speaker-0: Welcome to the Extra Exchange. I'm Kate Conklin. This is where you hear unfiltered conversations with the people shaping the global economy, the policymakers writing the rules, the executives whose decisions move markets and nations. And today we're talking about geoeconomics, what it is, how it works, and why it's become so critical for countries and companies. We are lucky to be talking to the foremost expert in the world on this topic, Josh Lipskey. And while most people building careers and expertise in international economics start at the Department of the Treasury or maybe Goldman Sachs, Josh took a different path from Harvard and Georgetown Law to the writers' room at the Daily Show with Jon Stewart. He went from there to the White House to the State Department and eventually to writing speeches for Christian Lagarde at the International Monetary Fund. Josh is now chair of international economics at the Atlantic Council. Welcome, let's get to it. Josh, welcome to the show. It's great to have you here. ⁓ there's a lot that we could obviously talk about with your background in international economics, but the most curious thing that people probably want to hear about is that you worked for Jon Stewart at the Daily Show. What was that like?
speaker-1: Well, thanks, Kit. And I just always laugh at this because ⁓ wherever I've done in my career, this is the first thing anyone wants to ask me. One, I was only there a year, two, I could not have been more junior in that system. So that being said, it was fantastic. It was a long time ago. ⁓ it was about 20 years ago. ⁓ so this, you know, that it would just shows you about Storch's longevity and his popularity on the program now that he's back doing it. ⁓ all all I can say. Is that one of my roles there was to spend eight or nine hours a day watching videos of Chris Matthews, which some of your listeners will remember an MSNBC host back in the day. And so, you know, different people were assigned different media personalities to basically watch for hours a day and then take down notes and pitch ideas if anything was funny. And, you know, when you watch eight hours of Chris Matthews a day, that really does something to you. And I still bear the scars from it. So that's what I say about the ⁓ fantastic time I had at the Daily Show. Hmm.
speaker-0: It seems it seems to have not impacted your career doing geoeconomics. So we can transition to that. ⁓ look, so from your vantage point, you sit ⁓ at the Atlantic Council, you deal with geoeconomics on a daily basis, but a lot of people may not be familiar with that term. And it's really the intersection of finance, national security, foreign policy, economics, trade. ⁓ but from where you are. How has economic statecraft evolved from a crisis response tool into something closer to the default operating environment for governments and companies? It's different right now.
speaker-1: Yeah, it it is, and I I'm glad you asked that question because I do think it's helpful in this conversation to set terminology a little bit. What are we talking about when we say geoeconomics and economic statecraft? And people use those terms interchangeably. I think they're a little different, and I'll explain why. But the fundamental thing to understand is that this is not a new idea. Geoeconomics is not a new idea. It's an old idea the US had the luxury of forgetting. The Bretton Woods system, the IMF and the World Bank created six weeks after D-Day. Those are geoeconomic institutions, the mixture of national security, foreign policy, macroeconomics, and finance. But in the post-Cold War era, we could often in the United States and Europe to a lesser extent as well, separate out our national security and economic policy making. And we didn't have to have Treasury sitting in on these meetings and commerce sitting in on these meetings, and we didn't have to have the banks part of Washington every other day talking about sanctions. We don't live in that world anymore. And if you go to China, if you go to India, if you go to Brazil and ask them what geoeconomics is, they just say, yeah, that's policy. They don't have a word for geoeconomics. That's how a lot of emerging markets live every day, the intersection of national security and macroeconomics. We didn't live that way for the past 20, 30 years, and we're returning to that way of thinking, but we're doing so in the heart of the capitalist system, the heart of global finance, the heart of a new global economy, a tech-driven global economy. AI consideration. So it's different. Geoeconomics looks different in the United States than it looks in China, than it looks in other emerging markets as it should. And economic statecraft, in my view, are the tools of geoeconomics. So geoeconomics is the framework to consider this world and the intersection of the ideas. And by statecraft, we mean sanctions and export controls and tariffs. So the tools by which a geoeconomic mindset can be deployed. That's how we define it at the Atlantic Council.
speaker-0: Super helpful. I mean, to make it even more real, look at US China competition, and that's a geoeconomic framework. There's a lot of competition economically in capital markets, in trade, certainly with tariffs and other restrictions. And then you have economic ⁓ security toolkits, like, for example, China's utilization of export controls for rare earth magnets last year that could have absolutely crippled the US economy, ⁓ everything from autos to semiconductors to the data centers that are are powering. The AI boom that's keeping the rest of the economy kind of afloat at the moment. All of those things are ⁓ in the news. They've been in the news, but what about those choke points of economic statecraft or geoeconomic power? What are we missing beyond the obvious ones like critical minerals? What do you see as the top two or three issues right now?
speaker-1: Yeah, that's a great question. It's something we kind of keep us up at night at the Atlantic Council. What's next? That's what we should be doing at a think tick, right? You do it the immediate crisis, but you're trying to figure out where's the next one coming. You know, it one thing I will say, and Eddie Fishman has done a great job outlining this both in his book Choke Points and then talking about it since, is that we see this conflict between America's financial power and other countries' territorial power. So you see Iran leveraging this in the Strait of Hormuz. You see China thinking about this when it comes to Taiwan. What are the geographic choke points versus the financial choke points? And I think the next big conflicts are not coming in the geographic choke points like we're experiencing now in the Strait of Hormuz, but they're coming in the financial choke points in the system. And here we're talking about Swift. Here we're talking about the banking system, how money moves around the world. The US has enormous leverage in that system. Others are trying to compete. And I think there's growing tension and frictions in that system. So when I think about the next choke points, I think about the subterranean network of financial pipes that connects the global economy and how that can be geopoliticized, geoeconomically thought of in a way that could have enormous ramifications for the entire global economy.
