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TRANSCRIPT:
Paul Krugman in Conversation with Henry Farrell and Abraham Newman
(recorded 9/10/26)
Paul Krugman: So, it’s a world full of choke points. Weaponized interdependence is a term I think coined by Henry Farrell and Abe Newman. Certainly I learned it from them. And there’s a big conference—not including them for some reason—taking place at the European Central Bank a few days after we record this. And so I thought I would talk again with my two favorite international relations people (although now I’m thinking of some friends who will be upset by my saying that.) But anyway, hi guys.
Both: It’s great to be here.
Paul Krugman: There was a seminal 2019 paper by the two of you, and then a book called Underground Empire. Anybody want to tell me what you meant by that? And let’s talk about the history, and then this weirdly more weaponized moment than anyone expected that we’re living in.
Henry Farrell: Maybe I’ll take a first stab at it.
So really, where this came from was that we had finished a long book looking at fights between the United States and European Union over privacy. And as part of that, one of the things we had looked at was the SWIFT system, which is a system which you use when you’re making bank transfers. It’s a messaging system that makes sure that the money gets to the right place, and that everything gets reconciled properly at the end of the day.
And so Abe pointed out after we had finished this, he said, “Well, nobody’s written anything about SWIFT, and there’s something interesting and important with geopolitics going on.” And I was working with a statistical physicist who does a lot of work on networks and network dynamics, and so he thought that we could come up with something on this.
And so we began to write. And we began to figure out that there was something really going on, which I think had been going on in plain sight for a number of years, but which nobody had really been able to put their finger on in such a way that they could actually sort of crystallize what the phenomenon was. And this was what we called “weaponized interdependence.” And the idea behind it was very straightforward. You know, we’ve been living for decades in a highly interdependent global economy, and the ways in which both political economy people in international relations and, I think, most economists had thought about it was in terms of the enormous efficiency advantages that flow from this. Because, if you think about interdependence in terms of trade theory, even in terms of the simple benefits of specialization that Adam Smith talked about a couple of centuries ago, the more interdependence you’re able to use, the better you’re able to achieve various outcomes collectively.
But we began to think about the ways in which this relied upon all of these really boring-seeming networks, such as SWIFT, and the ways in which these networks had increasingly and quietly become a target of international coercion, especially at that stage coming from the United States.
So we argued that if you had two conditions—one, a network which had some degree of centralization, so that there were some kinds of choke points in the network; and secondly, you had some great power which had a means of putting pressure on the actors that were in charge of those choke points—that you would begin to get the conditions where a weaponized interdependence could begin to happen. That is, that that great power could begin to weaponize that choke point against others.
And then our argument was that this could also set a longer dynamic in train, because our fundamental sense was that this was not an equilibrium. This was not something that was sticky and was static unless the weaponizing power was extremely careful, and that the more that a power like the United States sought to weaponize choke points against its adversaries—and here the U.S. used a dollar clearing system as a means of cutting Iran and other countries out of the global banking system; it began increasingly to use other forms of technology and also semiconductor supply chains after our work began—the more that we saw a power doing that, the more that other powers were likely either to look to defend themselves or to retaliate against us. And this, we think, is a world that has come into being.
Krugman: So if you were looking at SWIFT, that’s an interesting case, among other things, because the bureaucracy is formally based in Belgium. But that doesn’t really matter, right?
Abraham Newman: No. I mean, with many of these things, there are Americans that sit on the corporate board, and often that’s the way that the U.S. or anybody that’s weaponizing—they look for, like, a legal channel in order to influence the operations of a company. And so first, it was just like the personnel. But at the time that they were doing this, SWIFT also—they had a data center in the United States where they mirrored all of their data, in Virginia. And so that was also just easy pickings for the Bush administration at the time, as they were trying to kind of deal with the response to 9/11.
Krugman: What you were focused on very much was the U.S. trying to weaponize its control of financial and, I guess, information networks, largely against Iran, but also to some extent against China. And so this starts out as a U.S. initiative, right? So in some sense, you know, who started the fire? We did.
