The New Era of Economic Warfare, With Edward Fishman

LINDSAY:
Welcome to The President's Inbox. I'm Jim Lindsay, the Mary and David Boies Distinguished Senior Fellow in U.S. Foreign Policy at the Council on Foreign Relations. This week's topic is the new age of economic warfare.

With me to discuss the expanded use of financial and trade sanctions by the United States in recent years, and whether they have enabled Washington to achieve its foreign policy objectives, is Edward Fishman. Eddie is a Senior Research scholar at the Center on Global Energy Policy and an adjunct professor of International and Public Affairs at Columbia University. From 2015 to 2017, he was a member of the Secretary of State's Policy Planning staff and represented the State Department at the National Security Council's Strategic Planning Group. He was previously the Russia and Europe lead in the state Department's Office of Economic Sanctions Policy and Implementation, and before that, he was a member of the Iran Sanctions team during the nuclear control negotiations. He's the author of the new book, Chokepoints: American Power in an Age of Economic Warfare. Eddie, thanks for joining me on the President's Inbox and congratulations on the excellent reviews that Chokepoints has received. I see the Financial Times has called it a masterful narrative and the Wall Street Journal called it compelling and dramatic.

FISHMAN:
Thank you so much, Jim. I've been a fan of this podcast for many years, so I'm excited to be here today.

LINDSAY:
Well, I'm glad to have a chance to chat, Eddie. I want to get into the ways in which successive U.S. administrations over the past fifteen years or so have used various tools of economic statecraft to try to bend others to Washington's will. But before we do so, I want to begin with what I would call the conventional wisdom about economic sanctions, and that is they don't work very well. What was the conventional wisdom, and why did it come about?

FISHMAN:
So that conventional wisdom really comes about at the very beginning of the 21st century, and it's in the wake of a thirteen year UN-backed embargo against Saddam Hussein's Iraq. Right after Saddam Hussein invades Kuwait in 1990, the UN imposes a full scale embargo on Iraq. That embargo actually lasts beyond the end of the Gulf War in 1991 and persists all the way up into 2003. The embargo was implemented by a multinational naval force. For that entire thirteen year period, there were sailors from twenty different countries under the command of a U.S. naval officer patrolling boats coming in and out of Iraqi ports all around the clock. Inspecting cargoes, sometimes they would even have to take oil samples from tankers and send them out for laboratory testing to try to ascertain their origins. I think what this shows is, even as recently as the 1990s, economic warfare was really an offshoot of military force. The Pentagon was commanding this mission more than the Treasury Department or the State Department. It was very costly.

I think, beyond that too, it required full backing from the UN, and this was a unique period in modern history, where you actually had Russia and China and those permanent members of the Security Council willing to support something like this. Yet, even after those thirteen years, there's this belief that the sanctions have failed. Really, I think it's in one of the very first National Security Council meetings of George W. Bush's administration, where Donald Rumsfeld basically says that, "Sanctions haven't worked. We need to consider a new military option against Iraq." And in many ways, the invasion of Iraq in 2003 was an outgrowth from the belief that sanctions had been tried and they didn't work. And so, that really was the conventional wisdom on the eve of what I call the Age of Economic Warfare. That sanctions are costly, have humanitarian challenges, and frankly, do not work.

LINDSAY:
And I should note, Eddie, there are lots of other examples one can offer on that score besides the sanctions against Iran. I remember the U.S. grain embargo against the Soviet Union after the invasion of Afghanistan. You had the failed effort by the League of Nations to impose sanctions on Italy after its invasion of Abyssinia or Ethiopia. There's a long list of examples of sanctions that were particularly on goods failing to produce the sorts of outcomes that the sanctioning country hoped to achieve. So, what changed?

FISHMAN:
What changed, and you know in many ways, was an ironic turn, because, you know, as I mentioned, the Iraq War in 2003 largely comes out of the view that sanctions hadn't worked. That said, you know, when the inspectors actually go into Iraq after Saddam Hussein is overthrown, they realize that his nuclear program has actually not been reconstituted to the extent that they thought it was. One of the ironies of the Iraq sanctions is, well, they never changed Saddam's calculus. They did significantly hamstring his ability to produce weapons of mass destruction. To a certain extent, they kind of did work and we just didn't realize that they had worked. But when we get to 2005, when Iran elects Mahmoud Ahmadinejad, an extremist hardliner as their president, who speaks repeatedly about potentially wiping Israel off the face of the Earth and restarts their nuclear enrichment program, we have a political problem in the US, which is that Iran is developing a real nuclear program, but we're already committed to two wars in the Middle East, in Afghanistan and Iraq, and there's just no political appetite or resources for a third war. And so, we have a problem.

