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Friendshore First, Trade War Second
00:42:31
Economic interdependence is unraveling. What comes next?
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- [00:01]
A
The reason that I think U.S. officials really on both sides of the aisle have been concerned about China is that there is no reciprocity in our relationship. Right. You even just look at big tech companies, right? TikTok, last time I checked, is still one of the most, if not the most used apps amongst American teenagers. Right. And yet American software and social media companies are largely banned for the Chinese market.
- [00:30]
B
I'm Ricky Mulvey and that's Edward Fish Fishman. He's the author of Choke Points, American Power in the Age of Economic Warfare. Fishman now teaches at Columbia University's School of International and Public affairs, but previously he served at the U. S. Department of State working on economic sanctions against foreign adversaries. What a time for a chat with him on Motley Fool Money. My colleague Mary Long caught up with him to discuss his book, the history of America's trade dispute with China. The weapons other than tariffs that countries have in an economic war, and new questions about the US Dollar is a risk free asset.
- [01:11]
C
Your book essentially opens with a prediction in the intro that I truly, upon reading it, I wrote in the margins, called it exclamation point. You wrote economic warfare. Now, the baseline feature of our world will permeate other areas of foreign policy, global economics, domestic politics, and business. The result will be a scramble for economic security that redraws the geopolitical map and ends globalization as we know it. That's the end of the quote again. Road in the margins called it, because that sounds about right. As on the nose as that prediction seems to be, there's also a lot of uncertainty that kind of comes in this current moment that we're at. So from where you're sitting, how is the geopolitical map getting redrawn right now? What? Something new is taking shape.
- [01:55]
A
Sure. So look, I think what Trump has been doing in the last few months is new in a sense, but it's also the continuation of a trend that has been playing out over the last several decades. And as you might have guessed, I started writing choke points before we knew that Donald Trump was coming back as president in 2024. So what we've really been seeing is a shift from what we had in the 1990s where we viewed economic relations between countries as win win between the US And China. More trade, more investment was considered good for both sides to something that looks much more conflictual, that looks much more like geopolitical competition. And this is what I call the age of economic warfare, in which sanctions, tariffs and export controls have become the primary way that great powers are competing with each other. It's definitely true of the United States in terms of, you know, using sanctions and tariffs more and more for every single president in the 21st century. But increasingly, it's true of other countries, too. China, Russia, European Union, Japan. Every country is using these weapons. And I think what I saw several years ago when I started writing the book, and what is even more true today, is that we can't just continue with the global economy as we know it when these tools are just part of the fabric of our everyday lives. And there's going to be a massive rupture in the global economy. I think the thing that Trump could be shaping is what that rupture looks like, whether it's going to be a clean break down the middle between two blocks or something significantly more chaotic.
- [03:20]
C
So if we are, in fact, you mentioned that we've shifted from this win, win mentality that was all around in the 1990s to something that, okay, feels much more like the end of globalization. If that's true, what might come next?
- [03:37]
A
Yeah. So I think the thing that's very clear to me and that I had seen many years ago, is that economic interdependence is going to unravel. I think that that's almost a certainty within the next five to 10 years. And oftentime with these paradigm shifts, the way it works is you first need an intellectual mindset shift before the actual trade relationships start to change. And what we've had so far is that mindset shift has already occurred. You'd be hard pressed to find anyone on either side of the aisle in the US who believes that US, China, economic relationships are strictly win win. But obviously there's still quite a bit of time to go for a $500 billion trade relationship on an annual basis to come apart. I think where we were headed during the Biden years was something that looked like a bloc based global economy, where you had one bloc where the United States was sort of ahead of it with other democracies as part of it, the Canadians, the Mexicans, the Europeans, Japan, South Korea, Australia, and then another bloc that was led by China. This was sort of the new authoritarian axis that had been talked about with China, Russia, Iran, and then several other hangers on. I think where we're headed now, especially if you don't see a major reversal in terms of Trump's economic warfare policies, is something that's much more different because, of course, Trump, in just the last three months, has been weaponizing American economic power, not just against the Chinas and Russias of the world, but really against everyone, against Canada, Mexico, the eu, even countries like Vietnam, who we've been trying to kind of bring in as a substitute to China in global supply chains. And I think where we go, if that's the direction, is something that looks more like autarky, which I think sometimes gives people the shutters, because it's hard to imagine America having an autarkic economic system. And I think it would be very costly for us to get there. But if you put yourself in the mindset of an investor or a business person and you're trying to figure out where to locate your supply chain right now there are not many options that you can think of where you're really confident that they're not going to be hit by a massive tariff or sanction shock in the next few years. And so I think inevitably, even if it's not our goal, we might may wind up sliding into something that looks more like autarky over the next 10 to 20 years.