Newman: I think it’s important, as Henry was talking about, that the source of this power is often about that: the key platforms, infrastructures of the global economy are centralized. They’re not flat. You know, we were told this vision was like “the world is flat,” but actually, you know, look at even my iPhone: it’s not flat. Those products and platforms were often American companies. And so in many domains, what the U.S. kind of realized—and in our book, Underground Empire, we kind of chart how after 9/11, different U.S. bureaucracies start to see these places in the international system where they can either exclude actors, like with SWIFT—say you can’t have access—or they use it to monitor, to surveil. We call it the Panopticon. And that’s what you see in the Snowden revelations. And so it’s both the development of markets, that markets are centralizing around U.S. companies and products, and then also that the U.S. government has this legal jurisdiction over them.
Farrell: And the final thing to add to that is just that there’s also an institutional change that happens as well. And this is really connected with September 11th, 2001, because before that, you know, SWIFT manages to push back relatively successfully against U.S. efforts to try and get into its data. Mueller and other people—of course, Mueller is famous for his efforts to try and figure out what Donald Trump did, but at the time, he was in the FBI. And so he tries to get SWIFT to provide information, sort of via subpoena, and SWIFT’s response, crudely speaking, was, “We don’t do subpoenas.” And they are able to call on their friends in the U.S. Treasury, and Treasury sees part of its job at the time as being protecting the global financial system against the depredations of the United States national security state.
And then suddenly, after September 11th, that is completely reversed. Treasury radically revises its understanding of its self-interest as being—instead of trying to protect the global financial system—it begins to start looking at the global financial system, thinking, “What are the ways in which we can enhance U.S. power to defend against these actors, these terrorists?” And over time, as happens in every bureaucracy, this begins to creep. It begins to expand until the U.S. is willing to go after lots and lots of different actors, including, most recently under Trump, officials in the International Criminal Court.
Krugman: Okay, I want to come back to all of that. But when I read Underground Empire, the focus was, first of all, largely on U.S. actions, and largely on these kind of high-tech, you know, 21st-century choke points. As it’s turning out, there’s a lot of other kinds of choke points in the world, right? Strait of Hormuz, most obviously, but Chinese rare earths. So the potential for weaponizing interdependence seems to be a lot bigger than I think even I realized when I first read your book.
Newman: I mean, one of the things that Henry and I have been talking about and warning people is that, you know, it creates an escalatory dynamic where people say, “Okay, if you’re going to weaponize these choke points, then we’re going to look for ways to do it ourselves.” And with the Chinese rare earths example, China had weaponized their rare earths back in 2010, but they had done it in what I would say is like a much more traditional trade war kind of way. It was about market access, and it was saying, you know, “If you do this, we’ll block it.” But what happens is that they learn from the way that the U.S. uses these tools to kind of create their own system of weaponization.
And so what the U.S. had done is they had used export control systems in order to clamp down on Chinese access to semiconductors. And the legal system was that the U.S. has an Entity List. It’s basically a no-go. “You need licenses if you’re going to sell to these operators.” And it gives the U.S. extraterritorial power because they say, “Look, Taiwan or, you know, TSMC, if you’re going to make these chips with U.S. intellectual property, then you need permission to sell it to China.” And so the U.S. extends its ability to weaponize interdependence through basically intellectual property networks. And so physical goods, chips—this isn’t just about information or finance. It’s about physical goods. They get restricted.
What China does is they then implement the same system. They create their own Entity List. They basically say, “If you use Chinese intellectual property to make your machine tools to process rare earths, you’re going to be on these lists.” And so yes, they use just market access—like, you can’t sell these batteries or these magnets—but then they also say, “If you use our processing technology to do this, we’re going to limit your access.” In the latest round of back and forth, China is really copying and then escalating these dynamics.
And I think that part of it is just a norms thing. And that’s why I sometimes say, like, there’s weaponized interdependence, which is the tool; like, the choke points part; but there’s also the vibe, which is: these are now increasingly acceptable. Of course, the Strait of Hormuz was a choke point. Everybody knew that. But nobody was willing to do it because it had been seen as kind of against the norms of the economic system. And as actors like the United States and China do this, it becomes more acceptable. You know, Iran has now weaponized the Strait of Hormuz, and everybody’s like, “Oh, what do we do?” because up until this point, it was just not in the realm of what people thought you could do.
