Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
How to Wage Economic Warfare image

How to Wage Economic Warfare

S2 E11 · How to get on a Watchlist
Avatar
1.8k Plays11 months ago

In this episode, we speak to Max Hess and Nicholas Michelon about economic warfare.

Maximilian Hess is a political risk analyst and consultant, as well as a fellow at the Foreign Policy Research Institute. Max is the founder of Enmetena Advisory. Max speaks German, Russian, Georgian and Spanish, and has written for the Financial Times, the New Statesman and Foreign Policy, alongside a regular column for Al Jazeera. Max’s book, Economic War, is available from Hurst & Co.

Nicolas Michelon is a 20-year veteran of emerging market entry strategies, financial markets & geo-economics research. A Partner at Confluence Consultants and the editor of Asiapowerwatch.com, he has previously served as an Indo-Pacific economist at the French Ministry of Finance, financial analyst at KPMG Hong Kong, and a portfolio manager at Schroders Singapore. Nicolas is a lecturer in business Intelligence, geopolitics and geo-economics at ESCP Business School & EM Lyon Business School in France, the International University of Monaco, and the Paris School of Economic Warfare.

Patreon: https://www.patreon.com/EncyclopediaGeopolitica

Recommended
Transcript

Introduction to the Podcast Series

00:00:02
Speaker
Welcome to How to Get on a Watchlist, the new podcast series from Encyclopedia Geopolitica. In each episode, we'll sit down with leading experts to discuss dangerous activities. From assassinations and airliner shootdowns through to kidnappings and coups, we'll examine each of these threats through the lenses of both the Dangerous Act to seeking to conduct these operations and the agencies around the world seeking to stop them. In the interest of operational security, certain tactical details will be omitted from these discussions.
00:00:34
Speaker
However, the cases and threats which we discuss here are very real.

Meet the Hosts and Guests

00:01:05
Speaker
I'm Louis A. Prisant, the founder and co-editor of Encyclopedia Geopolitica. I'm a researcher in the field of intelligence and espionage with a PhD in intelligence studies from Loughborough University. I'm an adjunct professor in intelligence at Science Pope Paris. And in my day job, I provide geopolitical analysis and security focused intelligence to private sector corporations. My name is Colin Reed. I am a former US intelligence professional now working in the private sector to bring geopolitical insights and risk analysis to business leaders.

Economic Warfare: An Overview

00:01:35
Speaker
In this episode, we're discussing how to wage economic warfare. Joining us to do this are Max Hess and Nicholas Mitchell. Maximilian Hess is a political risk analyst and consultant, as well as a fellow at the Foreign Policy Research Institute. Max is the founder of En Matina Advisory. Max speaks German, Russian, Georgian, and Spanish, and has written for the Financial Times, the New Statesman, and foreign policy, alongside a regular column for Al Jazeera. Max's book, Economic War, is available from Hurston Co.
00:02:03
Speaker
Nicolas Michelin is a 20-year veteran of emerging market entry strategies, financial markets, and geoeconomics research, a partner at Confluence Consultants, and the editor of AsiaPowerWatch.com. He has previously served as an Indo-Pacific economist at the French Ministry of Finance, financial analyst at KPMG Hong Kong, and a portfolio manager at Schroeder Singapore.
00:02:23
Speaker
Nicolas is a lecturer in business intelligence, geopolitics and geoeconomics at ESCP Business School and Uemlion Business School in France, the International University of Monaco and the Paris School of Economic Warfare. So, Nicolas and Maximilian, thank you very much for joining us. Thank you for having us. Thank you for having us.
00:02:43
Speaker
So, two very interesting backgrounds there. The question we always like to ask our guests is, how did you get into your line of work? So, Nicholas, how did you find yourself in a background like that? Well, basically, I started off as a macroeconomist in Hong Kong. I was working for the French Ministry of Finance, secondly, to the Consulate General of France in Hong Kong. I was doing macroeconomic research, a bit of forecasting as well, looking at mainland China, Taiwan, mostly North Asia, I would say.
00:03:09
Speaker
Then I transitioned into financial analysis. I became a portfolio manager in banking. The idea was to implement the macroeconomic ideas and turn them into actual investment ideas. This took me through the subprime crisis of 2008, 2009, the collapse of Lehman Brothers, that some of the listeners may remember. And then I got into my own business. I started to do private equity advisory for clients and mostly in North Asia. And this is what ticked me off.
00:03:37
Speaker
I started realizing that many of my clients were going into private equity, not so much for the financial incentives that they would get out of it in terms of pure investment strategy, but for influence. Some of those people were getting into private equity, for example, in Japan, just to become influential stakeholders and to be able to influence the political debate, the legislative debate for a much wider strategy going forward.
00:04:05
Speaker
That's really what took me off and that's what decided for me that I had to go into business intelligence, study those issues of economic warfare. I went back to France, studied business intelligence at the Paris School of Economic Warfare and started incorporating this into the advisory work that I do. Max, what about yourself? How did you get into your line of work?
00:04:25
Speaker
Well, by fate, I guess, and a lot of luck. But what I would say is I began and sort of remain focused on the world as a Eurasianist, somebody who studies Russia and the countries of the former Soviet Union across Eurasia, but come from a background where I had grown up across central Western Europe and the United States.
00:04:48
Speaker
really it was that everybody in my family was in finance and i had no interest in that and when i was very young i was seventeen i went to georgia for the first time in the middle of russia's just after russia's invasion in two thousand eight also in the financial crisis was breaking out around the world and i sort of really developed a passion and interest for that part of the world and then as i sort of.
00:05:14
Speaker
continued my studies and went on to do my postgraduate work here in London. I sort of discovered that what I was really interested in and sort of had a better understanding at least because it had sort of been expected that I would go into finance. That's what everybody else did. That's what I did internships for.
00:05:31
Speaker
of understanding the markets impacts of a lot of what was happening in the region. So I began working first for security consultancy and then a political risk consultancy. And I started working very closely with the insurance market in London that writes a lot of political risk, trade credit, sovereign finance insurance.
00:05:49
Speaker
I had done some of my research work on bonds and how government bonds were affected by interstate competition, brought that on to sort of do some other work and then of course the sanctions were being developed. A lot of it deeply impacted those markets. So from there went on, spent a few more years at various advisories and then eventually went on and founded my own.

