Chokepoints: American Power in the Age of Economic Warfare

by Edward Fishman

A second crack in the façade stemmed from backlash to the constraints on cross-border capital movements. In London during the 1960s, a new market emerged in which firms could deposit, borrow, and exchange dollars. As it was based outside the United States, the so-called Eurodollar market was free from regulation and thus gave banks and multinational corporations an avenue to evade the strict capital controls of the time. Although the Eurodollar market was something of a Wild West, the British government embraced it as a way to preserve the City of London’s role as a world financial center. The U.S. government could have taken steps to shut the market down, but Washington also ended up supporting it out of its own self-interest: the Eurodollar market increased the appeal of dollar holdings, effectively enticing foreigners to finance American deficits, which were growing rapidly amid the Vietnam War. It didn’t matter that the Eurodollar market undermined Bretton Woods; the prospect that Washington could run big deficits and avoid spending cuts trumped all. In a manner that today’s cryptocurrency enthusiasts could only dream of, the Eurodollar market started as an unauthorized monetary experiment and then evolved, with the blessing of the U.S. and British governments, into a piece of critical infrastructure for the world economy. Gradually, the capital controls of Bretton Woods eroded, and money began moving across borders more freely.

In July 1974, Simon boarded a plane at Andrews Air Force Base and headed for the Saudi coastal city of Jeddah. En route, he indulged in copious amounts of whiskey. By the time he got off the plane, he was noticeably drunk. The liquor had no apparent effect on his negotiating ability, however. Simon was no Kissinger; he was not schooled in the art of diplomacy. But he was a damn good bonds salesman, and he left the desert kingdom with a deal in hand: In exchange for American military assistance and continued oil purchases, the Saudis would funnel their oil money into U.S. Treasury bonds, which they would be permitted to buy in secret outside the normal auctions. Simon had secured a commitment by a foreign country to finance American deficits—and the petrodollar was born.

Undergirding the entire system, however, was the U.S. dollar. No data point better illustrates this than the meteoric rise of the foreign exchange market to become the biggest financial market of all. In the 1950s, global foreign exchange trading was minimal. By the 1990s, it had reached almost $1 trillion per day, roughly forty times the daily value of global trade. Today, foreign exchange trading eclipses $7 trillion each day—a staggering volume that is more than eighty times the daily value of world trade. (If you don’t have a calculator handy, that’s equal to an annual market volume of around $2.5 quadrillion.) A whopping 90 percent of these foreign exchange transactions involve the dollar.

Moscow took the colossal rents it generated selling oil and gas and redistributed them to pensioners and to industries that were not globally competitive but employed large numbers of people, such as auto manufacturing. It also used these rents to finance Putin’s military buildup, which was costing Russia 25 percent of its total federal budget by the time the “little green men” descended on Crimea. All this meant that Russia was completely dependent on foreign trade—more so than the United States, more than Japan, more than even China. But that dependency cut both ways, and it was clear that Europe would never agree to anything amounting to an oil or gas embargo.

Heavily dependent on Russian energy, the EU had a lot to lose from a protracted economic struggle with its eastern neighbor. The zeal for sanctions in Europe after the MH17 tragedy was an exception, not the norm. In the end, the West’s caution proved a costly error. It allowed Russia to absorb the initial shock of sanctions and then carry on much as it had before. It gave Putin the chance to partially rehabilitate his country without doing anything to reverse the damage he had inflicted upon Ukraine. And it ultimately reinforced Putin’s view that the West was weak and unwilling to bear the burden of a high-intensity economic standoff. All this would have ripple effects well beyond the current crisis.

Yet he did not seem to grasp that the deficit also reflected that the average American consumed more than the average Chinese and enjoyed a far higher standard of living. He also did not seem to appreciate that ending the deficit by increasing U.S. exports to China would require an unfathomable increase in exports. The year before Trump entered office, the U.S. trade deficit with China stood at a whopping $350 billion, three times the total value of American exports to the country. Closing a gap this wide would be impossible by simply inking a trade deal that promised to grow U.S. exports, but Trump charged on anyway.