Krugman: How much do you think it was that there was a norm, and how much of it was that the U.S. was just such a hegemonic power that no one else even dared to do it? I haven’t made up my own mind on that. But it’s one of those things I’ve been thinking about a lot.
Farrell: So I think that our sense is that there is an enormous amount—and much more, I think, than academics who study this imagined, because we love models, and models make a lot of assumptions. So very often models assume that decision-makers have complete information about the world. And of course, anybody who knows an actual real-life decision-maker knows that this is not true.
So I think one of the things that really comes through from our research in the United States, but also other people’s research elsewhere, is that people very often don’t do this because they don’t know about it, because it’s difficult to coordinate sort of different parts of the bureaucracy together to get something done unless there is some perceived terrible threat. Or because they sort of know that it’s possible, but they don’t know about what kinds of unexpected repercussions it might have, and they’re worried that it might go very badly wrong.
And I think there’s a final thing here, which flows from—you had a piece on your Substack about weaponized interdependence where you’re talking about it primarily in terms of trade, and you talk a little bit about how you can threaten to use weaponized interdependence or you can actually use it. And I think a lot of the assumptions that you would have—and this is if you do think about things very rationally—is that a lot of the active use of weaponization, you would imagine, would happen off the equilibrium path; that is, that if I look at you as the United States and you’re incredibly powerful, I don’t necessarily want to weaponize against you unless I absolutely have to. And this creates an equilibrium where nobody actually sort of does the forceful stuff, but everybody behaves as if the forceful stuff is options in the background.
So trying to figure out what is happening in any particular case is really hard. But if you look at, for example, rare earths, Jessica Chen Weiss and Gloria Xiong had a piece in the current issue of Foreign Affairs, which looks at this, and it suggests that this really was a really haphazard process, just the same as in the United States. In the U.S., our experience is from talking to policymakers, people are not trying to create a grand system. Instead, they are improvising in response to particular crises. They’re trying to figure out what will fix the crisis, and then they’re trying to do that, not necessarily thinking about the precedent that it will set. And China, it seems, according to Jessica and Gloria’s account, seems to be doing very much the same kind of thing.
So there’s a lot of messiness, there’s a lot of improvisation. And the final thing I would say is that, if we look at the world of weaponization, as you say, there seem to be choke points everywhere. And also there are all sorts of ways in which the choke points are connected to parts of the economy where things can go very badly wrong. So you can think about this as being a complex system, and the standard way that people think about the world and complex systems is that if you do stuff, sometimes unexpected stuff happens. And the more that we see actors looking to weaponize without any very good maps of how and what they are doing or what kinds of unexpected repercussions might happen, the more we can expect not simply increased risks of tension and worry, but also people screwing up, doing dumb stuff.
And here you can think about the other side of the Strait of Hormuz, is that clearly the Trump administration thought that this was going to be a super quick operation: go in and sort of bomb the hell out of Iran. The people will revolt, and glory: Donald Trump is able to pat himself on the back and go back and pour a couple of bottles of ketchup onto his well-done burgers, and eat his dinner and watch TV. And of course, this isn’t what happened.
So I do think that the more that we’re in this world, the more that we find ourselves in a world where really unexpected things can happen, and where policymakers don’t have the strategic knowledge, and they also don’t have the sense of how the system works, that would really allow us to create the kinds of stability that, for example, businesses and ordinary citizens who want to live their lives without having to pay whatever ridiculous amount it is for diesel... You know, that is a world that is very far away from us right at the moment.
Krugman: By the way, I’m not sure that even now everybody knows about rare earths and what they are, but these are these sort of almost trace metals that are actually weirdly critical to electronic technology these days—magnets and things. And I’m not sure that the Chinese particularly have the world’s dominant deposits, but they’ve invested, and it’s apparently really expensive and extremely environmentally destructive to process them. And so China just dominates the production of these things. And the Chinese can say, “Oh, no rare earths for you.” And that is at least as influential as the United States saying, “No banking transactions for you.” Right?
Farrell: So the Trump administration discovered.
Krugman: Yeah. I try not to interject myself here too much, but I do have a story for you. A very old story, which is that I was in the Reagan administration, sub-political level, Chief International Economist at the Council of Economic Advisers. Chief domestic economist was a guy—what was his name? Summers… Larry Summers. Don’t know what happened to him. But anyway, the main virtue of that for me was sitting behind the table at interagency meetings, being the guy sort of passing those slips of paper to Marty Feldstein, my principal, saying, “Don’t forget to mention that.”