Understanding Economic War vs Trade Wars

00:06:12
Speaker
So Max, when we think about economic war in the Western Anglosphere sense, what are we talking about?
00:06:18
Speaker
Sure, so I use the term economic war as a very specific definition in the book, but of course economic war is a much larger concept relating to competition between states, the use of what is called geoeconomics, the use of economic trade, policy, investment, and credit tools to gain advantages over one state, or to sort of structure the international system in a way that gives advantages to one state or group of states.
00:06:49
Speaker
For me, what I really term the economic war between Russia and the West to differentiate it from sort of the trade wars that we see between China and the West, for example, that have now been ongoing for essentially the better part of seven years, is that the war between Russia and the West is one that has become not just about the economic future of Ukraine and Eastern Europe, but one that is really about the future of the international economic order itself, the position of the dollar and the global financial system
00:07:18
Speaker
the impact that that has on sanctions, Russia's attempts to develop alternatives, whether those be based on cryptocurrencies or commodities, its use of its oil power to try to get around that and to try to weaken that system and at least the part of it known as the petrodollar. So I use the term economic war in that case and that very specific reference to differentiate it.
00:07:39
Speaker
But economic warfare and the practice of geoeconomics is a much larger branch that affects not only direct major competitions between states, but even competition between allies from time to time. Nicholas, in French, we talk about gureconomique, economic warfare. Is this a different thing to this English definition? Would you describe it differently or is it broadly in the same area?
00:08:03
Speaker
No, I do believe that there are quite a few things in common. Just maybe from what Max has just explained, in France we have developed probably a little bit of a more, how should I say, maybe a bit more holistic view of economic warfare. We do consider that economic warfare is basically the extension of a nation's power through economic means.
00:08:26
Speaker
a way to build sovereignty, to reaffirm sovereignty, to build strategic autonomy, a very fashionable term these days, and hopefully we'll get back to that on how you build strategic autonomy through the economy. I do very much agree with Max on the fact that much of the economic warfare, or we could call it economic statecraft, goes on between allies and actually, from a French standpoint,
00:08:51
Speaker
I would point out that most of the acts of economic warfare, for example, directed at French companies come from actual allied countries, much more so than from countries that are considered by France or the EU in general as competitors or adversaries like China, Russia, or Iran, for example.
00:09:08
Speaker
I was teaching business intelligence today in one of the business schools, and I was reminding my students precisely of this. If you count the number of acts of what could be considered as economic warfare in the most white sense of the term, using law fair, extra territorial laws, using norms and standards, using information warfare, cognitive encirclement, et cetera, against European interests,
00:09:34
Speaker
Those attacks come by far mostly from our own allies than from China, Russia, and Iran combined. So it is a very interesting point to remember for our audience that it is first and foremost a way to increase your resilience, your economic resilience, your technological resilience, and to build strategic autonomy.
00:09:58
Speaker
and it doesn't necessarily follow the fault lines imposed by much wider geopolitics. Of course, the geopolitics affects the way that economic warfare is being fought, but it very often transcends those fault lines imposed by geopolitics.
00:10:15
Speaker
Max, in your book Economic War, which we're going to link in the show notes for everyone that has not read it, excellent book. In the book, you describe economics as war by other means. That's a twist on the Clausewitzian phrase. Is economic warfare really such a new phenomenon or is it something that Clausewitz would recognize himself?
00:10:35
Speaker
I do think it's something that Clausewitz would recognize himself. I mean, the real schools of it, at least within the English and Anglo-American thought, were mostly developed a little bit later, but certainly some of the work already had begun by his time. And certainly he would have recognized the use of tariffs, the use of
00:10:57
Speaker
investment bans effective what we call sanctions today by states against other states as something that had military components. I think that then when there was also a lot less integration that we lose some of the art of the Guéric and Homique and the French understanding
00:11:18
Speaker
Because today of course not every policy usually has an economic impact, not necessarily every policy is aimed at economic war. Back then almost it was more sharply understood and there was a smaller list of tools.
00:11:33
Speaker
The idea of states competing over not just instruments of trade, but in my view instruments of market access and in particular the other states credit worthiness and ability to grow is something that goes back as early as we have recorded conflict. So my political risk advisory firm and Matena advisory takes its name from King and Matena of Lagash who in the earliest recorded conflict that we know in ancient Mesopotamia took over the city state
00:12:02
Speaker
of Uman next door and used calculations about overdue interest to justify that war, as pause of the cause of belly, and then of course, imposed reparations that they had to be repaid to justify the taking of the land. So economic war, in my view, certainly goes back to as long as we've had recorded conflict. Nicholas, what about the French view? Has that evolved over time? Is that something that you think has changed over history?
00:12:30
Speaker
It has evolved. It's interesting that Max is referring to very ancient history in Mesopotamia. I'm going to take the auditors to a much more recent time, the 19th century. We do have records of the use of economic instruments
00:12:48
Speaker
to wage war and to impose French influence at the times of Napoleon III, for example, when we started having those colonial adventures in Mexico, for example, that took us all the way to Cameroon, the founding moment of the French foreign religion. And we have traces that
00:13:09
Speaker
economic instruments, not too different from what Max has just described in ancient Mesopotamia, sorry, economic instruments have been used by the French to basically impose that type of influence on those territories and on those local governments that they were trying to control at the time. For France, I would say that the philosophy that really drives the whole way of
00:13:35
Speaker
Our way of looking at economic warfare in general, the philosophy behind it, is very much influenced by the policy of the General de Gaulle after the Second World War, definitely. I mean, it does mirror General de Gaulle's wish to remove France from the centralized command of NATO, which President Sarkozy much later on brought France back into. But there is always this
00:13:59
Speaker
search for strategic autonomy, for reaffirming using the economy to reaffirm French special power in the concert of Western nations. The fact that France always has a special place in the concert of Western nations within NATO, for example.
00:14:15
Speaker
In terms of the current philosophy and the current doctrine of business intelligence and economic warfare in France, I would say that the birth moment is one report, which is called the Mart Report, which was written in 1994. It's a report that was commended by the French Parliament to a group of experts. And the question that was asked to them was, how do we rebuild
00:14:42
Speaker
economic power? How do we re-industrialize France? And to achieve this, how can we rebuild a culture of business intelligence and a culture of economic warfare? How can we regain the ground that we have been losing over 50 years, over the past 50 years? So this is really, I would say, the birth date of the modern French take on economic warfare and on business intelligence.
00:15:07
Speaker
If I may, I certainly agree with everything Nicholas just said. Another example from the 19th century that also shows France's history in this, that I'm a particularly fond of this example, is in 1887, the German Chancellor Otto von Bismarck issued what was called the Lombard Fairburt, the Lombard ban, which banned Russian credit, Russian borrowing from the German market. Very similar to what we see the US
00:15:37
Speaker
the EU, other Western countries imposed on Russia as part of the economic war that's been going on now. The shift that this caused, though, was that the French credit markets, which were much healthier in part due to France's colonial power, was able to absorb very large amounts of Russian lending. The French government supported it. That helped drive together France and Russia as allies, of course, in the period leading up to World War I.
00:16:00
Speaker
And then ultimately when it of course all blew up in the aftermath of the war and the Russians defaulted on their debts in 1917 after the Soviet Revolution, the second most commonly held investment in all of France was Russian government paper, far more broadly held than even Apple shares or shares in the largest French companies are amongst the French population today.
00:16:22
Speaker
So France is a long and storied practitioner of this that also shows how sometimes the best laid plans can have inadvertent consequences in the long run that then are responded to by new policies.
00:16:36
Speaker
We've covered a couple of really fascinating historical moments where this has changed significantly. I'm thinking now about our current historical moment where the United States, for the last three decades or so, has enjoyed something of a monopoly over these tools of economic warfare that rely on the dominance of the dollar as the global trade currency.
00:16:55
Speaker
that rely on the centrality of US financial institutions for controlling so much of global commerce and really have weaponized those things as tools for economic warfare. What are your takes on the end of this American dominance over the global financial system? Do you buy into these theories that the dollar is in decline and that the day in the sun of the dollar dominance may be coming to an end?