- [05:48]
C
It feels very much like we have reached a tipping point in this age of economic warfare. But one of the things that your book makes very clear is this has actually been stewing and brewing over the larger part of the past two decades in particular. So the US Dollar is the foundation of the global economic system. System, and central to the reason why the US in particular has been able to kind of lead us into this age of economic warfare and have it be in certain cases that we'll maybe debate that later on in the show. So effective. So let's maybe start with a history lesson to kind of help listeners understand how we wound up at where we are now. When did the dollar become the global reserve currency? And why has that remained the norm since then?
- [06:32]
A
Sure. So the dollar officially became the global reserve currency in 1944 at the Bretton Woods Conference. So this was the conference of the Allies during World War II. This actually happened as the war was still going on to try to decide what the structure of the global economy looked like at the end of the war. And one of the sort of main considerations of the negotiators, including people like Harry Dexter White in the US And John Maynard Keynes from the United Kingdom, was that the system of floating exchange rates that had kind of prevailed in the 1930s had exacerbated the Great Depression and had played a role in globalizing that and making it more than just an American crisis. And so there was a desire to really anchor the global financial system on one pillar. And the pillar that was chosen was the US Dollar, because the dollar, America was by far the most powerful economy at the time. As Europe and other advanced democracy economies were kind of being ravaged by war, America was only getting stronger. At the same time, there was also this desire not to make finance the center of the global economy, but rather trade. And so the dollar was also linked to gold at a fixed rate of $35 an ounce. So to answer your question simply, it was officially the Bretton woods conference that made the dollar the world's reserve currency. But for at least the first 30 years of that system, finance was not that big of a deal, really. It was just there to support what was seen as an ever increasing trading economy. And it really wasn't until the 1970s, with the Nixon shock in 1971, that August, when Richard Nixon unilaterally pulls the dollar off of this gold peg and ushers in a period of floating exchange rates, that the dollar is not only sort of officially the global reserve currency, but we wind up getting the gears in motion for this globalized, dollarized financial system in which everyone around the world is using dollars for virtually everything.
- [08:22]
C
In the book, you highlight that the rise of the dollar can be tracked by looking at the rise of foreign exchange markets. And so you point out early on that global foreign exchange trading went from being pretty minimal in the 1950s to reaching almost a trillion dollars a day in the 1990s, which was 40 times the daily value of global trade, to today being worth more than $7 trillion a day. And about 90% of those foreign exchange markets involved the dollar. So those statistics, to me, underscore just how essential the dollar is to global trade. But to the. I think that the plumbing of those foreign exchange markets can still be pretty opaque. We're a show that caters to retail investors. What do retail investors need to know and understand about how foreign exchange markets work?