And there was a discussion that I remember, which was about the first of the gas pipelines from Russia to Germany. And two things were doubly relevant to this discussion. One was that the Americans were worried that the Soviet Union would be able to weaponize gas supply as a threat to the Western European economy, which was actually totally right, it turns out. But the other thing was that there was then talk of sanctions on third parties—that we were going to sanction anybody, any company that’s doing anything to help this construction. And I think it was the guy from the U.S. Trade Representative’s office that said, “We can’t do that. That’s illegal. That’s illegal under all our international agreements.” Which, of course, now we’ve learned that the fact that something is illegal under agreements doesn’t matter all that much, but it does say that there were norms that we just didn’t do that sort of thing back then, and all those are gone.
So anyway, sorry, moving forward. So, what we’re seeing right now, I’m actually having my doubts because the Strait of Hormuz—obviously, that’s a choke point, more of a literal choke point than these financial ones. And it’s weaponized interdependence in a form that is much more literally weaponized than any of us had in mind. I’m not even sure how in the end, if that’s ending up being the decisive factor. I don’t know if you have any thoughts. I mean, it’s really not your field nor mine.
Newman: Well, I mean, I would just say I think one of the points that Henry and I try to think about is: what’s the difference between more traditional forms of economic coercion—you know, market access restrictions or embargoes—and then the kind of things that we talk about in the book, which is these network-based types of coercion. And, you know, our argument is that the more traditional forms, which I think the Strait of Hormuz is, as a traditional kind of choke point, is that there are often then just questions of substitutes, and that increasingly actors are engaging in circumvention, they’re changing traffic patterns. There’s also the changes in the global economy and their ability to create... I mean, you’ve talked about this in your posts before about efficiency and the less dependent we really are on these systems.
But when it comes to things like the U.S. dollar clearing system, because it’s a network-based platform, it’s very difficult to switch. And, you know, there are people who said that the overuse of these tools will erode these systems over time, but that’s more of a long-term game than a short-term game. And so at least at one level, I think there are ways that these kinds of approaches, once you get technical, they can help you think about the difference between, let’s say, just embargo-based kind of actions and then these kind of more weaponized interdependence actions.
Krugman: Yeah. I mean, Hormuz is a good example of how weaponizing in this way can be a kind of a wasting asset, right? That more oil is finding its way around the Strait. The ships are getting better at running dark through the Strait. That’s happening a bit with the dollar as well, right? You’re probably tracking this more than I am, even though it’s in some way more up my alley. But we are seeing not a replacement of the dollar, but more bypasses out there.
Newman: So that’s, I think, the key question, like everybody then asks: “Well, who’s going to create their own hub, their own network?” And sometimes that is what people are doing. But actually it’s very difficult. Like if you think about the dollar, the two alternatives are the yuan or the euro, and they’re both domestically hamstrung, for a whole bunch of reasons. So it’s very difficult for people to really put trust in the yuan or the euro basically because of politics.
But that doesn’t mean that people are not doing other things that are warping the global economy. And so if you think about, whether it’s crypto on the dollar, or if you think about the shadow fleets in terms of the oil, you’re getting what Henry and I often call dark spaces—places in the global economy that are allowing for bad actors to do bad things, and that will undermine the whole point of the full faith in credit, the kinds of things we want in a solid, stable, and chaos-free global economy. And so you can have bad stuff happening even if China or the EU doesn’t replace the dollar with their own reserve currency.
Krugman: The coercive ability of the U.S. also gets much eroded, even if only a few percent of world commerce is undertaken using these Chinese clearance systems or using crypto. The fact that those things are now out there and bigger than they were makes it a lot easier for somebody to adjust when, you know, the U.S. tries to cut somebody off by saying, “No, we’re gonna exclude you from all dollar-based banking transactions.” And they’re going to say, “Oh, that’s a pain, but at a 3% discount I can go through this other route.” Right?