The BRICS Currency Debate: Impact and Challenges

00:17:20
Speaker
Is that something you buy into or do you think that we're still going to live in this moment?
00:17:25
Speaker
I think it is a trend that we're going towards. We have to make a distinction between some of the plans that are being announced, and here I'm thinking about, of course, the project of a BRICS currency, Brazil, Russia, India, China, and South Africa proposing a common currency, and with the recent enlargement to a few more countries. This is an extremely ambitious plan.
00:17:47
Speaker
As with all ambitious plans, I think what is interesting is that it's showing you a direction. I'm an economist by trade. As I explained in the introduction, I do not believe that this is feasible in the short to medium term. I'm not worried if I was at the Federal Reserve. I would not be worried that the US dollar will be replaced anytime soon. That being said, it is
00:18:14
Speaker
something that is pointing you towards a certain direction. It certainly gives us a very clear indication of what the will of
00:18:24
Speaker
the so-called global south is about freeing themselves from the dominance of the US dollar. We have to recognize that as much as this project of a BRICS currency remains pretty much of a white elephant project, we are seeing already more and more trade being done in local currencies between BRICS economies. For example,
00:18:46
Speaker
I mean, the United Arab Emirates, which will be joining BRICS early next year, is already starting, as we speak, to sell oil to India and to get paid in Indian rupees. So we are seeing very concrete signs that there is a will and there is a strategy to replace the US dollar. It will be done gradually. But what people should remember is that
00:19:14
Speaker
The cause for this project is the use by the United States of extraterritorial laws on the back of US dollar dominance. And here I'm talking about FCPA, the Foreign Corruption Practices Act, which enables the United States and the Department of Justice in particular to strike any company worldwide on the grounds that they may have practiced corruption in US dollar. So the idea is if you free yourself from the US dollar base, you're already freeing yourself
00:19:43
Speaker
from the long arm of the DOJ in that term, you're very largely freeing yourself of much of the sanctions being imposed on you because many of the sanction regimes imposed by the United States are using the US dollar as their main basis. So you are already solving a lot of your problems if you are part of the global self by doing this. So in a nutshell,
00:20:06
Speaker
the US disappearing as a currency for international trade. Not anytime soon, definitely not, because it will take a lot of adapting. Central banks will need to adapt to that. The entire economic systems of the countries who want to toy with this idea will have to adapt to that. It will take time, but we are certainly going in that direction. And time will tell how fast we go. And you know how it works in these cases. Sometimes you have fantastic phases of acceleration.
00:20:34
Speaker
I would not be surprised to see those phases of acceleration. I mean, look at the sanctions on Venezuela, for example, the embargo on Venezuelan oil and the fact that Russia is being used by China as a proxy to keep buying Venezuelan oil in spite of the embargoes. Same with Iran. So this is something that is accelerating. We are definitely going in that direction. Maybe not a BRICS currency yet.
00:21:01
Speaker
broadly agree with most of what Nicolas said. I think that the reality of global reserve currencies and the structure of them throughout history as well as the dollar today is that the threats to them
00:21:17
Speaker
are often visible for quite a long time. But I love the Hemingway novel, The Sun Also Rises, about the aftermath of World War I. And there's a famous scene in which the American character asks a Scottish character, how did you go bankrupt? And he says, gradually and then suddenly. And that is in some ways a parable for also the US replacing Britain as the global reserve currency at that time.
00:21:46
Speaker
What I would say about the BRICS currency and the idea that it's structured now is that the countries named in the BRICS acronym, I know they're trying to expand, Brazil, Russia, India, China, South Africa, South Africa, sadly a bit of an economic basket case right now, but the rest of those countries are all large surplus earning countries. However, they certainly don't have a lot of trust with one another, and crucially, they don't have open capital markets.
00:22:12
Speaker
You still can't move money without government permission from Russia to China or India, vice versa. We have plenty of examples from right now of how money affected by the current economic war between Russia and the West has gotten trapped, even in countries like India, which is not a sanctions enforcing country on Russia's side.
00:22:31
Speaker
To have an alternate currency system really work with all these surplus countries, you need a deficit market or at least a trusted and investable market that they can all move that capital into. Right now, the US dollar, and to a lesser extent, the euro, but certainly the US dollar dominates, but the euro is in some ways a part of the system, and I'll come to that.
00:22:51
Speaker
is that it serves as that point, right? In the global financial crisis, in COVID, even just now in the geopolitical tensions we've seen after Hamas's terrorist attacks in Israel and the response there and potential for conflagration across the Middle East, what happens to money? It goes into US dollars and into US treasury holdings.
00:23:11
Speaker
So for that BRICS system to really have an alternate path and to offer a sustainable future, it needs to be the currency that people in time of crisis, when that suddenly comes, then move their assets into. That's why it's the reserve. It's there which you go to in an emergency, so to speak.
00:23:27
Speaker
And that's not going to happen with the BRICS countries anytime soon, even if they come up with something on paper that they say enables this. They are agreeing new measures for some swaps and some efforts to try to make some capital move more easily, but quite a distance away from actually getting there.
00:23:47
Speaker
But we need to prepare and understand and discuss these issues now because eventually it will not be that there's an announcement after a brick summit or something and all of a sudden people don't want to use the dollar anymore it will be another geopolitical crisis twenty thirty years from now whatever that may be i think it's more likely in that time frame than in the sort of five to ten year time frame.
00:24:09
Speaker
That that we have to consider and you know, that's why I think in particular in the economic war between Russia and the West Russia's attempts to divide Europe and While in some cases, you know, I certainly see the benefits of strategic autonomy for Europe especially in policy uncertainty coming out of Washington DC and
00:24:27
Speaker
But really you know the need for a bricks alliance to drive europe and united states apart is key to that long-term aim because it creates a deficit market with open capital flows in one or the other where they can potentially partner with and so that's why you know russia's of course had many much more short-term interest in europe but that's one of the reasons i think it's so close to the euro and european union project as a whole and the sort of you know argument that i always have is
00:24:57
Speaker
The financial crisis in the Eurozone crisis in 2011, 2012 aside, which again might not have happened in the way it did if it wasn't for the connections with the US in the first place and the global financial crisis that started there, is that really the deal that
00:25:13
Speaker
the United States and Europe have is Europe is the only block over the last 50-60 years to develop a real successful alternate currency. Yes, there are issues with its capital markets and Eurozone European Union back bond issuance. It's not quite there yet, but 90% plus of trade between Eurozone countries is denominated in Euros. Other countries are willing to trade it. It's grown even faster than the Chinese Yuan as a share of IMF reserves and the like.
00:25:41
Speaker
The U.S. deal and the relationship between the U.S. and Europe, to me, broadly comes down to Europe, despite having this success and potential to be a major economic competitor on that currency level and on that credit market level, essentially complies with the U.S., right? When the U.S. unilaterally withdrew from the JCPOA, the Iran sanctions deal under the Trump administration, the European financial markets were not rerigged to get around that, even though every European country, in my opinion, rightfully opposed it.
00:26:11
Speaker
So in exchange, the US provides the core security guarantee, right? Even if every NATO country got to 2% of GDP spending, it would only take a relatively minor decrease in US spending to wipe all that out. So I see that alliance there as very much a core part of it, but these factors are not always that well understood, even in policymaking communities. And that's exactly why I think we're so right, that even if neither of us think these threats are immediate, it's so important to be talking about them now.
00:26:41
Speaker
I want to stay on this idea of economic orthodoxy being challenged to stick with an icon of American economic power here, but perhaps to dumb it down slightly.