- [09:06]
A
I'm glad you brought up those statistics, because as I mentioned, sort of for the first few decades of this Bretton woods system, the 1940s, the 1950s, the 1960s, the dollar was the center of the global economy, but it was really there just to facilitate trade. And if you think about it, having stable exchange rates between currencies make trading relationships easier to have over time. Right? Because if they're not big fluctuations in currency values. Right. But what we have today, as you mentioned, you have $7 trillion every single day in foreign exchange transactions, which is just remarkable. You mentioned this stat that 90% of all foreign exchange transactions use the dollar. Compare that with only 10% of global trade that is accounted for by the United States. So what that tells you is that there's a massive amount, trillions of dollars every single day of foreign exchange transactions that are happening that have nothing to do with a US Company selling a widget to a foreign company and getting paid in dollars. Right. These are trades in equities, in stocks, in bonds. These are even foreign countries using the dollar to trade with one another. So an example I give in the book is even if you have, for instance, Saudi Arabia selling an oil cargo to India, India is going to be paying for that oil cargo in dollars and vice versa. If you were to have India selling rice to Saudi Arabia, ultimately that transaction would go through the dollar based financial system. For retail investors, the fact that the dollar has this outsized role in the global economy that's divorced from our trading role as a country means that interest rates in the US Are lower than they would otherwise be. Because if you think about it, there's demand for dollars that has nothing to do with demand for US Products. Usually if you're a country that doesn't have a reserve currency. So let's say we're talking about Saudi Arabia. Their currency is going to fluctuate based on the demand for Saudi goods. Because the only reason anyone's going to want Saudi riyals is if they need it to pay a Saudi company for their exports. Right. But for the dollar, there's demand for the dollar that goes well beyond American exports. And I think even more to the point, I think, and this is not even just about retail investors, this is about every single American. The fact that the dollar has this role and that there's effectively unlimited demand for dollar assets and unlimited demand for Treasuries debt means that every single year the federal government can run massive budget deficits. Because if you think about it, the revenue side, if it was just taxes, that would fall way short of the expenditures. And so we have to plug that gap every single year by issuing debt. And the reason that other countries and other investors around the world want to buy our debt is because they have confidence that the dollar is always going to be stable, they're always going to get a return and that's effectively a risk free asset. And I think the thing that I'm particularly worried about, Mary, is some of what Trump has done in the last few with tariffs. Looks like it may be jeopardizing this sort of risk free nature of the dollar for the first time in my lifetime.
- [11:59]
C
Yeah. So what does the global economic system look like if the Dollar is no longer the global reserve currency. What might realistically replace it?
- [12:08]
A
It's a great question. And look, I think the, probably the biggest thing the dollar has had going for it over the last several decades is there is no alternative. Right? It's this notion that you need something as a reserve currency, and if it's not the dollar, what is it? Most of the time, when people talk about an alternative, they oftentimes gravitate toward the Chinese rmb. The reason being that just to go back to this sort of trade versus finance element, China is actually the world's biggest trading power. They're a much bigger share of global trade than the United States is. China is actually the number one trading partner for 130 countries around the world. So two thirds of the world, their top trading partner is China. So you think about it, if these countries are buying goods from China, you would imagine that China would be able to say, okay, well pay us in rmb, right? And it would be almost a natural thing to internationalize the Chinese currency. And yet, just to give you another interesting statistic, and I think something that investors and market watchers should be paying attention to is as of last year, only 30% of China's own trade was invoiced in RMB, which is remarkable. You know, so most of it, 70% was, was in dollars. The reason being that China has a closed capital account. They haven't been seen to have a very strict commitment to the rule of law. Investors are worried about their investments being expropriated, not being able to get their money back from China. And so that has added risk on top of China. That has made it harder for the RMB to become internationalized. The thing that's interesting though, is what Trump has done, particularly in terms of the tariffs and showing that really any country around the world might be in the firing line of American economic warfare, coupled with some threats to the rule of law and what a few weeks ago seemed like threats to the Federal Reserve's independence, threatening to fire Jay Powell, is that the dollar is sort of losing some of its safe haven status. And what's creeping up actually looks like it's other sort of second place reserve currencies like the euro. So the euro, by a lot of metrics, is similar to the dollar in that you've got the rule of law. In Europe, it is a convertible currency. Up until recently, only 20% of foreign exchange reserves were in euros versus 60% in dollars. But I think particularly right now, if the Europeans do go ahead with a rearmament program and potentially joint debt issuance. You could see in the next two to three years the euro gaining ground on the dollar. I don't think the euro necessarily will replace the dollar as the world's reserve currency, but you could get something that looks more like a multipolar currency regime. If these trends in the US and.
- [14:40]
C
Europe continue, and if that were to happen, what does that mean for America's ability to wage economic warfare as it has done over the past, again, let's call it two decades.