To Matt Pottinger, however, Trump’s reversal mattered less than the lesson taught by the strike on ZTE: Washington could exploit technology as a chokepoint, much like it did with the U.S. dollar. In fact, American technology was so essential that cutting off access to it—a measure that Pottinger had already recommended in his strategy paper—could send a major Chinese tech company into a death spiral. As new instances of Chinese economic malfeasance came to light in the months ahead, Pottinger and his colleagues would keep that lesson in mind.

There was no such behaviorist calculus in the minds of Trump officials. Xi Jinping would not reverse course and abandon his imperial ambitions in the face of American resistance. He believed that supplanting the United States as the world’s preeminent superpower was China’s destiny. The Trump administration thus made little effort to build off-ramps. Washington had declared Chinese domination of global 5G networks as a threat, and it would seek to weaken the companies at the forefront of that threat. The expectation was for this to be a permanent effort, even if no one said so out loud. The penalties were not designed to change behavior but to downsize China’s role in the world economy. Over time, inflicting economic damage on China became an end in and of itself.

Oil-consuming countries had long aspired to gain pricing leverage over petrostates. As early as 1973, while the U.S. economy writhed under an Arab oil embargo, Henry Kissinger floated the idea of establishing a buyers’ cartel as a counterweight to OPEC, but he did not get very far. What Washington now envisioned was not quite a buyers’ cartel, since all G7 members had either stopped importing Russian oil or made plans to do so. It was a service providers’ cartel, and the aim was similar: to control the price that Russia, one of the world’s largest oil exporters, was paid for its wares. The strategy rested on two assumptions. The first was that Russia would find it impossible to sell much of its oil without access to G7 services—specifically, British insurance, European shipping, and American finance. Of these three logistical components, British insurance was a particularly important chokepoint: the London-based International Group of P&I Clubs insured roughly 95 percent of the global tanker fleet, making Britain the global hub for maritime insurance. The second assumption was that buyers of Russian oil would utilize the price cap to negotiate lower prices with Russian sellers. This, however, was hardly guaranteed: Buyers might be hesitant to ask for lower prices for fear of antagonizing Moscow. And of course, Russia could refuse to sell oil for prices below the cap.

At least for several years to come, however, the clean-energy industry will offer chokepoints that China can exploit for economic warfare. Among other things, Beijing could use this advantage to deter the West from tightening the “technology blockade.” China’s export controls on gallium and germanium, announced in July 2023, were followed by high-level outreach from U.S. officials and public reassurances that America sought only “narrow de-risking,” after which the two countries could “begin consequential diplomacy”—a sign that China’s shot across the bow had accomplished the desired effect. But there’s also a risk that China’s weaponization of critical minerals will lead to a spiraling economic war that destroys every last shred of the U.S.-China economic relationship. The hard reality is that, in the coming years, the scramble for economic security is likelier to break the global economy than it is to break just the chokepoints.

When judging economic warfare on its own merits, moreover, it’s important to consider counterfactuals. What would the world look like had the West refrained from striking Russia with hard-hitting economic weapons in 2022? Europe would still be reliant on Russian energy. The Russian economy and war machine would continue growing on the back of Western financing and technology. The lesson for the rest of the world would be that you can keep on reaping the benefits of the global economy no matter what you do. China would see fewer obstacles to seizing Taiwan by force, as would other would-be aggressors salivating over their neighbors’ territory. Even if one doubts the signaling effect of sanctions, it’s hard to argue the United States and its allies would be better off having maintained economic interdependence with Russia. Those ties outlived their purpose long ago—at least since Russia annexed Crimea in 2014, if not since it invaded Georgia in 2008—and it’s a pity it took such a heinous act of Russian aggression for the West to finally cut them. Still, sanctions are now undermining the economic model on which Putin built his imperialist foreign policy, blunting his capacity to do more harm.

There’s another trade-off of sanctions that Washington must consider as it draws lessons from the Russo-Ukrainian war. While holding economic weapons in reserve can be helpful from a deterrence perspective, it does little good if deterrence is not a viable goal. Put differently, if it’s true that sanctions could never have deterred Putin, the West would have been better served by weakening Russia’s economy as much as possible before the invasion. The G7’s costliest error was to defer serious discussion of oil sanctions until after the war began, at which point it took nearly ten months to implement the price cap and the EU oil embargo. As a result, Russia raked in a whopping $220 billion from oil exports in 2022, contributing to the highest single-year energy revenues the Kremlin has ever collected.