You go back to the 2004 election, George W. Bush and John Kerry are repeatedly asked about how are we going to stop Iran? Iran, couldn't they get nuclear material and give it to Hezbollah, and we could have a nuclear 9/11? And neither of them has a good answer. And so, after Bush is re-elected, he makes this comment where he says, "We've already tried sanctions against Iran, we can't sanction them anymore." And one of the people listening is his own Undersecretary of the Treasury for Terrorism and Financial Intelligence, Stuart Levey. And when he hears Bush say this, he takes it as a personal challenge and he says, "Well, really, maybe I can think of something else." There's this episode I recount in my book Chokepoints, where Stuart is traveling to Bahrain and flipping through a newspaper and he reads about a Swiss bank who has stopped doing business with Iran of their own volition. They just decided it wasn't worth the risk.

And a light bulb goes off in Stuart's head where he realizes, "Well, maybe we don't need UN-backing for sanctions against Iran. Maybe we don't need to deploy the U.S. Navy to the Persian Gulf to police Iraqi ports. Maybe I can just go around the world, talk to bank CEOs, bring with me dossiers of declassified intelligence, showing them how their banks are being used to funnel money into Iran's nuclear program and to supporting Hezbollah and Hamas, and persuade them of their own volition to quit business with Iran. I could basically isolate Iran from the global financial system." And this was the key insight that leads to the invention of financial sanctions that we now use and rely on more than any other tool in our arsenal today.

LINDSAY:
So let's talk a little bit about the use of financial sanctions, Eddie. I should note for full disclosure that Stuart, after he left government, was a fellow here at the Council in Foreign Relations for a bit, so I want to do the full disclosure note. But on this issue of financial sanctions, my understanding had been that for a long time, US officials, particularly officials in the Treasury Department, were reluctant to use financial devices to go after other countries. I believe Bob Rubin, very successful Treasury secretary in the 1990s, had phrased the concern is that if you were to do this it would jeopardize the sort of special role that the dollar has in international finance as the reserve, the currency that most international transactions are carried out in.

FISHMAN:
Yeah. That's exactly right, Jim, and I'm glad you brought up Bob Rubin, another CFR family member.

LINDSAY:
Chairman Emeritus.

FISHMAN:
Yeah. You know, the possibility of modern financial sanctions really comes to the fore in the 1990s, because it's in the 90s after the end of the Cold War that we do get true hyper globalization. We start bringing in China, Russia, other countries that had previously not really been integrated into the global financial system, deeply enmeshed in the dollar-based financial system.

LINDSAY:
So before, they were disconnected, and then with the advent of the collapse of the Cold War and the integration, now they're connected to some extent.

FISHMAN:
Exactly, and this accelerates in the 90s and really accelerates in the early 2000s when China and Russia come into the WTO, because they're trading more and as a result, they're having to do more foreign currency transactions. When you're trading, even if China's trading with a country that's not the United States, usually they're clearing that trade with dollars.

LINDSAY:
Can you give a specific example? Because I think, for most people, it's really hard to understand what seems to be the opaque nature of international transactions.

FISHMAN:
Sure. Let's talk about potentially China buying oil from Saudi Arabia. Chinese banks don't carry Saudi riyals and Saudi banks don't carry Chinese RMB. Banks around the world, it would make no sense for them to try to have every single currency they may encounter. So typically, what they have is they have significant stores of their own local currency and the dollar. And so, if you're trying to make a transaction between RMB and riyals, what you'll do would be to take the RMB and convert them into dollars and then pay in dollars, and then the recipient bank could either hold those dollars in a correspondent bank in New York or take them and then convert them into their home currency.

And so, even in transactions, where no U.S. company is involved, the dollar often serves as this intermediary currency. And that's why I think one of the best statistics for this is by far the biggest market in the world is the foreign exchange market with about seven trillion dollars in turnover every day, and ninety percent of all foreign exchange transactions have the dollar on one side of them. Contrast that with trade, where I think the U.S. accounts for something like five percent to ten percent of global trade. So clearly, there's a number of transactions that are happening that aren't really about trading with the U.S. that are still using the dollar.

