How the US is weaponising the world economy
Back in 2002, serious people were worried about the possibility of a nuclear exchange between India and Pakistan. Millions might have died — and the prospect seemed real enough that both the US and the UK advised their citizens to flee the region. How, then, was the crisis defused?
Thomas Friedman, author of The World Is Flat, is fond of telling the story that US businesses (in particular Dell) told their Indian suppliers (in particular Wipro) to calm things down or get cut out of the loop. And things did indeed calm down, so perhaps it was the concerns over Dell’s supply chain that prevented catastrophe. Perhaps.
Mr Friedman duly coined the phrase “the Dell Theory Of Conflict Prevention”: no two countries will go to war if they are part of the same global supply chain. He was never entirely serious about that, but the question now arises: did he have it backwards? Rather than a line of defence against hostile action, might global supply chains be a line of attack?
One example is the recent executive order banning US companies from working with Huawei, effectively denying the Chinese telecoms company the use of Qualcomm’s chips and Google’s Android operating system. Another was Mr Trump’s crude — and fleeting — threat to slap tariffs on Mexico if it didn’t satisfy him on immigration policy.
It is tempting to view such actions as uniquely Trumpian. Would any other president threaten sanctions against one of its largest trading partners, via Twitter, with 10 days’ notice, at the very moment they were presenting the new Trump-championed trade agreement to the Mexican senate?
Yet while a different president might act with more subtlety, the US seems unlikely to abandon the aggressive tweaking of the nerves and sinews under the skin of the world economy. Henry Farrell and Abraham Newman — political scientists at George Washington and Georgetown Universities, respectively — have popularised the term “weaponised interdependence”, the title of a forthcoming article in the journal International Security.
Messrs Farrell and Newman point out that supply chains and digital networks can be used both as a “panopticon” to see everything that happens and as a “chokepoint”, denying access to some vital service. Both approaches require a certain bureaucratic apparatus — something that would be hard to disassemble once in operation. There is more going on here than the whim of “Tariff Man”.
Consider Swift, the international financial messaging system. Although Swift does not directly handle transfers of money between banks, it provides the secure service that makes those transfers possible. Swift is a private company based in Brussels, yet last summer it found itself on the receiving end of US demands to cut off Iranian banks. The EU, in turn, demanded that it did not comply. Forced to pick a side in this tug of war, late last year it picked the US.
That is an indication of just how much power the US can wield if it is determined to do so. And the temptation is strong: it seems far safer to attack Iranian interests through stern letters to a messaging service in Brussels than with a carrier strike group.
That very temptation, of course, risks over-reach. The US is not the first global superpower to ponder the use of financial and communication networks as a weapon of war. In the early 20th century, modern economies were increasingly underpinned by complex financing. Britain viewed the central role of the City of London in the world’s banking, telegraph and marine insurance system as potentially decisive when coupled with the power of the Royal Navy. Should war break out with Germany, these networks could be used to sustain the UK economy while crushing that of Germany.
The idea seemed plausible, but needless to say, these plans for economic shock and awe failed both to head off the first world war and to limit its duration and brutality.
Two questions arise: would the US be wise to use its economic leverage more sparingly? And should other nations be building alternative networks beyond the hegemon’s gaze and grip?
It is too easy to say that the US should restrain itself in its own enlightened self-interest. The logic of network effects is self-reinforcing. Having established a central position in finance through Wall Street and the mighty dollar, and in digital networks thanks to Silicon Valley and the Pentagon’s role in funding the early internet, the US advantage may endure many abuses.
Still, the more the US seeks to coerce others through its privileged position in banking and the internet, the greater the incentive to develop alternatives that cut the US out of the loop — for example, a Chinese-built operating system for smartphones, or Instex, the special purpose vehicle launched by France, Germany and the UK to allow companies to do business with Iran beyond the reach of US punishment.
Wolfgang Munchau described Instex as “a dysfunctional insurance vehicle for small carpet traders”; it turns out that these alternatives are not cheap or easy to develop. In ordinary circumstances, few would even bother to try. But if the US presses too painfully on the global economy’s nervous system, its rivals and even its allies will look for relief.
Written for and first published in the Financial Times on 14 June 2019.