speaker-0: It's super interesting. So the Wall Street Journal came out last week, or a few weeks ago rather, with a story about ⁓ the Iranian regime receiving billions of dollars in crypto to ⁓ help offset some of ⁓ of the financial crisis that the country is under. When you talk about Swift and you talk about global capital markets, crypto is an aspect of that. Certainly it's not the only one, but how effective are some of these tools that you just mentioned? Sanctions. It's not necessarily working that well if you look at for example whether or not the strait is open right now.
speaker-1: Yeah. And we have a forty year history of sanctioning Iran, which is one of the reasons why when new sanctions are threatened, I think it has very limited impact for the Iranian economy that has lived under these sanctions for decades. So you don't have a lot of extra pressure to exert on that front. The importance of crypto when you think of sanctions evasion is that it creates a new conduit to work around the dollar. The desire to work around the dollar is not new. It exists as long as the dollar has been the world's reserve currency and certainly as long as the United States has implemented sanctions as a foreign policy and national security tool. But crypto is one avenue and not the only one that can make it cheaper and easier to do than it was before. And what's happening is that a range of countries are taking blockchain technology and figuring out can they put their own currency, not cryptocurrency, but their own currency, on those rails and transmit it without touching US banks. Why do we have so much power and sanctions enforcement? It's because almost every transaction, even transactions that don't involve the dollar, touch the dollar at some point and therefore touch the US financial system. But what if blockchain technology made it possible for me not to do that? And I could still have enough liquidity, I could still have enough security of settlement, that I don't need the reasons I trust the dollar right now and have to go to it. And that's what we see happening. And China's project, Embridge, one of the most advanced in the world. Is an example of using blockchain technology and putting their own currency, the renminbi or the digital version of it, on those rails and not touching the dollar. So crypto is one aspect, but the broader blockchain technology revolution is giving countries more opportunities and at other actors to try to chip away at the dollar's dominance.
speaker-0: And you talk about the access of evasion, this network of countries, China, Russia, Iran, North Korea, there's there's others. But the network ⁓ or the access of evasion rather, they they are using this technology. They are using ⁓ ways to de dollar their economy in a way that limits the overall power of the United States and our allies. The EU, for example, has announced twenty some odd rounds of packages of sanctions against Russia. The Ukraine conflict is still ongoing. Russia is still procuring military technology. They're still buying drone parts that are flying into Ukraine every day. The same for Iran. ⁓ what do you see as a way to counter some of that? Or is there not anything that we in the West can do?
speaker-1: No, there is something we in the West can do. I think it's a really important point. And I want to give a shout out to my former colleague Kim Donovan, who coined the term access of evasion here at the Atlantic Council and her economic statecraft team, which captured exactly what we were talking about, this network of evaders around the world. We have a tendency in the West to look at that and say to other countries and other companies, don't join those systems. Don't be part of those systems. Don't be part of those networks. I think the more we say that. The more it just incentivize countries and companies to find hedges. What we should be doing in the West is bringing the best cross-border payments technology to the table. Let's be very honest. Some of the systems we rely on are antiquated. They are in need of an upgrade. And we fall back on the legacy, the network effects, the scale of the dollar and its power to say, good luck to everyone else. You're not going to compete with us. Why don't we have a much more forward-looking approach, a much more innovation forward approach? Do so with allies. And say, here's the future of payments. And we're going to do it the dollar, pound, yen, and euro together. And by the way, any other country, you can't afford to be outside this system. So then if you want to go on the Renmin B based systems, good luck. But I think given the nature of global commerce and global trade, you're going to find it unavoidable to be part of this global network. And so it should be a much more proactive and less defensive posture toward these challenges. I think we will find diminishing returns if we just wag our finger at systems we don't like.
speaker-0: That it hasn't worked in the past, and I doubt it'll work in the future. I'd like to think of an example of a physical supply chain to help people in the audience that may not spend a lot of time thinking about de dollarization conceptualize some of these issues because it they are challenging, right? So if you think about, for example, the F 35, the fighter jet that's ⁓ used by the US and allies around the world, that F 35 fighter jet had 30, 40 countries. contributing to the parts, the systems, the weapons, the components that ultimately made that aircraft fly. Are you talking about something similar for payments?
speaker-1: So the way to think about it is that right now, I always think about it in terms of pipes of the global economy, right? We build this infrastructure. Swift is at the heart of the infrastructure. US banks are at the heart of the infrastructure. The dollar is at the heart of the infrastructure. And it really is a US European collaboration. I mean, you go back to the nineteen seventies and the creation of Swift, Nixon broke the gold standard, and Citibank, which was then first national bank, said, you know what, there's probably going to be a lot More cross-border currency transactions going on. If we don't have the gold standard, we could be the hub of that. And the Europeans said, no, no, no, wait. We don't want that to be dominated by the American banks. We want to do it here in Europe. And there are a few steps in between, but basically out of that, Swift was born. So we get this global financial architecture, this piping. What's happening now, and the way to visualize this for your audience, is that other countries are building alternative pipes. The pipes take a long time to build. It is not easy to build financial infrastructure and architecture. But once you build the pipes, water can start flowing through them, and that's the money. And so we only look at the pipes and say, we're not worried because there's no water in them. But once the pipes turn on and the water flows, things can move very quickly. So that's how I think about it. And we have to pay attention to the incentive structure and the architecture that's being built around the dollar in real time.
speaker-0: So for American companies that are listening to this and they make things and they sell things overseas, right? If you're an American tech company and you're exporting a a full American AI tech stack program, data center build, the chips, the compute, everything needed to power a data center, for example, in Malaysia or Indonesia, is there a world in which that trade is not done in the dollar, but instead those American companies are having to do it in the Rimmin B or another currency? What And if so, what is that what does that change?