Myths of Economic Integration and Conflict Prevention

00:26:51
Speaker
For years, there's been a popular theory that no two nations with a McDonald's fast food franchise could go to war. In recent weeks, I've seen comments online that we now have two different franchises of McDonald's in two different countries,
00:27:05
Speaker
essentially supporting adversaries in an ongoing conflict, which seems like the ultimate test of this. I've even seen it described as an intra-corporate proxy war. Is this theory outdated then? I'd love to hear your thoughts on this.
00:27:20
Speaker
I think it is becoming outdated now. I mean, this is a reflection of one particular moment in time, which I believe is a total historical anomaly, which is that time when the US was enjoying sole hegemony after the collapse of the Soviet Union. We are in very different times now. We are facing two hegemon. We are back to two hegemon. China is a hegemon in its own right.
00:27:47
Speaker
I'm not saying that China has the influence that the US still enjoys, culturally speaking, in terms of imposing its own cultural norms and the way it consumes and all of this. China certainly doesn't have that. China, I believe, is not even trying to get any close to that. This is not their interest. But we are in a situation now where
00:28:12
Speaker
In spite of the fact that you may have a magnanimous franchise in two different countries, this will not stop any clash from turning into an actual confrontation, be it kinetic or not, being military or not.
00:28:26
Speaker
We are in a time where economic models are clashing, ideals about society are clashing increasingly. You have McDonald's restaurants in China. It is still a fact that China is proposing a model of society, a model of governance.
00:28:44
Speaker
a model of society, a model of governance that is completely opposite to the ones that we have been used to in the West over the past more than half a century. So I do not think that we can claim that this is a factor that will prevent anything. If anything, the fact that you have magnum's franchises now, we can actually see in some countries, especially in the global South, is a factor
00:29:14
Speaker
that is driving some of those countries away. I mean, it is those symbols in many countries that I've been traveling to recently for business are crystallizing the opposition to a certain model of society, to a certain economic model, to certain, you know, the entire ethics that go with it, the entire morals that go with it. It does crystallize that. So I would say that those are the remnants
00:29:40
Speaker
of a time when we were in a unipolar world when the US was enjoying sole hegemony, but these times are changing and we should not be fooled by the fact that we still have some of those signs hanging here and there. I think Russia is an interesting example. Even those remnants are changing their name now as a result of the sanctions. Some of those companies have to exit by force.
00:30:06
Speaker
Local owners are rebranding those those outlets so even this is disappearing very fast.
00:30:16
Speaker
Yeah, I think I'll begin with Thomas Friedman as well. So Thomas Friedman, who came up with this, you know, golden arches theory of pieces, he himself updated it maybe 20 years ago. Now to the Dell franchise theory, the Dell supply chain theory, right, that no two countries that had integrated supply chains would go to war with each other.
00:30:37
Speaker
which is also complete nonsense. And you see it now that integrated supply chains between China and Taiwan, for example, are one of the factors that people talk about as making it more likely that China will go to war in Taiwan to get control over that chip-making technology.
00:30:52
Speaker
So I very strongly disagree with those ideas. I think that while to say that I'm a believer in Pax Americana would be wrong, I do think that there is still a not complete dual hegemon system. I think that there are two great powers in the US and China, but the US still sets the rules.
00:31:16
Speaker
And china is of course very unhappy about that and tries to change the rules and we can talk later about what more of those examples are but i do think that that means that that the u.s is in terms of at least pure economic. Fire power far more capable that being said part of china strategy of combating that and part of the reality of the global capital markets is that there is a bit of mutually assured destruction right china is the world's largest holder of treasury bonds.
00:31:40
Speaker
if there's full economic war between China and the US in the same way we see between Russia and the US now, it'll be a global depression. I'm relatively confident to say that what I think got Thomas Friedman and that generation so drunk was on the defeat of the Soviet Union, the realization that they didn't have power. The 1990s were
00:32:04
Speaker
Almost as violent as the current era and arguably even more so, right? You know, it's just we weren't paying attention The first and second Congo wars right took place and probably had more casualties I'm quite confident, you know had more casualties than the Ukraine war has today You know, that doesn't mean that they're not tragedies both of them, you know, they're not comparable but we weren't as integrated and didn't care as much about what was going on in the DRC in the broader west and
00:32:32
Speaker