- [14:52]
A
The most important lever that the United States has for economic warfare is the dollar. The choke points in the title of my book are areas of the global economy where one country has a dominant position and there are few, if any, substitutes. American economic dominance is. It spans a number of different sectors and industries, but nowhere more than finance for a lot of the reasons that you and I have talked about. I think if the dollar were just another major currency, American sanctions would be a lot less effective because banks, companies around the world could decide that they want to trade in euros instead. And Interestingly enough, in 2018, in the wake of a month, actually April of 2018, when Trump pulled out of the Iran nuclear deal and reimposed sanctions on Iran, when he imposed export controls on the Chinese company zte, and critically, when he imposed sanctions on the Russian aluminum company Rusal, which sent chaos in aluminum markets, the Russian central bank actually did dump its treasuries and dump its dollars and euroze its economy. So Russia, post Trump sort of 2018, successfully euroized its economy. The only reason that the sanctions in 2022 were impactful was that Joe Biden successfully got the Europeans to do the same sanctions as the us. So right now, if you look at the frozen Russian assets, you know, the central bank reserves, almost 300 billion of which are frozen in bank accounts around the world, most of them are actually sitting in European bank accounts. Let's say Europe and the US were drifting apart, not, not working together, and the euro was a good substitute for the dollar. The US's ability to weaponize the dollar would be a way weaker weapon than it is today.
- [16:30]
C
So your book walks through case studies from modern history in which the US wages economic warfare. So you kind of start with Iran and all that we did to halt the development of its nuclear program and ultimately build out the nuclear deal. Then you move on to Russia and actions that were taken to slow its invasion of Crimea. And at the time it was thought that they would continue to invade Ukraine. This is around 2014. And then you move on to China and. And again, actions that the US waged to slow China's building of a global. Global 5G network. What's interesting is that while I'm reading your book, right, and you read about, okay, first Iran, then Russia in particular, those case studies felt like victories at the time, but now you read it in 2025, and those victories don't. They don't feel like victories. And it really. It plays out to me, okay, the difference between a battle and a war. What does it look like to win a battle in economic warfare versus winning a war? How do you know when the war even ends?
- [17:25]
A
Yeah, this is a great question, Mary. And you mentioned when you were giving my intro, I had the good fortune not only of working on these issues in the State Department and the Treasury Department, but I also did a stint working at the Pentagon as an advisor to the then Chairman of the Joint Chiefs of Staff, Marty Dempsey. And one thing I never heard asked when I was at the Pentagon was, does a bomb work? Well, yeah, bombs work very effectively to blow things up, but they don't always get you what you want politically. So sometimes when people ask me, do sanctions work? I'll refer them to that. Because sanctions, because of the American power that we've talked about today, are very effective at wreaking economic damage on foreign countries. Right. I mean, with the stroke of a pen, you could see Donald Trump can send other countries into a recession. What we're much less good at is translating that economic harm into sustainable political outcomes. Probably the closest we've gotten in the last 15, 20 years is the Iran nuclear deal in 2015, where no one disputes that the key to getting that deal with Iran was that they were under significant economic pressure from sanctions. In fact, even the Republican critics of the deal said that if only we had kept sanctions in place longer or sanctioned Iran more, then we would have gotten an even better deal. I think the challenge that we've had as a country isn't so much that it's. We've had these fluctuations in our political process, right, where one president has one view on Iran and the next has a completely different view. And we might be seeing something like that with Russia now, where I've heard this narrative sometimes put out that the Russia sanctions from 2022 have not been that effective because Russia's economy is still plugging along. Well, if you look at Russia's economy now just three years into the war, I mean, they're mired in stagflation. You know, their economy is not gonna grow at all. This year. They've got extremely high inflation. You've got interest, the benchmark interest rates over 20%. You can't get a home mortgage in Russia for anything below 30%. So, I mean, the reason that Putin is so desperate for a deal with Trump right now is that his economic advisors know that they can't go on like this for another couple years. And I think the fear I have is that we could have this another wild swing. Right. Where you've heard some people in the Trump administration talking about a big deal with Putin right now, I think that would be sort of a classic example of when you're winning the battle, maybe losing the war. Right. As with many things in our government today, and not just economic warfare, our political dysfunction hurts us. The fact that we have these strategies that vary so much from president to president. One final point on that is I mentioned the Iran nuclear deal is probably the best example of kind of winning the war, at least for a few years until Trump pulled us out, is that whole strategy. This is something I retell in my book. Choke Points really started during the Bush administration. It was a joint project between the George W. Bush administration and the Obama administration. And the key architect of those of the economic pressure campaign against Iran, Stuart Levy is a Republican lawyer who was appointed by George W. Bush and then reappointed by Barack Obama. So if you think about it, I mean, that was only, what, 15, 20 years ago, and we feel like a totally different country now. The idea of a leader like that spanning the Biden and Trump administrations is almost unthinkable.