LINDSAY:
I have to ask, Eddie, why does it matter that such a high percentage of international financial transactions are carried out in the dollar and flow through U.S. banks in one way or another?

FISHMAN:
Yeah, because what this does is it provides the U.S. government with a chokepoint. It is a part of the global economy, where the United States has a dominant position and there is basically no alternative, and so, the U.S. can cut people off from this network. And so, looping back to the point about Stuart Levey, many banks that he talked to in capitals like London or in Frankfurt financial capitals did decide to stop doing business with Iran of their own volition, but there are some in places like Dubai and in Turkey that didn't. Right? They said, "Well, okay. Well, what are you going to do about it? I don't care. I'm going to keep doing business with Iran."
And what Levey is able to do is he's able to threaten their access to the U.S. financial system, to tell a bank in Dubai that if you keep doing business with Iran, you will lose access to this U.S. dollar-based system that we just talked about, and without access to the dollar, you basically can't do business in a major way internationally. And so for, you know, almost all banks around the world, they then comply with that dictate, and this is what's known as secondary sanctions.

LINDSAY:
So explain how secondary sanctions work.

FISHMAN:
So a primary sanction, to use Iran as an example, would be for the United States to impose sanctions on an Iranian bank like Bank Melli, which is the largest bank in Iran. If that were the case, which is and has been now for decades, U.S. persons, U.S. banks, U.S. individuals cannot transact with Bank Meli. It's illegal to do so. You can be fined and put in jail as an individual if you're knowingly transacting with Bank Meli.

LINDSAY:
And the fines are fairly substantial.

FISHMAN:
The fines are proportional to the amount of business you're doing. So BNP Paribas was doing a lot of sanctionable business with Iran, and even though they're French, they're operating as a U.S. bank, and they were fined nine billion dollars in 2014, which wiped out their whole net income for the year, so it can be quite substantial. A secondary sanction would be for the United States to go to, you know in this example again, Dubai Bank and say, bank in Dubai, if you're transacting with Bank Meli, you yourself can be sanctioned. You will be cut off from the U.S. financial system. So it's basically giving foreign banks a binary choice. You can do business with the U.S. or do business with Iran or Russia or whoever else it is, and this is a very powerful threat given the importance of the dollar as a chokepoint.

LINDSAY:
So how did this work in the specific case of Iran? Stuart has come up with this idea, he's managed to sell it both internally in the U.S. government, and I think it's important to stress that the U.S. government is not a monolith. There were people of different views of the wisdom of what Stuart was trying to do and how effective it would. But eventually, he got people to come around. How did it play out? What were the consequences and the limits to what Stuart devised, Eddie?

FISHMAN:
So I think one thing that is important about this Iran story, which is really a fascinating story, one of my favorites that I wrote about in the book, is that it helps people understand, I think, and readers who I've spoken to so far, that sanctions campaigns don't work overnight even when they're very successful, right, because Stuart launches this campaign in 2006. He's actually reappointed, even though he's a Republican, he's reappointed by Barack Obama and continues on to serve for the first couple years of the Obama administration. But by the time he leaves in 2011, Iran is isolated from the international financial system, but its economy is still chugging along. It's not in free fall yet. And that's because the one area of Iran's economy that had not really been hit was oil. There was a real fear in both the Bush administration and the Obama administration about taking Iranian oil off the market and some doubt about whether it would be possible just, you know, using these financial sanctions to take Iranian oil off the market. You're not going to be deploying the Navy like we were against Iraq.

And so, after Levey leaves, the U.S. Congress starts imposing quite a bit of pressure on the Obama administration to finally take action against Iranian oil sales. What this leads to is a compromise, and actually, David Cohen, who is the successor to Stuart Levey at the Treasury Department, comes up with a compromise with the Congress, where they say that the U.S. will sanction any bank that is transacting with Iran's central bank, because the central bank of Iran is the repository for Iran's oil proceeds, but they can be exempted from these sanctions if their country reduces their purchases of Iranian oil every six months. So for instance, a bank in China can pay for Iranian oil, China can import Iranian oil, but only if China, as a whole, every six months lowers the amount of oil it's buying from Iran.