Of course, today where so many critical minerals come out of the Congo that are so important in this transition, it's certainly arguable that the macroeconomic impact of a third major Congo war down there would be far, far larger than it was today. So of course, we'd feel it more and rethink our paradigms more.
00:32:50
Speaker
Whereas in the 90s and early 2000s, without besmirching him too much, Thomas Friedman could get away with not caring about it. He could care about what was going on in the Middle East and certainly did. But again, that's because the US had interests there and oil. We sent foreign correspondence there. We didn't as much as the DRC.
00:33:09
Speaker
If I may just add one last thing on what I believe, and I totally agree with Max on this, what is the fallacy that economic integration guarantees some form of peace? I would just like to remind our audience of one historical fact. In 1913, so we are one year before the start of the First World War,
00:33:30
Speaker
Economic trade intensity between the United Kingdom and Germany was at its highest historical point. Never in history had the UK traded so much with Germany. And yet, a year later, they were butchering each other in the trenches of northern France. So not only does it not guarantee peace, but as Max very rightfully said, in many cases, it actually increases the stake of the conflict.
00:33:59
Speaker
So one place to potentially give Thomas Friedman some credit, because I feel we've been excessively critical, and rightfully so in my opinion, but what I will say, and I will say I go out and agree with, is that I do think that in democratic states or states that are responsive to their populace care a lot more about that economic integration than dictatorships or states driven by ideology that don't, or in the case of World War I that are driven by great power politics and small
00:34:31
Speaker
incestuous courtrooms. So, you know, France, for example, has long been perhaps the most eloquent critic of a lot of the US's geopolitical power, right? This is a reference to exorbitant privilege of the dollar comes from a former French president.
00:34:50
Speaker
De Gaulle often also, in particular, tried to build up his own alternatives to this system, some of the legacies of which today the CFA franc are also controversial. I happen to think the CFA franc is a great thing, even though I broadly support anti-colonial movements, but that's another point we could talk about later, maybe. I would say, look, for example,
00:35:12
Speaker
for Germany, which was so misled into thinking that economic integration with Russia could help decrease conflict before 2014, even continued that after the annexation of Crimea started of the war, up to the point where it shut off the Nord Stream 2 pipelines after they were built, but before they had come online just on the eve of Russia's full-scale invasion. And I think a lot of that
00:35:38
Speaker
False policy in Germany came from overconfidence in the legacy of the Ostpolitik, the Eastern politics that existed in Germany in the 70s and 80s, where economic integration and trade with East Germany and buying gas from the Soviet Union did help lower tensions in Europe. And in some ways, I would use this to say, I think the Soviet Union was actually more responsive to its citizens' economic concerns than Putin's Russia is today.
00:36:05
Speaker
The standard of living in Russia has never gone back to its 2013 level since the full-scale invasion, and I just think Putin really doesn't care at this point. He has far more priorities, whereas I'm not saying the Soviet Union was in any way a nice and soft and cuddly bunch.
00:36:23
Speaker
I think they recognized in the 80s at the time that Germany was pursuing that politic that they were in a very dangerous situation if they couldn't turn things around economically. Ultimately, of course, they failed to do so, but I think that's why there was this sort of big misunderstanding in Germany. So in countries and how responsive the country is to its people can change from time to time. And of course, countries that engage in a sharp economic warfare
00:36:46
Speaker
can use this to their advantage that there is democratic accountability, right? So I expect next year where we have European Union elections, we have UK elections, US elections, Russia to really engage in a lot of these tools because it knows that it might help bring those who are more politically aligned with its interests to power. We've seen that with the grain disruption recently in Europe and Russia's withdrawal from the Black Sea Grain Initiative.
00:37:15
Speaker
which hasn't had that big an impact on global prices, but it has led to squabbling between Poland, Slovakia, Hungary, and Ukraine. Of course, there was the Slovak elections where a much more Putin-friendly candidate won the large share of the vote despite extensive corruption scandals.
00:37:37
Speaker
And I'm not saying it's an iron fast law. I certainly don't believe the international relations theories that democracies will never go to war with each other. But I do think countries that are economically accountable to their own population or the more economically accountable they are.
00:37:51
Speaker
the more important interdependence can play a role, but it's only one role and factors such as ideology, perceived threats, and even style of governance can override that very easily. So I want to stay on this theme because we're talking about the effect of economic warfare tools right now.