speaker-1: Sure. There definitely is a world where that happens. So you're building an infrastructure data center in Indonesia and you have a lot of subcontractors you're working with and you have loans associated with it and the various financial institutions involved say we'd like your payments dominated r nominated in ECNY, China's digital currency, instead of the dollar. And the Indonesian government supports that, as do the finance ministry there, and you don't really have a choice. In that conversation anymore, because if you want to build that data center, that's how it's going to be paid. Now, in the past, that wouldn't have been something that could even been offered by them because there wasn't enough liquidity, there wasn't enough money, there wasn't enough access to that kind of currency. That's changing. And so that will happen in the future. There will be an internationalization of the Redmin B push, especially in Asia, where countries and companies are asked to pay back in Redmin B, and then you will have to onboard as a company. Into their financial payment systems. This is the SIPS network, the cross-border interbank payment system that China has built, and others. And so the question is: so what? You pay them in Renmin B or you pay them in dollar? What does this really matter? And then it gets to a more theoretical question of what advantages conferred to the United States by being the issuer of the world's reserve currency. The first advantage, the most important, is macroeconomic stability and a seemingly endless demand for US treasuries. We do not appreciate in the United States what a luxury and privilege we have by the fact that the entire world wants to buy our debt at any time, anywhere. We live in a way that no other country gets to live. And maybe it has basically allowed us to do things fiscally that we wouldn't have done otherwise because of the incentives created around it. But the one I think about more is the national security implication. The more money moves outside the dollar, the less we can do sanctions, the less those sanctions bite. Now you may say and others may say, well, sanctions are ineffective, so that doesn't matter. I have a different view of it. I think sanctions have been very effective on the Russian economy. They have not destabilized the Russian economy. They have not turned the ruble to rubble, as we'd advertised at the time, but they have weakened the Russian economy. And I think we would lose the power of those sanctions and miss it. We would miss the national security power that comes with it. With all the problems sanctions cause and with all the backlash ⁓ and with all the limitations they have. It would erode the national security and foreign policy power of the United States just from a perspective of national security to think about how the dollar could lose some of its privilege. And that's the world we're talking.
speaker-0: I can't say I'm super excited to see what that looks like, but it is interesting to think about some of these new tools and to switch gears to a slightly different topic. There's been a lot of news recently, even out of the EU, on new economic security and statecraft tools. Things, for example, like new tariffs on sectors. Can you explain a little bit more about what you're seeing from Brussels and how that might impact what you're just describing?
speaker-1: I think it's so interesting that Brussels is considering taking a page out of the US tariff toolkit. If you think about what has happened over the past year and a half with trade wars, the Turnberry deal, you would not think the Europeans would turn around to the US and say, ⁓ that's an interesting tool. Maybe we can use it on China, but that's exactly what's going on here. Europe has woken up a little late, but they've woken up to China's industrial overcapacity, and it really came to a head with electric vehicles. Because what Europe realized was that the sort of fundamental engine to use that metaphor of the European economy, which was automaking, especially in Germany, was being rapidly undercut by Chinese EVs and Chinese vehicles, and this is BYD and others flooding the market. And the Europeans said, We can't live with this. This is now too core to our fundamental interest as an economic union, and so we have to fight back. That is not a conversation kit that we could have had five years ago. about Europe. It is just and it's still a tough one in Brussels as the debate playing out over the coming days will show, but it's changed a lot in five
speaker-0: It definitely is. Like I I remember when I was still with Congress, I went on a delegation to Brussels and we discussed Chinese overcapacity and what the EU is going to do when all of a sudden every product that is built in that market for that market can no longer be cost competitive because of ⁓ there's so much output coming from China that prices ⁓ you just can't you can't fight them. And so it's not just auto companies, it's everything ⁓ up the value chain and all the way down the value chain. Companies that are selling clothes made with forced labor that cost fifty cents a shirt being exported into the EU. That undercuts competitiveness as well. It's not just those those high tech products like cars, right?
speaker-1: No, that's right. It's the entire value chain. And I think what Europe realized was it's moving from the low end of the value chain to the high end of the value chain. We're realizing this too in the United States. It's not unique to Europe. We may have lost the low end of the value chain fight 15, 20 years ago with China. They dominate. It's hard to recapture that from a Western manufacturing perspective. But from a national security perspective, we do not want to lose the high end of the value chain. We cannot lose from a US and European perspective auto making. industrial production, semiconductor production. There, we have not just an economic but a national security priority to protect these industries. And that's what you're seeing Europe wake up to. And so they're figuring out how they can protect those industries. And so they are developing what we would call, now we get very wonky kit, but a Section 301 like tool. The bottom line is it's a new tariff capacity for the EU to penalize Chinese imports and to do it on the justification Of Chinese overcapacity, which did not exist as a justification before. That's the way to think about it. And it shows you how they've woken up to the
speaker-0: So you have Washington placing tariffs on Chinese products. You obviously have now Brussels considering very substantive tariffs against autos to protect their own industries. And there's other economic security and statecraft tools that are also being used by Brussels that we've only seen really out of Washington the last decade. So, for example, there's been other news coming out about ⁓ the EU trying to come up with A new way to protect the chips that are being used and sold by European companies. There's a proposition right now whereby the EU would restrict the commercial engagements where ⁓ a chip manufacturer has agreed to sell X number of chips to any company anywhere in the world. The EU is saying we need a policy lever that says, nope, nope, nope. We need these chips in the EU. We can't export them to the UK. We can't export them to the United States. We can't export them to Asia. This is a real wake-up call. And I don't think industry has quite realized how much further ahead Brussels is on some of these policy making tools than perhaps we've seen Washington in the last couple of years. From your sense of the Atlantic Council, you obviously work with governments and policymakers all over the world, but you also engage a lot. with companies and financial institutions. How do you see them reacting to some of this news? Do you think they have a good path forward? Or is everyone still trying to wake up a little bit?