Farrell: Yeah, I think that’s right. And I think that there are two things that are happening here. One is that the indiscriminate threat, you know, the Donald Trump approach of threatening, “The world will fall on your head today, and tomorrow we will have the awesomest deal ever.” This is a terrible way of doing things. And it also speaks to what you had in your Substack this morning—we’re recording this on Thursday—the Scott Bessent “speak bigly and carry a soft stick” approach, which turns out also not to work particularly well, because, you know, the real value to the United States in this is not when you have to apply this stuff, which is pretty costly and which, as you say, involves using a rapidly obsolescing asset, because the more that you use this, the more that you encourage other actors to figure a way around it.
But it is when you’re able to rely on this without actually having to threaten other actors all that much. So you see the United States, during the period when it was really at the peak of its power, what it used to do was it would go after big banks. There’s an article by these two political economy people in international relations—Early and Preble—where they called this whale hunting. So instead of going after lots of little actors, they would go after, say, HSBC or another enormous bank, and they would sort of extract billions of dollars’ worth of fines from the bank. And the idea was to terrify the rest of the banking system into submission, to get all of these other banks to actually apply internal controls, create internal bureaucracies such that they would not mess around or screw around in the future.
And this is what the Biden administration also was trying to do, which you would think is the rational approach, as it was trying to do this with crypto. So you saw this in the settlement they reached with one of the big crypto exchanges, Binance, which has been involved in all sorts of rather sketchy-seeming activities. The CEO has to go to jail for a short period. And clearly they’re trying to do the same thing with crypto. They’re trying to domesticate crypto and force crypto to adopt all of these internal financial controls so that they get sucked into the system that the U.S. controls.
But now we are in a world where, of course, anything goes. And I think the interesting thing about the United States is that at the moment it’s losing credibility on two fronts. First of all, by making big, enormous, empty threats, which 70 or 80% of the time it doesn’t actually deliver on. And secondly, by bringing into the heart of the system crypto, which is really sort of a set of pipelines around the traditional U.S. dollar which make it far, far more difficult to monitor who is sending money to whom.
And of course, that means that if you’re trying to do what U.S. diplomats used to do, which is to go to other countries and say, “Well, you know, we all have a shared interest in making sure that we’re in control of the system, so that everybody knows where our money is going; the terrorists, drug dealers, and so on aren’t able to swap money easily”—you don’t have that credibility anymore. And this really, I think, is leaking away U.S. power in ways which are going to reverberate long after Donald Trump has departed the scene.
Krugman: Yeah, I’ve been saying for a long time that I don’t think crypto has much of a real future because there are basically no legitimate uses for it. And the problem is, I think that the second part of that was right, but the first part may have been misunderestimating the extent to which illegitimate uses matter in today’s world.
Farrell: Well, I should also plug, Abe and one of his colleagues, Stacie Goddard, had this article which more or less argued that we can think about this as that one of the possible ways in which the world is moving, or the Trump people would like to move it, is towards a neo-royalist system in which you more or less have clans of different actors sort of coordinating together and sharing up the proceeds. And that world is a world where crypto is definitely very, very useful for concealing the flows through which things actually happen. And so, if you really want to have nightmares, I think William Gibson’s The Peripheral—it’s a portrait of a world that looks exactly like that, where that is the sort of major organizing principle of global politics. That’s the kind of world that you might end up in if we aren’t able to push back.
Krugman: One thing, just coming back to the policymakers and the extent to which they really don’t know what they’re doing—that’s the other thing I learned during my one year in the U.S. government: the extent to which—and the Reagan administration was a collection of philosopher kings compared with the current management, but still—the extent to which people just didn’t know what they were doing. And one thing that strikes me right now is that particularly the Trump administration, their notion is that what’s important is being able to sell into a market, as opposed to being able to get stuff. Are you still seeing that out there?
Newman: I mean, let me say, this world that we’re talking about, the world of weaponized interdependence, is in many ways very uncomfortable for a lot of policymakers. And that’s kind of where Henry started with: you know, Treasury was not built originally to manipulate markets in order to target coercion. So first, there’s just the level-setting of that: the bureaucracies were not structured for this purpose.
Then you start to add objectives. So if you think about, like, traditional trade wars, it’s often about trying to rebalance trade flows. But here we’re thinking about objectives: they start with counterterrorism, then we go to nonproliferation, then it’s about sovereign encroachment with Russia, all of a sudden it’s about technology restrictions on China. And now you get, you know, “Colombia, if you don’t take our deportees, we’re going to put sanctions on you.” So the objectives that these policies are trying to obtain are shifting.