Do Economic Sanctions Achieve Political Goals?

00:38:11
Speaker
Does economic warfare work, in your view, at achieving sort of the political ends that states try to use it for?
00:38:18
Speaker
You know, I think that on my end, the answer is no and not always, but we do need the right understanding of tools of economic war. Tools of economic war can also be used as carrots. And I think far too much of the conversation around policymaking, particularly in the United States, focuses on sticks rather than on carrots. And I'd like to see much more of a shift there. But when it comes to those carrots in particular, I think that we've
00:38:45
Speaker
sometimes belatedly, but now come to the correct understanding, which is that using sanctions to deter a country, especially the one that isn't economically responsive to its own population, is very ineffective unless that country is already deeply integrated into the Western system, right? So the famous example of this from Dan Dresner's book, The Sanctions Paradox, is on South Korea. When the US threatened sanctions against South Korea over its own nuclear program, they stopped immediately.
00:39:15
Speaker
We've had sanctions on North Korea, Cuba, you know, for decades now, and those countries have never responded to changing their policies or let alone their regimes in a way that would show those sanctions are having that impact. Where sanctions do work, I think, is as a tool of war by other means, right? Mutually assured nuclear destruction means that war between Russia and NATO is unthinkable, but we can support Ukraine not only through direct transfers of weapons,
00:39:45
Speaker
weapons, but also through budgetary support, financial support, economic support, and other wars in other ways, and of course in other aspects of the larger economic war that have to do with that dollar system and integrating Ukraine more into that system.
00:40:01
Speaker
So, you know, I think sanctions do work as a tool of war by other means. I think they don't work as a deterrent tool, except for sometimes when they do, it is when they're used between allies or at least countries that are so deeply economically integrated and also have governance systems that are responsive to their population. Korea gets a complicated example there because it certainly wasn't a democracy at the time, but that's a lot of big concepts. So I want to make sure Nicholas gets a chance to respond too.
00:40:29
Speaker
No, I could not possibly agree with you more, Max, especially on the sanctions part. The fact that it has been proven that it often fails and if anything, it often ends up creating the opposite situation to the intended objective.
00:40:45
Speaker
It reaffirms counter alliances. It very often enables the government that you're trying to weaken to increase its connection with its own population to increase control over its entire economic system. But where I would differ a little bit is if we widen the definition of economic warfare, and especially if we look at a wider range of tools
00:41:11
Speaker
Then my answer would be yes, yes, and yes, again, economic warfare works. If you start taking into account law fair, legal warfare, the use of your legal system or your legislation, especially from an extraterritorial point of view,
00:41:27
Speaker
then it is a very powerful tool. The US has proven that they are extremely good at this, that they have absolutely no qualms using it on an industrial level. The Chinese are getting into this, by the way. The Chinese so far, from what I understand, their law fair is still fairly defensive. They've passed a law that basically criminalizes any Chinese company to submit themselves to foreign extraterritorial laws.
00:41:54
Speaker
So, you accept FCPA supremacy overseas, you will go to jail in China. And if you add on top of lawfare the use of norms and standards, influence in norms and standards, it starts to get extremely interesting as a tool.
00:42:10
Speaker
Just to give the auditors one example, the International Standard Organization. It is one of the many standard organizations. That's not the only one. But it is a particularly interesting one. They work alongside technical committees. And if you look at who controls the ISO technical committee for lithium, for cobalt, for rare earth elements, the chairmanship, Chinese. Secretaria, Chinese.
00:42:34
Speaker
So the decisions, the debates, even the technological debates get decided in Beijing by Chinese technicians, by Chinese engineers, which means that from the onset you have one actor who in some cases actually controls the natural resources in the case of rare earth elements. And even when they don't, lithium, which they don't have at home but they control overseas, cobalt, which they don't have at home but control overseas,
00:43:00
Speaker
They also get to control the definition of the technical norms and standards, which means that their companies, CATL, BYD, who are the leaders in the production of car batteries, for example, they get an advantage.
00:43:15
Speaker
from the onset, because from the beginning, they have their own champions who are prepared for the norms and standards, who get to know the next norms and standards in advance. And when you, a European or an American, try to get into that racket, well, you're already one train behind. You're always going to be playing catch-up.
00:43:34
Speaker
If you add on top of norms and standards the weaponization of civil society in the context of economic warfare, weaponizing NGOs, weaponizing influencers, those annoying influencers on Instagram who keep bad mouthing one particular company, if you start adding this to your toolkit of economic warfare.
00:43:56
Speaker
Then you're starting to increase dramatically the scope of stakeholders, and it becomes a nightmare for any company that you're trying to attack to defend themselves because their range of stakeholders has suddenly increased. The attack could be coming from absolutely everywhere.
00:44:12
Speaker
And I think that the pinnacle of economic warfare and the best tool there is, it is the best tool because it's discreet, it's legal, and it's even, I would say, morally and philosophically defendable, is cognitive encirclement. It's when you reach that point where you don't even need to bad mouth your adversary, you don't even need to sanction your adversary, you're controlling the narratives, you're controlling the definitions of the terms.
00:44:41
Speaker
So basically you're making sure that your adversary is encircled by your vocabulary with your definitions.
00:44:48
Speaker
And this way, you get to shape the environment. One example, and I'll leave the floor to Max on this. One good example is, how do you explain that the European Parliament voted the phasing out of combustion engines by 2035, in spite of the fact that not a single European company controls
00:45:11
Speaker
the supply chain for batteries neither upstream nor midstream nor downstream. So here you have the European Parliament voting a completely suicidal law which will open the floodgates to Chinese made electric cars, which by the way will be the only electric cars that the impoverished middle class in Europe will be able to afford because they come out at 12,000 euros a pop.
00:45:36
Speaker
