innovation. It's because

of financial innovation, that created things like the SWIFT Network

which was created by a consortium of banks in the 1970s,

or the correspondent banking system was created by American banks.

Andso, I think that in order for the US to maintain control over

the most valuable chokepoints, we need US companies to stay at the

frontier of innovation. And I think that applies not only to physical

technology, like semiconductors, but also financial

technology.

Andthat's something I explore toward the end

of the book. We are seeing new mechanisms come up to settle cross

border payments without using the dollar, using things like central

bank digital currencies. And I think, you know, I'm concerned that

the US is a laggard in some of these areas and we're not on the

frontier the way that we were in the past.

Andso, you know, that's

one of the challenges, I think, about where we are today.

As we've put national security more at the foreground of our economic

policy, we also run the risk of kind of losing control of some

of these chokepoints over time if we're not innovating fast enough

and getting our adversaries, frankly, hooked on our products.

Yeah, we had Richard Holden on the show a couple months ago who's

you know, talked about the digital currencies and how the US

was definitely falling behind and China was on the lead there.

But it points to this sort of irony in the sense that it was the

kind of hyper competition of the globalized economy that led the

US to have these world leading technology companies.

Chipmanufacturers

moved from the integrated model to kind of offshoring or outsourcing

production to places like TSMC, and then focusing on chip design.

And people said that well, we were losing our manufacturing capability,

which is true to some extent. But then the flip side is that we’ve

got Nvidia, and Nvidia becomes one of the most important companies

in the world.

So,it's like when you remove that hyper competition

of globalization, are we still going to be able to develop these

technologies that give us the power in the first place? I suppose

it's a question we'll find out the answer to.

Yeah, look, I think the United States has always thrived when we've

competed with the rest of the world. You know, and I think that's

been a big secret to American success. People ask, why do we not

have an industrial policy? Or why are our tariffs so much lower

than even European tariffs? You know, forget about the Chinese.

Andin some sense, I think we have had blind spots on our policy.

We've allowed our defense industrial base, for instance, to

atrophy, I think, and that has been a serious problem. But I think

outside of a very sort of select group of technologies that

are fundamental to national security and war fighting, America

has always done better when we have opened up our economy, when

we've competed with the rest of the world, and frankly, when we've

allowed our companies to set international standards.

Ithinkthat's

really critical because the reason we can use these tools as

a coercive mechanism against foreign countries is because foreign

businesses rely on American finance. They rely on American technology.

Andif we provide an incentive for these foreign countries not to

rely on us, or worse, if we fall behind and our products aren't

the best in breed anymore, that's a real problem. And I think,

to kind of go back to the Huawei example, part of the reason

that Huawei was such a psychological shock to the American

national security establishment is that the reason

it was winning market share across the world wasn't because China

was holding a gun to foreign government's heads and saying, buy

Huawei or else. It was because Huawei's technology had become best-in-class.

They had the best-in-class 5G kit that was being sold for 30% less

than the competition.

Andso, we see this now in things like clean

energy technology, where China very clearly has the lead, and their

lead has become such a significant problem for the United

States that the Biden administration saw fit to impose

100% tariffs on the import of Chinese electric vehicles into the

United States. And so, I think we need to be really careful about

remembering that innovation, our technological capacity, our financial

capacity really is what underpins American power both in

economic warfare and more broadly.

I know we're kind of running out of time here. And, you know,

a lot of the book is focused on the US relationship with Russia,

both in reaction to the annexation of Crimea and then the

invasion of Ukraine. And one of the, I guess, innovations, if

you want to call it that, that happened after the invasion of Ukraine

was, I think you call it the service plus cap model.

Andthat's

not something that I fully appreciated, but it seemed to have

been extraordinarily effective and kind of a backdoor way to get

people involved who normally wouldn't want to come out and support

sanctions on Russia. So, I'm wondering, because it's so important,

if you could just explain what that is and why it's been so effective.