And then the third part is, this is really fine-grained manipulation of market relations. And so in the book we talk about this: there’s a sanction that was put on Russia to kind of cripple one of the oligarchs, Oleg Deripaska. He has an aluminum empire. And when the U.S. sanctions them, it basically threatens this factory in Ireland. (And now, a disclosure: Henry’s Irish. But that’s not how we came across this one. You know, we don’t have any stocks or shares in that aluminum factory.) But this factory is like the only place in Europe that makes a very fine-grained aluminum that is used in German car production. So there are these ripple effects through the market because markets are very complex. And the Obama administration—they had to roll back these sanctions because it was having these unanticipated consequences.
What I think is as dangerous as all the things we’ve talked about is just the undermining of the bureaucratic state. You know, the whole DOGE process, the idea that we should take apart these bureaucracies that understand the markets at the same time that we’re basically unleashing a whole new arsenal of weapons on the world. I think Henry came up with this phrase: it’s like taking apart the engine while you’re flying at 30,000 feet. You know, it’s like we need a very sophisticated set of tools in order to do, basically, economic war, and instead we’re taking the whole thing apart as we’re flying. And so I think both of us are very worried that it’s not just new problems addressed by new agencies that aren’t used to it; we’re also taking away their expertise.
Krugman: Yeah. One of the things about the Tom Friedman world, the world of extreme interdependence, is that there’s just so many interdependencies you don’t realize are there, and that a DOGE-ified federal government is not going to know are there. I mean, we just saw Trump say, “No more Bombardier jets from Canada,” apparently completely unaware that a large part of Bombardier’s operations are in Kansas.
Newman: We’re not in Kansas anymore.
Krugman: The other thing that’s been striking me, and I think you’re getting at this a lot, is that there are so many choke points out there that in this world of extreme cross-border flows, the extent to which even what might seem to be minor players turn out to have choke points, to control particular things. I don’t know how much you’re looking at the absurd Canada stuff.
Farrell: Yeah.
Krugman: And what strikes me there is just, you know, Canada has a tiny economy. It’s polar bears and Mounties. How much can Canada matter to the United States? And then once you start to look, you see there are all of these things that actually, for the moment, are only made in Canada, and we don’t have domestic alternatives.
Farrell: So I think that there are two ways in which you can look at this. And one of the ways, I think, unfortunately, is the way which is prevailing. In a certain sense, a world of interdependence, crudely speaking, is almost necessarily going to be a world of choke points, because if you combine interdependence with the ordinary kinds of things that you, for example, wrote about—40 years ago was it? Geography and Trade?
Krugman: Yeah.
Farrell: The ways in which things cluster together in one of these—
Krugman: But that was only 35 years ago.
Farrell: Okay. Yeah, yeah. But that’s kind of naturally the way that production happens. And it’s also the way that a lot of other nonphysical networks happen as well, because you want to build a monopoly, because you want to make things just more efficient or whatever—networks tend to become choke points.
And so then I think the result is that we’ve moved from a kind of Thomas Friedman “the world is flat,” “everything is awesome” kind of view in which we completely cut out all of the geopolitics—we think politics is irrelevant because nobody would go to war against another country if they also have McDonald’s, and all of these theories—into a world where, I think, pretty well the opposite is happening. So we have these sort of policymakers now, squirrely-eyed, looking at the world, looking at every sort of possible external dependency as if it’s a massive threat.
Abe and I have a piece with Yeling Tan coming out in Foreign Affairs, so I don’t want to talk too much more about this, but this is its own sort of illusion, its own set of problems. And so I think really where we need to get to is to figure out ways to actually sort of accept a certain amount of risk, a certain amount of geopolitical difficulty, a certain amount of messiness, build forms of redundancy which minimize those risks without necessarily getting away from them completely—because you can’t get away from them completely—and try and build a form of globalization which is more robust than the form of globalization that we have at the moment.
But getting there from where we are at the moment, especially given the politics, not just in the U.S., but also in China, also in Russia—less so in Europe, but Europe has its own pathologies—it’s really hard to see how to get there.