Nobody in Europe can produce an electric car, 12,000 euros a car. Here you have a beautiful example of how some Chinese companies have been able to manufacture political consent, technological consent, and even consent within society at large.
00:45:55
Speaker
To believe that to save polar bears, you need to drive electric. It becomes natural. It's almost a reflex. To save the primal forest, you need to drive electric. This is cognitive encirclement. And this is, I believe, the most powerful tool in the toolkit for economic warfare.
00:46:15
Speaker
I think we have to find some areas where Nicholas and I disagree because I certainly agree very strongly on the ISO standards point and I think that's one that often doesn't get a lot of attention, but to continue the sort of story from where Nicholas left off, I think there are a lot of other examples that show
00:46:32
Speaker
key areas of this debate and dispute right now and China's competence as a player in this, which I certainly believe China has a long-term strategy in this, whereas China wants to be number one in the core node in the international economic order. Russia is interested in destroying the international economic order. And that's why I think they're not so aligned right now. But going back to Nicholas's excellent example from the electric vehicle debate, right? So look at the West's champion. You have Tesla.
00:47:00
Speaker
Of course must goes and invest in build his largest factories in china where the chinese have been very good about setting the rules he can't take his capital out of china so he has to keep investing in more factories there so doesn't end up building that you know i'm upstream midstream or downstream components internationally because you can't take the profits from tesla and china and go and invest them in directly in cobalt mines.
00:47:25
Speaker
The reality is, though, whereas China is very good, it's fighting against a position in which a lot of the rules already are established and set and dominated by the United States in particular, but west more broadly. A great example of that is the Paris Club, which is the organization through which government interstate debts are refinanced.
00:47:47
Speaker
at least the vast majority of them. China is not a member of this club. When its finance ministry was once asked why it decided not to join, it famously said, well, where in China is Paris? And this organization, however, although it is based in Paris, the US really has the overall vote calling shot in it because the institutions that you need to help a country get out of that bankruptcy are the
00:48:10
Speaker
To a lesser extent the world bank into a larger extent the imf the imf and the world bank are both united nations institutions but like i'm like other united nations institutions they are not based in janiva or new york city there based in washington dc.
00:48:26
Speaker
Not only physically are they there, but the US has an effective veto on their management and directors. While there is an agreed rotating process between what nationality leads it, the US always really has the final say. That is something that China is itself combating against with other rules and standards that they're adopting as they do become an investor abroad.
00:48:50
Speaker
And this is where, you know, I am in some ways thinking some of the debt trap diplomacy debate around China is misleading because what we really have to focus on is how these investments are affecting its own capital markets and its developments of them rather than just the balance sheet of any one country to which they loan.
00:49:09
Speaker
And you know, the key example of that is China signs its own bilateral investment treaties that have very different wording from Western bilateral investment treaties. The key things that they've been setting up in recent years that hasn't gotten significant attention are their own arbitration courts, right?
00:49:24
Speaker
investor from whether it's France or the United States in let's say Georgia, particularly close to my heart, the Republic of Georgia, and you have an investment dispute, you will ultimately likely be hearing it in London, Stockholm, or the Paris Arbitration Centers. Even right now, we have one going on between Iraq and Turkey and the KRG.
00:49:47
Speaker
that came out of a ruling from the Paris Arbitration Court. These are set up and backed up by those bilateral investment treaties, investor state dispute settlement systems. China sets up its own in Beijing, now in which those disputes it wants to have settled in China by Chinese arbiters in the future.
00:50:05
Speaker
Certainly, we can argue about the fairness of Western arbiters, but I would certainly say that China is doing this with the view to the fact that it thinks arbiters based in Shanghai are more likely to rule in its favor than ones in Paris or Stockholm.
00:50:20
Speaker
And so, you know, there is this whole institutional underpinning where the West and the US in particular, and that always has to be said, you know, I'm not saying it's right. I'm not saying it's ideal. But the reality is, is that the US has the dominant position in it. And, you know, how China is able to compete on that institutional level from everything from the ISO standards to these investor settlement dispute systems is really at the core of this conflict, sometimes even more so than when we hear about
00:50:48
Speaker
Trump imposing tariffs on Chinese steel and China imposing counter tariffs and the like. It is a far more systemic issue than it is just about trade. We're discussing how to wage economic warfare with Max Hess and Nicholas Michelin. After the break, we'll talk about how to defend against economic warfare.
00:51:17
Speaker
You have been listening to How to Get on a Watchlist, the podcast series from Encyclopedia Geopolitica. If you like this show, don't forget to check out our other content at Encyclopedia Geopolitica, which you can find at howtogettontawatchlist.com, where you can find our analysis on various geopolitical issues, as well as reading lists covering topics like those discussed in the podcast.
00:51:41
Speaker
Please also consider subscribing to the podcast on your streaming platform of choice, giving us a rating and joining our Patreon.
00:51:59
Speaker
So we've talked a lot about the different ways of waging economic warfare. How can a nation that's being targeted by an adversary through economic means protect themselves? Are there lessons we've learned from the Russia-Ukraine conflict or from the US-China confrontation in how to do this?
00:52:15
Speaker
I think the key to really react properly in a constructive fashion and I would say even disencircle yourself when you're under attack from any means of economic warfare is first of all to have and it starts very far away from any
00:52:34
Speaker
economic thoughts is to have a will for power. And I believe that a lot of the countries that are constantly under attack and that do not seem to find any way to react to this, lack this will for power. It starts with this. I think it starts to a very high degree of patriotism, believing that your companies are your champions, that you need to protect. They are your champions for a very simple reason, is that they are
00:53:04
Speaker
your job creators, they are your technology creators, they are the ones that contribute to the real economy. For France, it's pretty easy for us and it comes very natural for us to think this way because we have this tradition of covertism.