speaker-1: It's a mix. It's a spectrum. You know, I talk to a lot of companies who say this is the new world and we as a company have to adapt to it. We're not going back. Countries are prioritizing national security over first in time supply chains. That is going to change our bottom line. That is going to change how we think about our business. And we know that won't shift as we operate overnight, but we understand we're in a five to ten year transition. Other companies, to be honest, are much more in the when are we going back mode. That's a mistake. We are not going back. From a Western perspective in the near and medium term. We are living in a geoeconomic era. Will it last forever? I don't know, but it's definitely going to last for the next 10 or 20 years, from my perspective. And it's going to look very different than the post-Cold War globalization era that we've come out of. And therefore, you see a different reaction based on the kind of company. You know, I speak with a lot of European companies. You get a different perspective in Germany or France and Italy. So it's not one size fits all. The way I always frame this kit, not to be overly stark about it, is imagine you were a German company in 2014 and Putin annexed Crimea and you knew what would happen eight years later in 2022, what he would do eight years later. What would you do to diversify your supply chains over those eight years? Okay, now take it to the China context. You're a company, you see what's going on between the US and China and the rest of the world. What will you do to protect your company, to diversify supply chains? Because I don't think companies are going to be able to go back to their shareholders in 10 years and say, we didn't realize we lived in this geopolitical conflict era. Look what's happened. It's there. The signs are out there. And so I think it's incumbent on everyone, governments and companies alike, to say we live in the new era and we have to prepare for it.
speaker-0: Love that. And I also think about capital markets, where you mentioned from your perspective, the forefront of geoeconomics is some of the plumbing. Well, I also think that there's ⁓ there's gonna be an increased focus on things like outbound investment screening and and new restrictions that target, for example, American companies and Americans' retirement accounts being prohibited from investing in Chinese military companies. I think in ⁓ the national security community, that seems like a no-brainer. But when you dive into it and when you have conversations with financial institutions and you talk to folks in New York, well, there's a concern, obviously, about the implications for restrictions like that. What do you think when it comes to ⁓ outbound restrictions and the role that outbound can or should play with respect to some of the supply chain considerations you just mentioned?
speaker-1: Yeah, and this really gets to the heart of what I see as the tension between New York and Washington. And they're that I mean not just New York and Washington, but really financial and political capitals around the world. So political capitals have woken up to the geoeconomic era in various parts of the spectrum, depending on where they are, and financial capitals are further behind. on that. And I think that Washington needs to actually listen to those concerns and not just drive forward only and say, we're going to do this and you're going to have to get on board. Because if that happens, you open up a world of undercutting the policy regimes in a country. Right. So you can do all the outbound you want and you can have all the laws and all the sanctions compliance, but you create the incentives as we were talking about earlier to work around those systems, versus figuring out a way to do this in tandem with the private sector. How do we bring your concerns on board to this process? How do we make sure we're not overburdening consumers and passing on cost to them in an era of higher inflation that we've come out of? Because that's what's going to drive political decision making in this country. And so I think the concerns are valid, is what I'm trying to say. The concerns of companies are not just we want unfettered access to every market and why are you stopping us? Companies are saying we have a global economy. And now you are trying to somehow blockade that global economy. And we understand you have a national security priority in doing so, but we also don't want to undercut the entire global system while we do it. I think that's a valid concern and we have to work together to figure that out.
speaker-0: Absolutely. And as you think through the next two, three years in the United States, it's almost the midterms, it's almost a new presidential election season. What what is the world going to look like in twenty twenty eight or twenty thirty when it comes to geoeconomics? I don't think yeah, I don't think we've seen the last of the tools.
speaker-1: What an easy question.
speaker-0: ⁓ being created and deployed. There seems to be a lot of room for growth when it comes to regulation in this ⁓ in this in this specific topic. Any thoughts?
speaker-1: Yeah, so I ⁓ we are in in an era of innovation of geoeconomics. And what I mean by that is that while I said in the beginning that geoeconomics is not a new idea, it's an old idea, it's gonna look very different in its reinvention phase in the twenty twenties and twenty thirties. And you just have to look at how the G seven froze three hundred billion in Russian sovereign assets, something that would have been unimaginable before, to think about the scale of what can happen in the new era of geoeconomics. So, Kit, we're talking about the traditional tools, financial sanctions, export controls. But get ready for a new set of tools in the era of geoeconomics. AI will play a role in all of this. We will find ways to leverage the financial power of the United States and in creative ways use that to influence and implement US foreign policy. But what we realize in the US or should realize is that this is only effective when done with allies. And there you can actually leverage the combined power of the G seven in a way that is effective. We saw that vis-a-vis Russia, but done solo, these things can be undercut both by allies and adversaries alike. So I just think the tools will continue to be developed and national security will take a higher prominence than it has in recent decades in policy making, both in financial capitals and political capitals.
speaker-0: Josh, awesome analysis. I always end with this. What's the most favorite book that you've read recently?
speaker-1: Well, I just finished well, first I'm reading a lot of different books to my kids. So let's see. I'm thinking of like my five year old, what I read with her last night about bugs, but I'll give you something else. ⁓ Apple in China. I just read the Pat McGee book, which I think actually speaks to a lot of this new era. You know, Apple operated in the old era. And that book is about Apple basically being the key US company in the old era and taking advantage of the dynamics it presented. And that book is really about in the end how Apple will or will not navigate this new era of geo economics. So that's ⁓ what I just finished and feels very relevant to our topic.
speaker-0: Definitely. Well, Josh, thanks for joining us. It's been a pleasure.