So, it leverages this threat of secondary sanctions. It leverages the financial chokepoint, but it does so in this really elegant and fairly complex way. Remarkably, it works, and within eighteen months of this going into effect, Iran's oil sales drop from two and a half million barrels a day to just one million barrels a day, so a sixty percent decline. Jim, that is really what it took in 2012 for Iran's economy to go into free fall to start moving into a dramatic recession. In some ways, history has its own ways of working sometimes in our favor, that was when in 2013 that Ahmadinejad was term limited and there was an Iranian election. And so, this economic crisis lines up with a political opportunity in Iran for one of the candidates, Hassan Rouhani, to effectively run on a platform of trying to get sanctions relief in exchange for a nuclear deal, and he wins in an eight-candidate field with fifty two percent of the vote. That is really what opened up the possibility of negotiating a nuclear deal.

LINDSAY:
I want to come back, Eddie, to the Iran case and how it played out in a moment. But first, let's talk a little bit about how financial sanctions and trade sanctions played out in the case of Russia, first, in the aftermath of Russia's seizure of Crimea in 2014.

FISHMAN:
One thing I tried to do in this book, Jim, is to show people how our history doesn't exist in silos. Right, the same people making decisions in the situation room on Iran are the ones who are making decisions on Russia, even though we oftentimes tell our history in these silos. And so, there's this interesting parallel, where the day that Obama gets the joint plan of action, which freezes Iran's nuclear deal, it's November 24, 2013, is the same day that for the first time you have over a hundred thousand protestors pour onto the Maidan in Kiev.
And I think that parallel is important, because when the Obama administration is scrambling to figure out what to do about Russia's annexation of Crimea a month or two later is right at the pinnacle of confidence in sanctions as a foreign policy tool. All of these officials had just come right off of this shock where we had frozen Iran's nuclear program just by using sanctions without firing a shot, without going to war, which was something that surprised even myself at the time, and I was working on this issue.

So there was some confidence that sanctions might work against Russia. The challenge, of course, was that Russia was the 8th largest economy in the world at the time, a much bigger oil and gas producer than Iran, and actually larger than all other economies under U.S. sanctions combined. And so, there was real concern that pushing Russia's economy into a crisis could lead to contagion that would spill into Europe and potentially then spill into the United States. And then, of course, there's the factor of time, where Iran's nuclear program was a really significant national security threat, but it was a slow moving threat, there were years to deal with it.
Whereas, with Russia's annexation of Crimea, you know the little green men show up in late February and two weeks later, the Duma has voted to annex Crimea. And so it's a rapidly moving crisis where the U.S. is working from behind, and then, one final point is that the UN, which had always been the primary mechanism to get multilateral sanctions even against Iran, is no longer a viable mechanism, because all of a sudden one of the permanent members of the UN Security Council is actually the aggressor in this case. And so Dan Fried, who's the sanctions coordinator for the Obama administration, has to stitch together this Coalition of the Willing to do sanctions, and of course, that takes months to build that coalition.

LINDSAY:
So help me understand, Eddie, what the purpose of the sanctions against Russia were in the aftermath of the seizure of Crimea, because by that point, the territory had already been taken. Was it merely to punish the Russians or was it to try to force the Russians to relinquish Crimea?

FISHMAN:
It's a really important question, and you're right that the sanctions were too slow to really have anything to do with Crimea. And I think the assessment we made at the time, within the Obama administration, was that it was very unlikely that, at least in the foreseeable future, we could use sanctions to extract Russia's hold of Crimea. And that was because, again, the Duma legally annexed the territory. And so, it would be quite a step for Russia then to give Crimea back. But what happened was, in early April, so just two weeks after the annexation of Crimea, little green men start showing up in Donetsk and Luhansk, and the beginnings of the war in the Donbas, which in many ways is still going on today, start really in April. And that's when also Putin's spokespeople start talking about this concept of Novo Rossiya for the first time, which is this greater Russia including something like half of Ukraine's territory.