- [20:36]
C
Oh, and meanwhile, while we have dysfunction aside, while we have alternated presidents and the parties in power every four years or so, you look at Russia and China, their leadership has stayed the same. So just like the way that domestic systems are built, that affects leverage and how different countries respond to these actions.
- [20:57]
A
Yeah, I need to jump in on there just because I'm so glad you said that, Mary, because this is something I think about a lot. Like when I see Trump and Steve Witkoff, his chief envoy, meeting with Sergey Lavrov and Putin, and I'm thinking to myself, these are the same people we were dealing with when I was in government a decade ago. And by the way, they're the same people that George W. Bush's team was dealing with a decade before that. And so you gotta think that these guys feel like they have us, they have our number. Right. The Russians feel like they know how we work better than we know ourselves. And we have to constantly learn and relearn the same lessons over and over again. And I do think it's hurt us quite a bit in our foreign policy.
- [21:41]
D
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- [22:47]
C
In modern traditional warfare, right? There's this idea of mutually assured destruction, particularly among nuclear powers. And that's perhaps a big part as to why so much of modern warfare has become economic. Because you can cause pain and, and deter people without actually causing bloodshed on the battlefield. But is there a mutually assured destruction point within the economic realm too? And are the people who are gaming these moves out and playing the 4D chess that's happening behind the scenes, do they have those mutually assured destruction points in mind? How, how might someone on the inside or just, just a citizen that's watching know if we're getting close to approaching that point?
- [23:26]
A
So maybe I'll start with your second point about what are the people on the inside thinking about? Because one thing I want to stress to this audience is we are still finding our footing as a country on economic warfare. And it's not like we have this cater of deep experts who are working around the clock the same way that people in the Joint staff working for the Pentagon do for military warfare. And so I think it's very important for everyday American citizens to educate themselves about these issues because we need as a country to sort of up our game on economic warfare. And that goes from everyone, from citizens to people in the White House in terms of mutual assured destruction. I think with respect to the US China relationship, I do believe we have something similar to mutual assured destruction. You're seeing it, even some evidence of it now, where China and the US have over 100% tariffs against each other. And both sides seem like they're eager just to pull back from the brink because they see how bad it will be for our economies. I mean, in the US we import so much from China that something that apparently Scott Besant said last week, although it was in an off the record meeting, so I can't confirm or deny whether he said this, but it was reported that he said that tariffs of 100% plus on China are effectively an embargo, which I agree. If you have 145% tariffs on China that stay in place for any long period of time, you're going to basically get the trade relationship down to zero pretty quickly. And for the US that means more than just inflation. That means shortages of key components. That means massive layoffs for companies that no longer can make their products or they have to raise their prices so much. Right. I mean, if these tariffs stay in place, it will be catastrophic for the US Economy. It'd be very bad for the Chinese economy. The thing I worry about, Mary, is that the whole concept of mutual assured destruction in the nuclear realm is that the prospect of a nuclear war between the US And Russia or the US and China is so bad that neither side would ever fire a nuclear weapon on each other. Right. It's basically a way to ensure peace. The thing is, we're already in an economic war with China. The first shots have been fired. We've imposed these massive tariffs. We both have imposed big export controls and sanctions on each other. And so I worry that in some ways we've already crossed the threshold and we almost need to get lucky at this point, because I think once you've crossed that threshold, you're in the realm of miscalculation. Both sides having to cater to domestic audiences who don't want to appear weak in front of them. And so even though I know investors are getting excited about the fact that maybe we're at peak tariff and the tariffs are going to come down or whatever, I still worry that there's a lot more that could go wrong and that this story is far from over.
- [26:00]
C
I do want to spend some time focusing on China and Russia in particular. But before we get there, you said something about upping our game on economic warfare. And I've. I've got a theory that I want to run by you because it was, it occurred to me as I'm reading your book, it Seems like we, we were almost so busy waging and playing offensive economic warfare over the past two decades that we forgo to play defense at home a little bit. And I think this is especially true in regards to China. Right. So we became so dependent on goods that were manufactured in China that we didn't hedge ourselves by building up our own manufacturing capabilities here. We're talking about that now. Right. But the problem is that, okay, you're playing catch up. So hindsight being 20 20, what could we have done to play better defense here, perhaps in regard to China, but also just other entities around the world?