speaker-1: Thanks, kid. Thanks for having
speaker-0: Special thanks to Josh for taking time out of his schedule at the Atlantic Council to join us today for this discussion. Geoeconomics may be a buzzword that will win you a Scrabble game, but it's also super important as we think through what the future of economic security, national security, and foreign policy look like. If you enjoyed today's conversation, subscribe, share it with somebody that needs to hear it. And we will see you next time for another unfiltered conversation with the experts moving markets and nations.
speaker-1: Well, thanks, Kit. And I just always laugh at this because ⁓ wherever I've done in my career, this is the first thing anyone wants to ask me. One, I was only there a year, two, I could not have been more junior in that system. So that being said, it was fantastic. It was a long time ago. ⁓ it was about 20 years ago. ⁓ so this, you know, that it would just shows you about Storch's longevity and his popularity on the program now that he's back doing it. ⁓ all all I can say. Is that one of my roles there was to spend eight or nine hours a day watching videos of Chris Matthews, which some of your listeners will remember an MSNBC host back in the day. And so, you know, different people were assigned different media personalities to basically watch for hours a day and then take down notes and pitch ideas if anything was funny. And, you know, when you watch eight hours of Chris Matthews a day, that really does something to you. And I still bear the scars from it. So that's what I say about the ⁓ fantastic time I had at the Daily Show. Hmm.
speaker-0: It seems it seems to have not impacted your career doing geoeconomics. So we can transition to that. ⁓ look, so from your vantage point, you sit ⁓ at the Atlantic Council, you deal with geoeconomics on a daily basis, but a lot of people may not be familiar with that term. And it's really the intersection of finance, national security, foreign policy, economics, trade. ⁓ but from where you are. How has economic statecraft evolved from a crisis response tool into something closer to the default operating environment for governments and companies? It's different right now.
speaker-1: Yeah, it it is, and I I'm glad you asked that question because I do think it's helpful in this conversation to set terminology a little bit. What are we talking about when we say geoeconomics and economic statecraft? And people use those terms interchangeably. I think they're a little different, and I'll explain why. But the fundamental thing to understand is that this is not a new idea. Geoeconomics is not a new idea. It's an old idea the US had the luxury of forgetting. The Bretton Woods system, the IMF and the World Bank created six weeks after D-Day. Those are geoeconomic institutions, the mixture of national security, foreign policy, macroeconomics, and finance. But in the post-Cold War era, we could often in the United States and Europe to a lesser extent as well, separate out our national security and economic policy making. And we didn't have to have Treasury sitting in on these meetings and commerce sitting in on these meetings, and we didn't have to have the banks part of Washington every other day talking about sanctions. We don't live in that world anymore. And if you go to China, if you go to India, if you go to Brazil and ask them what geoeconomics is, they just say, yeah, that's policy. They don't have a word for geoeconomics. That's how a lot of emerging markets live every day, the intersection of national security and macroeconomics. We didn't live that way for the past 20, 30 years, and we're returning to that way of thinking, but we're doing so in the heart of the capitalist system, the heart of global finance, the heart of a new global economy, a tech-driven global economy. AI consideration. So it's different. Geoeconomics looks different in the United States than it looks in China, than it looks in other emerging markets as it should. And economic statecraft, in my view, are the tools of geoeconomics. So geoeconomics is the framework to consider this world and the intersection of the ideas. And by statecraft, we mean sanctions and export controls and tariffs. So the tools by which a geoeconomic mindset can be deployed. That's how we define it at the Atlantic Council.
speaker-0: Super helpful. I mean, to make it even more real, look at US China competition, and that's a geoeconomic framework. There's a lot of competition economically in capital markets, in trade, certainly with tariffs and other restrictions. And then you have economic ⁓ security toolkits, like, for example, China's utilization of export controls for rare earth magnets last year that could have absolutely crippled the US economy, ⁓ everything from autos to semiconductors to the data centers that are are powering. The AI boom that's keeping the rest of the economy kind of afloat at the moment. All of those things are ⁓ in the news. They've been in the news, but what about those choke points of economic statecraft or geoeconomic power? What are we missing beyond the obvious ones like critical minerals? What do you see as the top two or three issues right now?
speaker-1: Yeah, that's a great question. It's something we kind of keep us up at night at the Atlantic Council. What's next? That's what we should be doing at a think tick, right? You do it the immediate crisis, but you're trying to figure out where's the next one coming. You know, it one thing I will say, and Eddie Fishman has done a great job outlining this both in his book Choke Points and then talking about it since, is that we see this conflict between America's financial power and other countries' territorial power. So you see Iran leveraging this in the Strait of Hormuz. You see China thinking about this when it comes to Taiwan. What are the geographic choke points versus the financial choke points? And I think the next big conflicts are not coming in the geographic choke points like we're experiencing now in the Strait of Hormuz, but they're coming in the financial choke points in the system. And here we're talking about Swift. Here we're talking about the banking system, how money moves around the world. The US has enormous leverage in that system. Others are trying to compete. And I think there's growing tension and frictions in that system. So when I think about the next choke points, I think about the subterranean network of financial pipes that connects the global economy and how that can be geopoliticized, geoeconomically thought of in a way that could have enormous ramifications for the entire global economy.
speaker-0: It's super interesting. So the Wall Street Journal came out last week, or a few weeks ago rather, with a story about ⁓ the Iranian regime receiving billions of dollars in crypto to ⁓ help offset some of ⁓ of the financial crisis that the country is under. When you talk about Swift and you talk about global capital markets, crypto is an aspect of that. Certainly it's not the only one, but how effective are some of these tools that you just mentioned? Sanctions. It's not necessarily working that well if you look at for example whether or not the strait is open right now.