And then, just from a pure geopolitical standpoint, you know, Russia has annexed Crimea, but there's no connection by land from Russia to Crimea, and so, it makes a lot of sense for the Russians to, at the very least, try to seize territories in the Donbas, like Mariupol, to connect the Russian mainland with this new Crimea annexation. So the goal of the sanctions pivots from us really trying to punish Putin, which I think was in the initial case, you're right, because Crimea, we weren't going to get that back quickly, to try to deter Putin from going for this broader Novo Rossiya goal. It really moves into a deterrence strategy.
And in some ways, we got lucky, because Putin, at the time, was still worried about being seen as overtly intervening in Ukraine. And so he was claiming that these were Russian proxies. They clearly weren't. They were being trained and equipped, and in some ways, commanded by Russian military forces, but he wasn't willing to send in the regular army until August of 2014. So even though we were moving a bit slowly on sanctions building this international coalition, Putin also was inhibited at the time, and I think it gave us a real chance for deterrence to work.

LINDSAY:
So, help me understand then how sanctions played out in the 2022 Russian invasion of Ukraine. In that case, in the lead up to the Russian invasion, President Biden clearly threatened economic sanctions in an effort to try to deter Vladimir Putin. Indeed, Biden said that he intended to impose the most severe sanctions that have ever been imposed. What was the nature of the United States response? And we obviously know it did not deter Putin because they invaded Russia, but how have those sanctions played out and have they met the expectations that policymakers had before they imposed them?

FISHMAN:
Jim, you're a hundred percent right. I think the goal of the Biden administration was to deter Putin from invading Ukraine the way he did in February 2022. This crisis in 2021, 2022 was also quite unique historically, in that the U.S. intelligence community gets it exactly right, which almost never happens. Five months in advance, they basically call that Putin is about to launch a large scale invasion of Ukraine. And so, unlike in 2014, Biden has time before the crisis to build the international coalition, put together the sanctions options and to message that if Putin invades there will be dramatic economic consequences. Of course, deterrence fails, so there's a real question as to why it failed, and I think if it's okay, I'd like to loop back for a second to this moment in 2014, 2015, because I think that is a key pivot point.

So after this sectoral sanctions go into place in Russia in the summer of 2014, in the second half of that year, the oil price falls by fifty percent, has nothing to do with sanctions. It has more to do with the Federal Reserve and oil demand than sanctions. But the combined effect of the collapsing oil price and the Western sanctions by winter of 2014 to 2015 has Russia's economy in a tailspin, similar honestly to Iran in 2013, declining at an annualized rate of about ten percent that winter. That is actually when the Russians explicitly disavow the Novo Rossiya goal, so there's some sense that deterrence may be working, and there's a discussion, a debate that goes on in the U.S. and Europe about should we press our advantage? Should we really try to turn up the heat and try to get the Russians out of the Donbas?

And European leaders at the time say, "No. We are worried that an economic crisis in Russia is going to bring down the Eurozone." And so, it's right then that Merkel and Alain, the German and French leaders, go to Minsk and negotiate this Minsk ceasefire in February of 2015. Mind you then, in the months ahead, Russia violates the ceasefire and sanctions are not increased, and I think that shows that the reason the West backs off isn't because they have faith that Russia is going to implement the ceasefire. It's because the West just doesn't have the spine to go forward with these really dramatic economic consequences that are being reaped on Russia. And so, I think the lesson Putin derives from that experience in 2015, was that the West just doesn't have the will to do real economic warfare.

LINDSAY:
So, he interpreted, in your view, Biden's threat as a bluff.

FISHMAN:
As a bluff, exactly. And I think it's reinforced, by the way, if you look at Obama, Obama made a very similar threat to Biden in 2016, personally, to Putin at the G20. He says, "If you keep interfering in the U.S. election, we are going to do dramatic sanctions on you." And he kept interfering in the U.S. election, and there are no sanctions to speak of, very minor ones.

LINDSAY:
Illustration of the rule, you shouldn't threaten what you're not prepared to do.

FISHMAN:
One hundred percent. And then, of course, Trump comes in and for four years, Trump does not increase sanctions on Russia at all. I think by the time you get to Biden's threats in 2021 and 2022, Russia has had seven years or six years to basically adapt its economy. So they're more sanctions proof, not fully sanctions proof, but more than they had been in 2014. And I think, psychologically, are more important than even any of the preparation, Putin just doubts the threat that Biden has. The best example of that, Jim, we actually don't have to get inside Putin's head to know that this is true, is within forty eight hours of the invasion on February 24, the G7 agrees to sanction the central bank of Russia. That was what Putin tried to do. He tried to build up Russia's foreign exchange reserves to sanctions-proof their economy. And yet, of the $630 billion in reserves, something like half are sitting in Western bank accounts.