- [26:48]
A
I think you've hit the nail on the head here and that what's happened is the US really pioneered the use of this new style of economic warfare in the first decade of the 21st century. This is the big U.S. sanctions on Iran that start really in earnest in 2006. But as we're waging these economic wars, other countries start building up their own arsenals and defending themselves against us. So in some ways, the rest of the world has been playing more defense than we have because they've been so afraid of us. We, on the other hand, I think, have kind of been ignorant of the fact that China could wage economic warfare against us or Russia or even Europe. I mean, the European Union built this anti coercion instrument to use against China that now they're talking about using against the United States. If Trump follows through with big tariffs on the eu, what could we do? I mean, the way I look at it is if sanctions, tariffs and export controls and investment restrictions are sort of the offensive side of economic warfare, the defensive side are really things like industrial policy, like stockpiles. So you have the Strategic Petroleum Reserve, where we have, for instance, had a massive reserve of oil that we can tap into in crises, but we don't have reserves for other critical goods that we need, like critical minerals. Right. You could see the US Government making strategic investments through something like a sovereign wealth fund. I do think the watchword when you talk about defense really is resiliency. And so some of that is investing in domestic capacity. I think the CHIPS act and the Inflation Reduction act are really good examples of that. Ways to try to insulate America from external shocks, be it economic warfare or otherwise. But I think the reality of the fact is, in order for us to build this type of resiliency in any timeline that is reasonable, we'll need other countries to play ball. And so this is the concept of friend shoring. Right. It's deepening our economic relationships with our North American partners, Canada and Mexico, deepening our relationships with other democracies, like in Europe, like in Japan or Australia. I think if we were to make a commitment to deepen our economic linkages with other democracies, we could much more quickly build resiliency to China and Russia and other authoritarian rivals. I think the thing that'll be much harder, Mary, is if we're viewing Europe and Russia and China as all sort of equivalent, then we are sort of sliding into something that looks like autarky and building that kind of resilience where everything has to come from the United States would be extremely time consuming and expensive. And so I don't think that is the best approach.
- [29:15]
C
Let's talk about China for a bit during the first Trump administration that you start to hear more of this narrative that China is taking advantage of the US And Trump talked a lot about this on the campaign trail. He argued that China was executing the greatest theft in the history of the world against the US you continue to hear that line a lot today. One of the stated reasons for the tariffs. Where does that thinking come from? That China is taking advantage of the US in what could be called the greatest theft in the history of the world?
- [29:43]
A
Yeah. So look, I think that in the 1990s, something very important happened, which was that China and Russia enter the global economic system. Right. So we had talked about earlier in our interview, the Bretton woods system. That system didn't really include the authoritarian socialist countries. Right. And it wasn't really until the end of the Cold War that both Russia and China entered the global economic system. China in particular. There's a lot of regret in US Policy, because I think what happened was the US Made a big investment, big bet on China helping China enter the World trade organization in 2000, giving China permanent normal trading relationship with the United States. And the idea really was that as China grew economically, as its economy became more intertwined with the US that it would also evolve politically, that China would move in the way of, you know, for instance, Poland, you know, which had previously been a communist country and then became sort of a Westernized, liberalized country. Unfortunately, China didn't evolve in that direction. And I think the US Was quite slow to recognize that the policy hadn't worked and to shift course. And honestly, I give a lot of credit to Donald Trump during his first administration for really helping us reverse course. It was something that no president really before that had really been willing to call a spade a spade and call time on this strategy toward China. The reason that I think U.S. officials really on both sides of the aisle have been concerned about China is that there is no reciprocity in our relationship, right? Even just look at big tech companies, right? TikTok, last time I checked, is still one of the most, if not the most used apps amongst American teenagers, right? And yet American software and social media companies are largely banned for the Chinese market, right? So just on a very basic level, there are Chinese apps that we use every single day, Chinese websites that we use every day, whereas our tech companies don't have access to their market. In terms of the theft side, this really comes from intellectual property, right? Where for many decades, US Companies, in order to have access to the Chinese market or in order to produce things in China, would be forced into creating joint ventures in China, which would oftentimes require them to hand over intellectual property to Chinese companies. That, by the way, was something that they deals that they willingly gave into. But China then would oftentimes copy their technologies and then create competitors to defeat them, right? So in some of the ways, and sometimes, like, it wasn't necessarily China doing anything illegal, it was some sort of violating the spirit of, of the World Trade Organization. And so I think that over this period, a lot of regret built up in the United States to the point where right now we feel that, you know, we, we do need a more reciprocal economic relationship and we shouldn't be giving China unequal access to our market when, you know, our companies, for instance, are not allowed to enter the Chinese market.