speaker-1: Yeah. And we have a forty year history of sanctioning Iran, which is one of the reasons why when new sanctions are threatened, I think it has very limited impact for the Iranian economy that has lived under these sanctions for decades. So you don't have a lot of extra pressure to exert on that front. The importance of crypto when you think of sanctions evasion is that it creates a new conduit to work around the dollar. The desire to work around the dollar is not new. It exists as long as the dollar has been the world's reserve currency and certainly as long as the United States has implemented sanctions as a foreign policy and national security tool. But crypto is one avenue and not the only one that can make it cheaper and easier to do than it was before. And what's happening is that a range of countries are taking blockchain technology and figuring out can they put their own currency, not cryptocurrency, but their own currency, on those rails and transmit it without touching US banks. Why do we have so much power and sanctions enforcement? It's because almost every transaction, even transactions that don't involve the dollar, touch the dollar at some point and therefore touch the US financial system. But what if blockchain technology made it possible for me not to do that? And I could still have enough liquidity, I could still have enough security of settlement, that I don't need the reasons I trust the dollar right now and have to go to it. And that's what we see happening. And China's project, Embridge, one of the most advanced in the world. Is an example of using blockchain technology and putting their own currency, the renminbi or the digital version of it, on those rails and not touching the dollar. So crypto is one aspect, but the broader blockchain technology revolution is giving countries more opportunities and at other actors to try to chip away at the dollar's dominance.
speaker-0: And you talk about the access of evasion, this network of countries, China, Russia, Iran, North Korea, there's there's others. But the network ⁓ or the access of evasion rather, they they are using this technology. They are using ⁓ ways to de dollar their economy in a way that limits the overall power of the United States and our allies. The EU, for example, has announced twenty some odd rounds of packages of sanctions against Russia. The Ukraine conflict is still ongoing. Russia is still procuring military technology. They're still buying drone parts that are flying into Ukraine every day. The same for Iran. ⁓ what do you see as a way to counter some of that? Or is there not anything that we in the West can do?
speaker-1: No, there is something we in the West can do. I think it's a really important point. And I want to give a shout out to my former colleague Kim Donovan, who coined the term access of evasion here at the Atlantic Council and her economic statecraft team, which captured exactly what we were talking about, this network of evaders around the world. We have a tendency in the West to look at that and say to other countries and other companies, don't join those systems. Don't be part of those systems. Don't be part of those networks. I think the more we say that. The more it just incentivize countries and companies to find hedges. What we should be doing in the West is bringing the best cross-border payments technology to the table. Let's be very honest. Some of the systems we rely on are antiquated. They are in need of an upgrade. And we fall back on the legacy, the network effects, the scale of the dollar and its power to say, good luck to everyone else. You're not going to compete with us. Why don't we have a much more forward-looking approach, a much more innovation forward approach? Do so with allies. And say, here's the future of payments. And we're going to do it the dollar, pound, yen, and euro together. And by the way, any other country, you can't afford to be outside this system. So then if you want to go on the Renmin B based systems, good luck. But I think given the nature of global commerce and global trade, you're going to find it unavoidable to be part of this global network. And so it should be a much more proactive and less defensive posture toward these challenges. I think we will find diminishing returns if we just wag our finger at systems we don't like.
speaker-0: That it hasn't worked in the past, and I doubt it'll work in the future. I'd like to think of an example of a physical supply chain to help people in the audience that may not spend a lot of time thinking about de dollarization conceptualize some of these issues because it they are challenging, right? So if you think about, for example, the F 35, the fighter jet that's ⁓ used by the US and allies around the world, that F 35 fighter jet had 30, 40 countries. contributing to the parts, the systems, the weapons, the components that ultimately made that aircraft fly. Are you talking about something similar for payments?
speaker-1: So the way to think about it is that right now, I always think about it in terms of pipes of the global economy, right? We build this infrastructure. Swift is at the heart of the infrastructure. US banks are at the heart of the infrastructure. The dollar is at the heart of the infrastructure. And it really is a US European collaboration. I mean, you go back to the nineteen seventies and the creation of Swift, Nixon broke the gold standard, and Citibank, which was then first national bank, said, you know what, there's probably going to be a lot More cross-border currency transactions going on. If we don't have the gold standard, we could be the hub of that. And the Europeans said, no, no, no, wait. We don't want that to be dominated by the American banks. We want to do it here in Europe. And there are a few steps in between, but basically out of that, Swift was born. So we get this global financial architecture, this piping. What's happening now, and the way to visualize this for your audience, is that other countries are building alternative pipes. The pipes take a long time to build. It is not easy to build financial infrastructure and architecture. But once you build the pipes, water can start flowing through them, and that's the money. And so we only look at the pipes and say, we're not worried because there's no water in them. But once the pipes turn on and the water flows, things can move very quickly. So that's how I think about it. And we have to pay attention to the incentive structure and the architecture that's being built around the dollar in real time.
speaker-0: So for American companies that are listening to this and they make things and they sell things overseas, right? If you're an American tech company and you're exporting a a full American AI tech stack program, data center build, the chips, the compute, everything needed to power a data center, for example, in Malaysia or Indonesia, is there a world in which that trade is not done in the dollar, but instead those American companies are having to do it in the Rimmin B or another currency? What And if so, what is that what does that change?