You got to imagine, Jim. If Putin had expected that within twenty-four, forty-eight hours of an invasion, that Europe and the United States would sanction the central bank of Russia, he would've diversified far more into assets like gold and RMB and other alternatives, maybe even cash. He could have taken boatfuls of dollars and euros and bank notes and brought them to Russia. Instead, these were sitting just on the balance sheets of banks. And so, as a result, half of his war chest was frozen just two days into the war.

LINDSAY:
Let's jump ahead, Eddie, and talk about U.S. economic warfare against China, in that case, not financial sanctions or blocking banks, rather the focus is on export controls. What has been the purpose of that effort and how is it playing out?

FISHMAN:
I talked earlier how Stuart Levey has this light bulb moment in 2006 when he realizes that banks and the financial system can be a chokepoint against Iran. There was a similar light bulb moment that happens in the spring of 2018 within the Trump administration that occurs to people like Matt Pottinger, who's the Senior Director for Asia at the National Security Council at the time.

LINDSAY:
And who once was the Edward R. Murrow Press fellow here at the council.

FISHMAN:
All roads lead to CFR, Jim, I think is maybe the takeaway. What happens then, in an ironic twist, ZTE, the second largest telecom equipment maker in China, basically, there had been a settlement for violating Iran sanctions that is signed right at the beginning of the Trump administration. And in 2018, it becomes clear that ZTE is violating this settlement. So what happens is Wilbur Ross, the Commerce Secretary, imposes significant export controls on ZTE, what's called a denial order, that cuts off ZTE from buying any goods from American companies, and at the time, ZTE is reliant on things like Qualcomm chips for instance.

It has nothing to do with our China strategy. It's really just because they had violated Iran sanctions, so it's sort of incidental. But within a couple of weeks, ZTE announces that it's about to go out of business. So these export controls almost bring down one of China's top technology companies very rapidly. It's so dramatic that Xi Jinping gets on the phone with Donald Trump in early May and begs him to remove the denial order from ZTE. Trump agrees because he assumes Xi will owe him one down the road.

LINDSAY:
Did President Trump get something down the road from Xi Jinping?

FISHMAN:
He did not. Nothing to speak of. I think this was, at the time, when Trump had more confidence in Xi. That winds up declining quite a bit in 2019 and 2020, but he still has some confidence in Xi, doesn't get much to speak of. But while there's frustration amongst the China hawks and the Trump administration, there's also this realization that technology, and in particular semiconductors, can be used as a weapon against China. And so this winds up serving as the blueprint for export controls that are then imposed on Fujian Jinhua, which is a memory chip maker in China that is also effectively put out a business by export controls. And then, critically, Huawei in 2019 is put on the entity list, and that really, I think the Huawei entity listing and then the foreign direct product rule, which goes into effect the next year, that is really the beginning of what we now call the U.S.-China Tech War that expands dramatically under Biden and that continues to this day.

LINDSAY:
This is focused simply on constraining or slowing down the growth of the Chinese technology sector, or is it tied to specific policy ask of Xi Jinping?

FISHMAN:
You're identifying a very important point, and I think this is a pivot, this pioneering of the Tech War against China, a pivot in how America thinks about economic warfare. Because really, up until the Tech War against China that starts in earnest against Huawei in 2019, we really viewed economic warfare as a means to an end. You were damaging another country's economy because you wanted then to dangle the prospect of relief to get something that we wanted diplomatically. And there was still this assumption that the ordinary state of affairs economically was open trade and investment. With Huawei and with China, there's no behavior-less calculus at all. The whole goal is to just hold back China's technological development. In Huawei's case, it was to prevent Chinese 5G equipment from rewiring the globe and basically giving China access to a chokepoint in telecommunications networks that was on par with the dollar in financial networks.

The reason I think there's this big intellectual shift is it really is about weakening China, about constraining China, and there's this new assumption that the baseline state of affairs between the U.S. and China is not free and open trade, it's restrained trade in certain key sectors.

LINDSAY:
So, how, Eddie, does President Trump's current effort to use America's economic might to compel Mexico and Canada in particular to change their policies on fentanyl, on border security, as well as internal policies about manufacturing and protectionism fit into your schema? Is this an example of economic warfare? Is it a throwback to an older style of warfare? I'm trying to understand what the chokepoints would be here.