- [32:35]
C
Trump had negotiated a phase one trade deal with China during his first administration, but that ultimately fell apart. What was that deal going to look like? And why not now, again in 2025? Why not when Trump comes into the, into office for the second time? Why doesn't he just try to revive that deal rather than go this route that we've seen play out over the past few months?
- [32:56]
A
Trump has always been sort of of two minds on China, right? On the one hand, he does feel like we've been ripped off by China. And this has been a theme ever since he really got into American politics over a decade ago. But on the other side, I do feel that he sort of views himself as a deal maker and kind of considers the idea of a US China deal as like the white whale, you know, the thing that he can deliver and chase and bring as no other president could. This was true during his first term as well, where, you know, on the one hand, he really pioneers the use of tariffs, which first go into effect on China in 2018. But he's always really pursuing this big trade deal. I think that the challenge for Trump is that, and this is just me interpreting his own statements and his own behavior is the thing that he seems to care most about in the US China relationship is the trade deficit. The idea that the US Imports a lot more from China than we sell to China, I think it's something like we import two or three times more from China than they import from us. And so what Trump has always wanted is to bring down the trade deficit. A big part of that phase one trade deal, which I'll mention, really never got off the ground. So I don't, I don't, you know, it sort of almost existed more in theory than in practice, even though it was officially signed, was that China was going to buy a lot more stuff from the US that some of their big state owned companies would buy more agricultural commodities from the US and other things by. The data shows that they didn't follow through on those purchase commitments. But I think more to the point, the idea that you could plug the US Trade deficit by just selling more soybeans or potatoes or something like that to China, to me, I consider fanciful. I think if you really did want to bring down the trade deficit, you need to do really two things. One is you need to buy less from China, and so this means sourcing goods from other countries. And two, if you wanted to boost American exports to China, you'd really have to sell them more high tech equipment. You'd need to, for instance, give the green light for Nvidia to sell their H100 chips to Huawei and other Chinese competitors. And so I think that this whole idea of rebalancing the trading relationship in many ways runs up against our geopolitical goal of weakening China technologically and staying ahead of them because we view them as a military competitor. And so I'm skeptical that he'll be able to get a really great trade deal with China because there's really no way to satisfy what he wants while also really preserving our national security. So I think that truly the likelier outcome if we're going to get the trade deficit down is just to buy less from China, which I think is almost certainly going to happen because these tariffs are in place. And even if they wind up coming down, companies are no longer going to be willing to source things from China. And I've had so many different CEOs in the last few weeks tell me. I'm scrambling to try to find somewhere else to buy this widget from because I no longer believe that I can rely on China even if these tariffs are going to come down.
- [35:48]
C
So some of the very important materials that we buy from China are rare earth minerals and magnets. And China recently suspended the export of rare earths to the US So these are minerals that are used in a lot of electronic electric motors, which are in turn used to build electronic cars, drones, robots, missiles, spacecraft. They also go into chemicals that are essential in the production of jet engines, car headlights, some spark plugs. So you've got that on in one arena, right? And then in another arena, we got an update this morning that the US And Ukraine could sign a minerals deal as early as this week. Is it right to think of these two things as working together? I mean, what does this Chinese export suspension on rare earth minerals to the US plus the US Signing slash seemingly going to sign a minerals deal with Ukraine mean for this quadrangle between the U.S. ukraine, China, Russia?