speaker-1: Sure. There definitely is a world where that happens. So you're building an infrastructure data center in Indonesia and you have a lot of subcontractors you're working with and you have loans associated with it and the various financial institutions involved say we'd like your payments dominated r nominated in ECNY, China's digital currency, instead of the dollar. And the Indonesian government supports that, as do the finance ministry there, and you don't really have a choice. In that conversation anymore, because if you want to build that data center, that's how it's going to be paid. Now, in the past, that wouldn't have been something that could even been offered by them because there wasn't enough liquidity, there wasn't enough money, there wasn't enough access to that kind of currency. That's changing. And so that will happen in the future. There will be an internationalization of the Redmin B push, especially in Asia, where countries and companies are asked to pay back in Redmin B, and then you will have to onboard as a company. Into their financial payment systems. This is the SIPS network, the cross-border interbank payment system that China has built, and others. And so the question is: so what? You pay them in Renmin B or you pay them in dollar? What does this really matter? And then it gets to a more theoretical question of what advantages conferred to the United States by being the issuer of the world's reserve currency. The first advantage, the most important, is macroeconomic stability and a seemingly endless demand for US treasuries. We do not appreciate in the United States what a luxury and privilege we have by the fact that the entire world wants to buy our debt at any time, anywhere. We live in a way that no other country gets to live. And maybe it has basically allowed us to do things fiscally that we wouldn't have done otherwise because of the incentives created around it. But the one I think about more is the national security implication. The more money moves outside the dollar, the less we can do sanctions, the less those sanctions bite. Now you may say and others may say, well, sanctions are ineffective, so that doesn't matter. I have a different view of it. I think sanctions have been very effective on the Russian economy. They have not destabilized the Russian economy. They have not turned the ruble to rubble, as we'd advertised at the time, but they have weakened the Russian economy. And I think we would lose the power of those sanctions and miss it. We would miss the national security power that comes with it. With all the problems sanctions cause and with all the backlash ⁓ and with all the limitations they have. It would erode the national security and foreign policy power of the United States just from a perspective of national security to think about how the dollar could lose some of its privilege. And that's the world we're talking.
speaker-0: I can't say I'm super excited to see what that looks like, but it is interesting to think about some of these new tools and to switch gears to a slightly different topic. There's been a lot of news recently, even out of the EU, on new economic security and statecraft tools. Things, for example, like new tariffs on sectors. Can you explain a little bit more about what you're seeing from Brussels and how that might impact what you're just describing?
speaker-1: I think it's so interesting that Brussels is considering taking a page out of the US tariff toolkit. If you think about what has happened over the past year and a half with trade wars, the Turnberry deal, you would not think the Europeans would turn around to the US and say, ⁓ that's an interesting tool. Maybe we can use it on China, but that's exactly what's going on here. Europe has woken up a little late, but they've woken up to China's industrial overcapacity, and it really came to a head with electric vehicles. Because what Europe realized was that the sort of fundamental engine to use that metaphor of the European economy, which was automaking, especially in Germany, was being rapidly undercut by Chinese EVs and Chinese vehicles, and this is BYD and others flooding the market. And the Europeans said, We can't live with this. This is now too core to our fundamental interest as an economic union, and so we have to fight back. That is not a conversation kit that we could have had five years ago. about Europe. It is just and it's still a tough one in Brussels as the debate playing out over the coming days will show, but it's changed a lot in five
speaker-0: It definitely is. Like I I remember when I was still with Congress, I went on a delegation to Brussels and we discussed Chinese overcapacity and what the EU is going to do when all of a sudden every product that is built in that market for that market can no longer be cost competitive because of ⁓ there's so much output coming from China that prices ⁓ you just can't you can't fight them. And so it's not just auto companies, it's everything ⁓ up the value chain and all the way down the value chain. Companies that are selling clothes made with forced labor that cost fifty cents a shirt being exported into the EU. That undercuts competitiveness as well. It's not just those those high tech products like cars, right?
speaker-1: No, that's right. It's the entire value chain. And I think what Europe realized was it's moving from the low end of the value chain to the high end of the value chain. We're realizing this too in the United States. It's not unique to Europe. We may have lost the low end of the value chain fight 15, 20 years ago with China. They dominate. It's hard to recapture that from a Western manufacturing perspective. But from a national security perspective, we do not want to lose the high end of the value chain. We cannot lose from a US and European perspective auto making. industrial production, semiconductor production. There, we have not just an economic but a national security priority to protect these industries. And that's what you're seeing Europe wake up to. And so they're figuring out how they can protect those industries. And so they are developing what we would call, now we get very wonky kit, but a Section 301 like tool. The bottom line is it's a new tariff capacity for the EU to penalize Chinese imports and to do it on the justification Of Chinese overcapacity, which did not exist as a justification before. That's the way to think about it. And it shows you how they've woken up to the
speaker-0: So you have Washington placing tariffs on Chinese products. You obviously have now Brussels considering very substantive tariffs against autos to protect their own industries. And there's other economic security and statecraft tools that are also being used by Brussels that we've only seen really out of Washington the last decade. So, for example, there's been other news coming out about ⁓ the EU trying to come up with A new way to protect the chips that are being used and sold by European companies. There's a proposition right now whereby the EU would restrict the commercial engagements where ⁓ a chip manufacturer has agreed to sell X number of chips to any company anywhere in the world. The EU is saying we need a policy lever that says, nope, nope, nope. We need these chips in the EU. We can't export them to the UK. We can't export them to the United States. We can't export them to Asia. This is a real wake-up call. And I don't think industry has quite realized how much further ahead Brussels is on some of these policy making tools than perhaps we've seen Washington in the last couple of years. From your sense of the Atlantic Council, you obviously work with governments and policymakers all over the world, but you also engage a lot. with companies and financial institutions. How do you see them reacting to some of this news? Do you think they have a good path forward? Or is everyone still trying to wake up a little bit?