Krugman: Yeah. I mean, I have seen the paper, and I guess I should not step on it too much either. But I’ve seen your draft, and I think this is more my phrase than yours, but “choke points arms race,” where everybody starts basically investing in duplicative capacity, has industrial policies, maybe tariffs, to make sure that you have domestic capacity in all kinds of things, which can be highly inefficient. That’s part of what you’re talking about, right?
Newman: Yes. And maybe I’ll go back to the conclusion of Underground Empire, where we talked about some of these same things. It’s easy to focus on the weapons. You know, that’s what happened when nuclear weapons were first getting invented: it’s like, “Oh, look, this is amazing. We can blow up huge things.” And then everybody’s like, “Well, then I need to have the weapons.” But what you really then quickly come to learn is that it’s about a strategy. It’s not about the weapon. It’s about trying to figure out: how does this fit into a broader set of objectives?
And right now, just very simple things like risk assessments—Yes, there are a lot of choke points. Everybody’s looking for the choke points. But actually there’s a lot of things in the global economy that aren’t choke points. There’s a great piece by Guillaume Beaumier where he basically says, “Look, in the semiconductor supply chain, there’s multiple choke points, there’s multiple networks. It’s not like there’s just one set of these networks.” And actors control different pieces. So ASML, the Dutch company that makes the lithography, the etching systems—they sit in the Netherlands, whereas the software part is in the United States, and of course the production is in Taiwan. So who has the advantage? And that’s where really policymakers in our world focus less on these choke points and more on how do you manage a world where there are these interdependencies?
And the first cut should be to say, “Here’s all the places where there’s not a risk. Here’s the places where we should be, you know, less worried.” And that simple risk assessment system hasn’t happened. Henry and I have been talking with people at the European Commission, and they’ve threatened to make this risk assessment for about five years, and it’s still not out. So, creating the norms, creating just basic structures—how do we identify what are the risks of having these choke points in place? I think it’s an easy first step.
The other thing that I think is really important to emphasize is the danger if we don’t. If we look at the kind of choke point arms race, these things aren’t just economic. These are increasingly being intertwined with kinetic wars. And you see that very clearly in Russia and Ukraine. There’s a ground war happening, but at the same time, different types of economic levers are being used, whether it’s the price cap or it’s the sanctions regime. And what I get very worried about is when you have the U.S. negotiating, like, “Give us a big deal with Europe on a trade level,” and all of a sudden, the flip side is, “If you don’t, we’re going to cut you off from the arms that you need to do your war in Ukraine.” And up until about five years ago, these were very separate, or people were thinking of them as alternatives. It’s like, you can weaponize interdependence or you can do these military kinds of things. But increasingly what we’re seeing is that the carrots and sticks are being combined in, I think, increasingly dangerous ways.
Krugman: Yeah. One of the things that worries me a little bit on all of this is how much, at least as I understand it, the drones are very heavily Chinese components. So the two sides are basically blowing each other up with lots of Chinese inputs. We kind of know who China supports, but in a limited way in this war. But they haven’t really applied that kind of leverage.
Farrell: There are just risks everywhere. Nick Mulder has this fantastic book which came out maybe four or five years ago called The Economic Weapon. He is a historian who worked with Adam Tooze. And so his argument is that we used not to distinguish between economic war and actual war nearly as much as we do right now, that this was a somewhat artificial set of sort of legal changes which happened after World War I, and that the risk of slipping from the one to the other, or having the two intersect with each other, is much greater than you might think.
Equally, I think Abe is right: we want to focus on the ways in which you can build forward, rather than just being sort of paralyzed by the multitude of different threats. And one thing I’m really interested to see here is what is happening between Canada and the European Union. It’s clear that they are building something together. We’re going to hear some announcement in the next few weeks. You can wishcast enormous amounts onto these kinds of decisions; they’re always much more disappointing in practice than the hopes that you attach to them. But I think that this is the first moment where we are seeing a really concerted effort by, you know, one major-ish country plus Europe—which is not a country; it is a power, nonetheless, economically—to try and put something together which can provide some kind of a neutral system for building up.