Yeah. So, after Russia's full-scale invasion of Ukraine in

February of 2022, the US and the rest of the G7 were intent on

imposing really aggressive sanctions on Russia. And I think

one of the challenges they had was honestly similar to the challenge

that policymakers faced toward Iran in the early 2010s which is,

you know, that Russia was a massive oil producer, five million

barrels of crude oil and another two and a half million barrels

of petroleum products each day. And so there was, really, a

limit probably to how much pressure you could put on Russia

without going after its oil sales.

AndI think quite quickly

the US and the G7 hit that limit. They imposed sanctions on

Sberbank and VTB, which are the two largest banks in Russia.

Theyimpose the foreign Direct Product Rule on Russia. So, the same

technology and semiconductor export controls that we talked about

with Huawei are imposed on Russia as a whole. And so, over the

course of 2022, you know, Russia's economy is definitely struggling

under these sanctions and export controls. But the war is going

on. And so, it's quite clear that something needs to be done about

Russian oil.

Andso, what the US and its allies come up with is

this idea of a price cap, which is that you can continue buying

Russian oil. So, if you're a Chinese or Indian refinery, you can

import Russian oil. But if you use services from companies based

in the G7, so, for instance, if you use Greek shipping, or British

insurance, or American trade finance, then you can only buy that

Russian oil for a price below $60 a barrel. So, it effectively

imposes a cap on the price of Russian oil.

Andthe reason that

the US and its allies think that this might work is because of

these chokepoints that exist in energy supply chains, in particular,

the shipping sector, which, you know, is really dominated by

Greece and several other European countries. The maritime

insurance sector, I think 95% of all oil cargoes are covered by

the International P&I Club, which is based in London, and then

of course, US Dollar and trade finance.

Buteven when this price

cap is imposed, I think there's still some anxiety that if

it's done too aggressively that you could see some Russian oil

come off the market and you could cause a spike in oil prices,

which is something the Biden administration is petrified about

because of inflation running at 40-year highs and gasoline prices

pretty high.

Andso, what we see is really for the first six to

12 months of this policy being in effect, it works really tremendously

well, and it cuts Russian oil revenues very substantially. But

sort of in the vein of the conversation we had just before about

where is this headed in the long term, it also creates a structural

incentive for Russia to build its own end-to-end oil supply chain,

to buy old tankers that it can use basically as a substitute for

the Greek shipping companies it used to use, or do sovereign guarantees

instead of using British insurance. And so, what happens is,

over time Russia does find ways around this price gap by effectively

indigenizing its energy supply chain.

AndI think where we are now

is we're at sort of an impasse because the price cap is still in

effect. Russia has, I think, successfully built workarounds to

it and the Biden administration never tightened it,

I think, to the extent that it could be effective in the long term.

And so, I think one of the first big decisions the Trump administration

is going to have to make on Russia is what to do about this policy.

Youknow, they could, could strengthen it pretty significantly

by using some of the tools we talked about with respect to Iran,

like the escrow accounts, I think could work very well against

Russia. But you know, a lot of that will come down to the prioritization

and whether they're going to take a risk in terms of energy prices.

Yeah. And you know, it's, it's led to a kind of a bifurcation in

the oil market, which was, for a long time, kind of the ultimate

globally traded commodity with a single price. And now we have multiple

prices. And I just was wondering if you think that is what

we're going to see with, with other markets around the world.

I think that's right. I think that you sort of hit the nail on

the head where a barrel of oil was roughly the same price, whether

it was coming from the Gulf of Mexico, or Saudi Arabia, or Russia,

up until 2022. And now you're starting to see really two oil markets.

Yousee a market for regular oil and a market for sanctioned oil.

And a part of the reason that countries like India and China have

bought so much Russian oil is that they're getting it at a significant

discount to Brent, which is the international benchmark.

AndI

do think that, to go back to our conversation about kind of building

this new global economy that comes after globalization, I do think

a hallmark of it is going to be that some of these markets that

used to look like a global commodified market become really

geopoliticized, where there are markets for Russian commodities

that sell for discounts, and can only go to countries that don't

support sanctions, and then markets for commodities from countries

that sell probably for a higher price but have a lower risk

of incurring sanctions.