speaker-1: It's a mix. It's a spectrum. You know, I talk to a lot of companies who say this is the new world and we as a company have to adapt to it. We're not going back. Countries are prioritizing national security over first in time supply chains. That is going to change our bottom line. That is going to change how we think about our business. And we know that won't shift as we operate overnight, but we understand we're in a five to ten year transition. Other companies, to be honest, are much more in the when are we going back mode. That's a mistake. We are not going back. From a Western perspective in the near and medium term. We are living in a geoeconomic era. Will it last forever? I don't know, but it's definitely going to last for the next 10 or 20 years, from my perspective. And it's going to look very different than the post-Cold War globalization era that we've come out of. And therefore, you see a different reaction based on the kind of company. You know, I speak with a lot of European companies. You get a different perspective in Germany or France and Italy. So it's not one size fits all. The way I always frame this kit, not to be overly stark about it, is imagine you were a German company in 2014 and Putin annexed Crimea and you knew what would happen eight years later in 2022, what he would do eight years later. What would you do to diversify your supply chains over those eight years? Okay, now take it to the China context. You're a company, you see what's going on between the US and China and the rest of the world. What will you do to protect your company, to diversify supply chains? Because I don't think companies are going to be able to go back to their shareholders in 10 years and say, we didn't realize we lived in this geopolitical conflict era. Look what's happened. It's there. The signs are out there. And so I think it's incumbent on everyone, governments and companies alike, to say we live in the new era and we have to prepare for it.
speaker-0: Love that. And I also think about capital markets, where you mentioned from your perspective, the forefront of geoeconomics is some of the plumbing. Well, I also think that there's ⁓ there's gonna be an increased focus on things like outbound investment screening and and new restrictions that target, for example, American companies and Americans' retirement accounts being prohibited from investing in Chinese military companies. I think in ⁓ the national security community, that seems like a no-brainer. But when you dive into it and when you have conversations with financial institutions and you talk to folks in New York, well, there's a concern, obviously, about the implications for restrictions like that. What do you think when it comes to ⁓ outbound restrictions and the role that outbound can or should play with respect to some of the supply chain considerations you just mentioned?
speaker-1: Yeah, and this really gets to the heart of what I see as the tension between New York and Washington. And they're that I mean not just New York and Washington, but really financial and political capitals around the world. So political capitals have woken up to the geoeconomic era in various parts of the spectrum, depending on where they are, and financial capitals are further behind. on that. And I think that Washington needs to actually listen to those concerns and not just drive forward only and say, we're going to do this and you're going to have to get on board. Because if that happens, you open up a world of undercutting the policy regimes in a country. Right. So you can do all the outbound you want and you can have all the laws and all the sanctions compliance, but you create the incentives as we were talking about earlier to work around those systems, versus figuring out a way to do this in tandem with the private sector. How do we bring your concerns on board to this process? How do we make sure we're not overburdening consumers and passing on cost to them in an era of higher inflation that we've come out of? Because that's what's going to drive political decision making in this country. And so I think the concerns are valid, is what I'm trying to say. The concerns of companies are not just we want unfettered access to every market and why are you stopping us? Companies are saying we have a global economy. And now you are trying to somehow blockade that global economy. And we understand you have a national security priority in doing so, but we also don't want to undercut the entire global system while we do it. I think that's a valid concern and we have to work together to figure that out.
speaker-0: Absolutely. And as you think through the next two, three years in the United States, it's almost the midterms, it's almost a new presidential election season. What what is the world going to look like in twenty twenty eight or twenty thirty when it comes to geoeconomics? I don't think yeah, I don't think we've seen the last of the tools.
speaker-1: What an easy question.
speaker-0: ⁓ being created and deployed. There seems to be a lot of room for growth when it comes to regulation in this ⁓ in this in this specific topic. Any thoughts?
speaker-1: Yeah, so I ⁓ we are in in an era of innovation of geoeconomics. And what I mean by that is that while I said in the beginning that geoeconomics is not a new idea, it's an old idea, it's gonna look very different in its reinvention phase in the twenty twenties and twenty thirties. And you just have to look at how the G seven froze three hundred billion in Russian sovereign assets, something that would have been unimaginable before, to think about the scale of what can happen in the new era of geoeconomics. So, Kit, we're talking about the traditional tools, financial sanctions, export controls. But get ready for a new set of tools in the era of geoeconomics. AI will play a role in all of this. We will find ways to leverage the financial power of the United States and in creative ways use that to influence and implement US foreign policy. But what we realize in the US or should realize is that this is only effective when done with allies. And there you can actually leverage the combined power of the G seven in a way that is effective. We saw that vis-a-vis Russia, but done solo, these things can be undercut both by allies and adversaries alike. So I just think the tools will continue to be developed and national security will take a higher prominence than it has in recent decades in policy making, both in financial capitals and political capitals.
speaker-0: Josh, awesome analysis. I always end with this. What's the most favorite book that you've read recently?
speaker-1: Well, I just finished well, first I'm reading a lot of different books to my kids. So let's see. I'm thinking of like my five year old, what I read with her last night about bugs, but I'll give you something else. ⁓ Apple in China. I just read the Pat McGee book, which I think actually speaks to a lot of this new era. You know, Apple operated in the old era. And that book is about Apple basically being the key US company in the old era and taking advantage of the dynamics it presented. And that book is really about in the end how Apple will or will not navigate this new era of geo economics. So that's ⁓ what I just finished and feels very relevant to our topic.
speaker-0: Definitely. Well, Josh, thanks for joining us. It's been a pleasure.
speaker-1: Thanks, kid. Thanks for having
speaker-0: Special thanks to Josh for taking time out of his schedule at the Atlantic Council to join us today for this discussion. Geoeconomics may be a buzzword that will win you a Scrabble game, but it's also super important as we think through what the future of economic security, national security, and foreign policy look like. If you enjoyed today's conversation, subscribe, share it with somebody that needs to hear it. And we will see you next time for another unfiltered conversation with the experts moving markets and nations.