- [36:43]
A
I do think they're related. And look, we're extremely vulnerable in the United States to Chinese export controls. And I think this is something that the media narrative often gets wrong on the US China dynamic right now is oftentimes people call it a trade war, where it's like the US has 145% tariffs and China has 125% tariffs or whatnot. That's all thinking about just us taxing imports, right? But as my book Choke Points shows, tariffs are just one weapon of economic warfare, and they're not even the strongest one. You think about export controls. That's China saying, we control 99% of the supply of this critical mineral and we're no longer going to sell it to you. And so in some ways, that can be a much more powerful tool than just imposing a tariff and certainly sanctions, which China has also done. China's imposed sanctions on a handful of US Companies, including pvh, the apparel company, and skydio, the big drone company, which is actually forced to ration batteries because of Chinese sanctions on the minerals piece. It's a tough industry because what China's dominating is the processing of critical minerals. So sometimes they'll own mines in foreign countries. Some of them are in China. The reason they have such a chokehold of the industry is they have these massive refineries in China where they process the raw minerals into usable finished products. Right. That process is extremely expensive. It's massively polluting. So very few countries want to do it. And the margin is pretty bad. Like, if you look at critical minerals as an industry, like, it's not like a Sexy industry. It's not something that, you know, investors want to be in, right? And so China is almost dominated by basically being willing to, you know, pollute, have low margins and make big capital expenditures. There's a reason why US Companies haven't wanted to do this in the United States. I think that the minerals deal with Ukraine could provide a good alternative to Chinese mineral processing and sourcing over time. But I want to caution folks that it will take a while, right? This would have to be a long term commitment. It's not the type of thing where we sign a minerals deal with Ukraine and tomorrow we say, hooray, we're independent from China. I think it has to be something where we signed this minerals deal and we make a decade long commitment to keep Ukraine secure, bring them closer into the US And European economies, and to really build up a minerals processing industry in Ukraine. I think they have all the ingredients. They've got a big industrial sector in Ukraine, they've got good mineral stores, they've got a great location in terms of being on the Black Sea, as well as having good rail links to the rest of Europe. I think the key is going to be a long term commitment by the United States.
- [39:14]
C
As we record this again, we've got different versions of economic warfare that we're kind of playing all around the world. I want to close with this question. Is this idea of economic warfare just the reality of the 21st century and the space that we're in now? Do you think that we'll always be engaged in some form of it? Or are there other non traditional forms of warfare that you see as kind of coming to the forefront in the decades ahead? Whether that's cyber war or some other version of that.
- [39:46]
A
So, look, when I finished writing my book, Choke Points, I'd written everything besides the conclusion. And I was walking around my neighborhood in New York City thinking to myself, how do I finish this book? Because for those of you who haven't read the book, it is a narrative history, right? It explains in depth the stories, the people, the individuals, the key decisions about how we got to this age of economic warfare. And yet when I look back across the narrative, I couldn't help but admit that there had been this secular trend, right? And from George W. Bush to Barack Obama to Donald Trump to Joe Biden now to Trump again, we've seen an exponential increase in the use of economic warfare. And so you got to think that people as psychologically and ideologically diverse as Barack Obama and Donald Trump, if they're both part of this trend, it's got to be bigger than any individual why we're using sanctions and tariffs so much. There has to be a structural reason. And the way I'd summarize it is that the global economy is still designed for the benign geopolitical environment of the 1990s, but we're living in a period of intense geopolitical competition. And so that mismatch between a global economy built for an era of peace and a geopolitical environment that is not quite peaceful is what is leading to all of these sanctions and tariffs and why I think that this trend is going to play out for the next several decades. I don't think we're going to see an abatement of it. The thing I worry about, though, is let's say we do kind of get the scenario in which we move toward autarky. We don't have the block based economy. We don't have friendshoring. What history shows is that when states don't feel confident that they can secure foreign markets and resources through open trade, they're tempted into things like imperialism and conquest, into actually fighting wars. And so I worry that if we mishandle today's economic wars, we could find ourselves back in the shooting wars that made the mid 20th century such an awful time.
- [41:37]
C
The book is called Choke American Power in the Age of Economic Warfare. It is a fabulous and fascinating read that does a truly fantastic job of helping you to understand how we wound up in the space that we are today. Edward Fishman, thanks so much for the time and for the truly fascinating discussion on where we are today.
- [41:55]
A
Thanks so much for having me. I really enjoyed it it.
- [42:11]
B
As always. People on the program may have interests in the stocks they talk about and the Motley fool may have formal recommendations for or against. So no buyer sell stock space. So beyond what you hear, all personal finance content follows Motley fool editorial standards and are not approved by advertisers. Motley fool only picks products that I would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We will see you on Monday.