In the worst-case scenario, this will just turn out to be a series of vaguely worded platitudes which will turn into nothing. But you could also see ways in which, for example, people in the European Union who are trying to escape their trap—which is that the member states dominate national security, so that it’s impossible to get agreement on important things—you could see ways in which some of the people who want to try and escape that trap could try to start using broader, sort of minilateral-type arrangements like this as a way to try and build something, and build some sort of more secure and robust means of coordination which actually might turn into something in the longer term. And who knows? Perhaps a future U.S. administration might actually be willing to enter into these things. You know, pigs could fly. It could happen.
Krugman: Well, I mean, for all of the exasperating things about the EU, Europe did succeed in creating both essentially a demilitarized continent, and the economic weapon has also basically been largely defanged in Europe. You don’t see the Germans having a dispute with the French and threatening to cut off their supply of, of whatever, diesel motors or something like that. So, I guess these things can happen.
Newman: Well, I think they definitely have defanged it internally. But a lot of times Europeans are like, “Oh, this is just China and the United States. China and the United States are messing everything up, and they’re weaponizing interdependence. And we’re these nice guys, and we’re about peace and trade and whatever.” But if you look at the Russia sanctions, how did that actually happen? Who froze the Russian central bank assets? You know, the 300 billion Euros—it’s mostly the Europeans. And so if you’re in Beijing and you watch that happen, you’re pretty clear that Europe has the power and capacity to be quite interventionist in the economic world.
And so I just think we should always remember that Europe has a lot of tricks up its sleeve as well, and is an incredibly powerful economy. Their problem in some ways is, in U.S.-European relations, they’re so dependent on U.S. security guarantees, it’s difficult for them to push back when Trump makes the ask, because they need our weapons right now.
Krugman: Okay. I actually have a beef with some of the research papers that I’ve been reading. There’s quite a lot of discussion of potential weaponization of economic relations between China and the United States, and some about possible Chinese weaponization against Europe. But no one ever seems to talk about what the Europeans could do. And yet the European Union is a huge economy with a lot of technology. There must be stuff.
Farrell: There is. And part of the problem, again, it’s institutional. So, as we say, when the United States really got its act together on this was when the different parts of the U.S. began to coordinate towards a common set of objectives, a common understanding of the strategic situation. Europe has not gotten there yet, and it is really hard.
And the fundamental, basic flaw that Europe has: it was exquisitely well adapted to deal with the Thomas Friedman world—that is, to deal with a world in which everything is about sort of markets and trade. And the European Union builds up its own form of power: it’s very, very good at using regulations to shape its internal market and then looking to impose those standards on the rest of the world. But we’re now in a world where markets and security are entangled. And that is a world that is absolutely godawful for the EU to deal with, because its market capacities are at the level of the EU, and so too its trade negotiating capacities. But the national security stuff is all at the level of the member states.
And this more or less forms a chaos for difficulty in coordinating for lots and lots of different member states with their particular national interests, each of which to squabble and to fight and to say, “No, we don’t want to do this because we are urgently dependent on China in X, or we depend completely on the United States in Y.” And so as a result, the European Union has had and will continue to have enormous difficulty in actually coordinating. Again, because the national security stuff happens at the level of the individual states, and the economic stuff happens at the level of the European Union. So all of these are problems which straddle the relationship between the two, and are inherently difficult for the EU to deal with.
The U.S. has very often been able to quietly bang heads together and get consensus in the past, but at this moment the U.S. is instead specifically seeking to divide the EU because it doesn’t like the EU, because it views the EU as a threat to, bluntly speaking, “Western civilization”—however the Department of State is defining that today: white folks, fundamentally, and sort of the awesome things that white folks have created. You know, it becomes really hard for the EU to push back against us because it has internal divisions and it has an external protector which is doing everything it possibly can to fan the flames.
And then China also is extremely good at playing the game of, “Well, you want this investment, then do X. But if you take some sort of actions against a Chinese company, we are going to visit hellfire upon your economy in this or that way.”
So, I think you’re absolutely right. Paul. The EU is a phenomenal achievement. I think both Abe and I—or at least I am—cautiously bullish that over the longer term, the EU will get its act together. But we all know what Keynes said about the longer term.
Krugman: Maybe that’s where we end. In the long run, you guys will help save the world with your book and your work. Thanks for talking today.
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