FISHMAN:
Yeah. So I don't think Trump has a great understanding of chokepoints personally. At the same time, you know the U.S. is the world's biggest importer, and we are the biggest market for other country's goods. So to a certain extent, you could weaponize our role as a consumer market, and that's effectively what tariffs do, right? What I would say though is that tariffs relative to something like sanctions are a very weak tool. The example I give, Jim, is let's talk about Canada, twenty-five percent tariff on Canada. I make pancakes for my daughter on weekend mornings oftentimes. If we had a twenty-five percent tariff on all Canadian imports, I could still buy Canadian maple syrup from a Canadian company. It would just cost me twenty-five percent more.

Now, think about if you were to sanction the Canadian maple syrup company. I would be not allowed to buy that maple syrup, it'd be illegal. I could be committing a criminal offense by buying that maple syrup. And more to the point, that Canadian maple syrup company would probably go bankrupt, because they'd lose access to the U.S. financial system. Tariffs are a throwback. They're a weaker tool than sanctions. I think, on the flip side though, so I think in some ways Trump is using a weaker tool, he's also using economic warfare against a broader range of countries, right? Historically, we've used these tools against countries that are very clearly our adversaries like Iran, Russia, China, North Korea. Now, in some ways, Trump is using them more potently against our friends. Now, Canada, the EU, I think is almost certainly in for significant tariffs and maybe other sanctions in the coming months. And I think the challenge there is it really does create quite an incentive around the world to get around American chokepoints, to diversify away from the dollar, to diversify away from American supply chains.

LINDSAY:
So, this is a power that could be self defeating given how widely it's used, which goes back to Bob Rubin's original concern back in the 90s about using America's financial power to go after people. It gives people incentives to blow up what you call a chokepoint.

FISHMAN:
What's that phrase, saying about Chekhov's gun? You see a gun on stage. At some point, it's going to go off later in the play, and I think that was Bob Rubin's concern. Once you start using this weapon, someone might misfire it or use it in a way that really does create a significant blowback. I think a really good example, Jim, and I think the reason why right now, I actually am quite worried about at least the rise of a multipolar currency order in the next five years or so, is if you look at what happened in 2018, there was one time that Trump actually did impose some sanctions on Russia. Under pressure from Congress, he sanctioned a Russian aluminum company called RUSAL. It caused all kinds of chaos in aluminum markets, and literally, the next day he pulls back. He pulls the sanctions back without getting anything from Russia. It was just because this had caused all kinds of problems.

Ford was worried that they may have to stop producing the F-150, right? Russia then, after seeing the damage that these sanctions can impose, and realizing that Trump was quite a bit erratic with the use of sanctions, diversifies entirely away from the dollar. They took all of their dollars and their foreign exchange reserves and convert primarily into Euros, but also RMB and gold. They start settling all of their cross-border payments in euros instead of dollars. Fast forward to 2022, there's fear that the U.S. and the G7, if we impose sanctions on the central bank of Russia, the dollar could lose its role as a world's reserve currency. That's why Janet Yellen, as I recall in chokepoints, opposed this action initially because for the same reasons Bob Rubin was worried about it in the 90s.

But what happens is the U.S. doesn't just act unilaterally against the Central Bank of Russia, it works with the issuers of the other main reserve currencies like the euro, pound and yen. And so, in an interesting twist, in the years after those 2022 sanctions on the Central Bank of Russia, the dollar actually increases its share in cross-border payments at the expense of currencies like the euro and the pound, because the dollar is seen as having equivalent geopolitical risk, I think, as these other currencies. But now, what's happening with Trump doing unilateral economic warfare against everybody and everybody feeling vulnerable is you are seeing already a shift away from the dollar, and although data is still pretty early, toward currencies like the euro and the RMB that could accelerate.

LINDSAY:
Why would that matter, Eddie, for the average American? Saudi Arabia has more euros in its bank account rather than dollars. So what? What does that matter to somebody in Topeka, Kansas or Ottumwa, Iowa?