So,I do think that in many ways the oil

market, by kind of coming under this grip of the national security

state, points the way forward for what we're going to see in a

lot of other markets in the years to come.

So do you… Is your… I mean, this is kind of an unfair question,

I guess, but I'll ask it anyway. Is your vision or view of

the... I don't know if endgame is the right term, for where we end

up that kind of mirrors the Cold War, where we go into like an

Orwellian world where there's kind of three big powers that don't

really interact very much economically? Is that where we're

headed? I mean, you know, that's one argument, but then the

data says that global trade has actually held up remarkably well.

So, I don't know, where do you think we are in 10 years?

Yeah, it's a, it's a really good question. I think that almost

certainly we are going to see some level of kind of blocks that

form in the global economy. I think that there are different versions

of that future and, and we're not exactly sure where it's going

to be.

Ithinkin the optimistic version of that future,

you know, you really see blocks that are formed really only

around very strategic technologies and commodities. So,

maybe there's a semiconductor supply chain or supply chain for

advanced semiconductors and military technology that exists only

with the US and its allies. So, this is kind of the friendshoring

model. And then maybe another supply chain that China and Russia

and some of, you know, what I would call the authoritarian axis

has.

Andmaybe in that world you wind up, actually, with a more

stable global economy because you don't have necessarily the ability

to coerce other countries through economic warfare and you

feel a little bit more secure. I think part of the reason you've

seen such, I think, hawkishness on China in the US, both

in the Democratic and Republican side of the aisle in recent

years, is that there's a real sense of vulnerability that we're

reliant on China for really strategic products that we can't

get in a crisis. And I think we felt that viscerally during the

worst part of COVID when we couldn't even get masks because China

kind of had produced, was producing all the world's masks.

Ithinkthe bleaker version of that future, and it's the one that

I'm particularly worried about with the Trump administration, if

they do sort of go into this direction of not only sanctions and

tariffs against China, but also against Europe and Mexico and

Canada and other close US allies and partners, is that you

have just a much more disorderly kind of breakdown of the

global economy that probably doesn't happen overnight just because

the US and China still have what, $600 billion almost in bilateral

trade a year.

Youcan't go from that to zero overnight, but

you start to see more shortages, more inflation. That just

kind of becomes more of a regular part of our daily life. And

then of course, at the end of that, where are we left? We're left

in a situation in which countries may not be able to get

the critical resources they need through trade. They may not

be able to get the things they need through for sort of peaceful

commerce.

Andwhat has happened, when that has happened

historically is the temptation for things like military conquest

begins to rise. You look back at sort of Hitler's calculus in the

1930s, his desire for Lebensraum and kind of conquering

parts of what was then the Soviet Union was getting key resources

and commodities for the German people that they couldn't get through

other means. So, I do think that there are two very, very different

futures that we could be headed toward in this block-based

economy. And I certainly hope we're in, in the former rather than

the latter.

Well, thanks for that. I appreciate you taking the challenge

of answering that question. I know it's impossible to answer, but

I think these are things we should all be thinking about. And

the book is a great kind of entree into just a deeper understanding,

as we said, of the contours of the new world economy that are being

built.

Yousay, toward the end of the book, that trust once lost

is not easily regained, and the scramble for economic security

is underway, and we're not going back to where we were in the

past.

So,Edward, thanks so much for writing the book and for

taking the time to talk about your ideas with us on the show. We

really appreciate it.

Thanks so much for having me on, Kevin. I really enjoyed our conversation.

Okay. The book is called Chokepoints: American Power in the

Age of Economic Warfare. And please go out and get a copy of Edward's

book and make sure you follow his work because I think, as you

can tell from our conversation today, a lot of these ideas are not

being discussed enough on mainstream media. For all of us here

at Top Traders Unplugged, thanks for listening and we'll see

you soon.

Thanks for listening to Top Traders Unplugged. If you feel you

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