FISHMAN:
Well, at a very baseline level, and this is still some years away, where the dollar to lose its exorbitant privilege. Basically, there was not limitless demand for U.S. treasuries and dollar assets, the U.S. could not continue to run deficits year after year after year. Right, we would have to either dramatically raise taxes or significantly reduced spending or probably both. It would change the entire political economy of the United States. By the way, there are people in the Trump administration, including influential people, who think that the dollar's exorbitant privilege is actually a bad thing. And if anything, it over values the dollar and leads our exports to be less competitive than they otherwise would be. So there is an active debate around this, but I don't think people fully appreciate what it would mean if the dollar were just another currency like the euro or the RMB.

LINDSAY:
Eddie, I want to close by coming back to where we started, and that's what the question of, how effective, at the end of the day, is the new economic warfare in achieving the goals set out for it? You conclude that sanctions are like antibiotics. They work well when used correctly, but cause a host of problems when used excessively or inappropriately. So let me ask, we've already really talked about when they're used excessively, how do we know when we're using them correctly? And I say that because, in the case of trying to deter Russia, they didn't work. We imposed pain, maybe not as much as we expected, but at the end of the day, Russia went ahead and just continued the war. And even in the case of Iran, it certainly forced the Iranians to the negotiating table, but at the end of the day, the deal they agreed to was quite limited, and as you know very well, opposed by a lot of people in the United States as simply not being good enough, because whatever constraints it had were going to go away after five or ten years or fifteen years.

FISHMAN:
Yeah. Look, sanctions are not a magic bullet, but that again, no tool of statecraft is. Right? I mean military force is also not a magic bullet. Ask anyone who's been tracking Afghanistan policy for the last twenty years how well the US military did at accomplishing our political objectives in Afghanistan. So just like any other tool of statecraft, sanctions have their downsides. The reason I refer to the use of sanctions and export controls and now tariffs as economic warfare, is I think that we need to be honest with ourselves about the scale of the changes that these tools are reaping on the international order and the global economy.

And what that means is we should be using sanctions much more judiciously. Currently, we have something like thirty sanctions programs. I would hope that DOGE were doing their job, that we would have something like four or five sanctions programs. But when we actually are using these tools of economic warfare, we really need to mean it. We should be ready to act with overwhelming force. I think one of the reasons that Russia's sanctions to a certain extent have been disappointing is that we had one hand tied behind our back. We didn't go after the lifeblood of Russia's economy, which is its oil sales, really not until the very end of the Biden administration.

LINDSAY:
Because we were afraid of driving up the price of oil, which would've harmed the U.S. economy, but also might've actually made the Russians better off, right, because they're major oil producers.

FISHMAN:
Right, but at the same time, there's also the counterfactual that maybe there would've been a market disruption that rose the price of oil temporarily, but then, maybe the market corrects itself. Maybe you get the Saudis to pump more. Maybe more U.S. shale production is incentivized and come online. And I think, had Biden done that in 2022, you actually would've given time also from 2022 to 2024 for some of these outcomes like inflation or oil prices to sort of go back into equilibrium. I think Biden did make a mistake, and I think that this is a pathology of American economic warfare. Oftentimes, we don't accept the what it would take in terms of sacrifice to actually achieve our political objectives, we wind up with sort of a halfhearted policy. And a big goal in writing chokepoints is to arm people with the knowledge they need to make the case for smart, and when necessary, very significant uses of economic warfare.

LINDSAY:
On that note, I'll close up this episode of the President's Inbox. My guest has been Eddie Fishman, Senior Research scholar and adjunct professor at Columbia School of International and Public Affairs, and most importantly, the author of the terrific new book, Chokepoints: American Power in the Age of Economic Warfare. Eddie, there's a lot more we could have talked about. Sorry, we didn't get to it, but thank you very much for being so generous with your time.

FISHMAN:
This was a great conversation. Thanks so much, Jim.

LINDSAY:
Please subscribe to the President's Inbox on Apple Podcasts, YouTube, Spotify, or wherever you listen and leave us a review. We love the feedback. The publications mentioned in his episode and a transcript of our conversation are available on the podcast page for the President's Inbox on CFR.org. As always, opinions expressed on the President's Inbox is solely those of the host or our guests, not of CFR, which takes no institutional positions on matters and policy. Today's episode was produced by Justin Schuster with Recording Engineer, Jamie Stoffa, and Director of Podcasting, Gabrielle Sierra. This is Jim Lindsay. Thanks for listening.