00:53:22
Speaker
Colbertism, just in a nutshell, comes from the minister Colbert, who was a minister of the economy in the ancient regime before the French Revolution. What Colbert put in place, and this was continued, it remained in French tradition, I would say at least until President Pompidou in the 1960s, the idea was that the French state would give the impulse
00:53:46
Speaker
the strategic impulse. To give you an example, we need to create Airbus. We need to have excellence in civilian nuclear energy. We need to have a high-speed train technology going forward. The government will give the impulse. It would put
00:54:04
Speaker
all the power of the state behind a project, and that project would be taken up by private companies or sometimes by public companies, but with a lot of influx from private capital to make the project actually real. What China does, I often tell my students, what China does is covertism on steroids. It's really the central state basically making all the decisions
00:54:29
Speaker
for all the companies, regardless of whether they are public or private, and sometimes even nationalizing it by force. But the idea being that the country has one direction that it wants to take, and the entire economic system needs to follow that direction. So you need to have this. In France, unfortunately, when President Mitterrand, the socialist president, was elected in 1981,
00:54:56
Speaker
Very quickly after his election in 1983, he took a very liberal turn in its economic policy and decided to engage into an endless trend towards privatization of companies.
00:55:12
Speaker
Not that I'm in favor of nationalizing all economic assets by far. I'm not of that political flavor. But it also turned into a very sad reality, which was that the French state ceased to have any leverage over any part of the economy.
00:55:31
Speaker
when it came to pushing for and helping the creation of industrial champions so we are finding ourselves in a situation now where for example the car manufacturer which used to be under state control because of the accusation that had collaborated with the german occupier in the second world war.
00:55:52
Speaker
Renault had turned gradually more and more into a private company over the years. When the Japanese company Nissan decided to attack the CEO of Renault, Carlos Ghosn, to reclaim control over their own strategic assets, nothing was done, neither at the company level nor the state level, to prevent the attack, to counterattack, and to prevent basically the Japanese size to reclaim that asset.
00:56:19
Speaker
It does take a lot of that willful power, a lot of that public sphere vision that we need to have champions and we need to protect them. A champion needs to be protected. The whole world is not the US where we have
00:56:36
Speaker
this all-powerful companies. We don't have any companies that have a GDP equivalent of superior to the state of California in France. Those companies, as big as they may be, they need to be protected against outside influence. When we start losing the leverage to do that,
00:56:55
Speaker
then this is when we start losing all actions all battles on economic warfare and this also takes you to another territory which is you need to have the financial means to put behind your project when you talk about strategic autonomy in europe i mean it is the buzz word.
00:57:14
Speaker
Right now, everybody's talking about strategic autonomy. Yes, but show me the money. Where is the money that is going to back this beautiful idea? We have, I mean, many, some of our auditors have heard about the fact that in Europe, we probably have enough ammunition to fight a high intensity war for five days. It means we must beat, defeat Russia in five days. Come day six, either with one or its white flag.
00:57:44
Speaker
So if we're going to talk about rebuilding a defense industry in Europe, it starts by rebuilding production capacity. As we speak, Russia produces more ammunition than the whole of NATO combined every day. But to do that, we need money. We need financing for that, public or private. From the public, there's no more money for this. And from the private sector, we have another problem, which is ESG standards.
00:58:12
Speaker
ESG, which has become the new religion in the West, ESG standards tell you that if you invest in defense company, well, this is bad. This is not socially responsible because bullets kill. So you invest, you're an institutional investor, you're investing in a defense company, your ESG rating
00:58:32
Speaker
degrades instantly. This is something that is really worrying. We've had CEOs of defense companies in Europe raising the alarm. We must change the definition of ESG standards, otherwise we will not be able to invest in the reconstruction of a defense industry in Europe.
00:58:49
Speaker
So, you have to take all those elements into account and you can see the problem already specifically in Europe. We are lacking on almost all of those indicators, which are, I believe, the only way we can start fighting back, protecting our assets, especially from acts of economic warfare.
00:59:15
Speaker
core position that we need to begin in is to have a much better understanding of our own geoeconomic positions in particular. I'm going to begin by giving some critical European examples, but then move on to the far more serious US examples. Don't think that I'm being too American biased in this, hopefully.
00:59:38
Speaker
A key example that I often give from the economic war at its height last year between Russia and the West, particularly in Europe, was of course Russia's weaponization of its own gas supplies and ability to drive up European gas prices.
00:59:53
Speaker
Now, also last year, running in the Netherlands, the Dutch government ordered the final closure of Europe's largest, Western Europe's largest gas field. Even though it has more than enough reserves in it that it could have, that year alone, replaced almost half of Russia's exports if we just brought it back up to production levels from 10 years ago, which the reserves are there for and the international energy companies are, you know, based exactly there and have literally run this facility before.
01:00:22
Speaker
Now, because of local opposition to this gas field, because apparently it had caused some earthquakes, and the Dutch government being only a two or three seat majority, they never got any support for doing this. I tried to bring it up at a European level, saying, hey, it will be much cheaper to literally buy all of the residents of this city a house in the south of France than it will be to spend
01:00:47
Speaker
the hundreds of billions of euros that we spent subsidizing energy companies and gas bills last year as a result of it. But the political will wasn't there, and a real understanding of this issue is needed for that to even begin to make sense. Obviously, I'm being a bit facetious with using the
01:01:04
Speaker
South of France example, many people don't want to leave their homes, would happily have one a little bit further down the street, but is a key example of where I think the sort of failures to understand are. Another one is returning to France is the CFA franc. I am a very big supporter of the CFA franc system in the African countries that it exists in.
01:01:27
Speaker
That's not to say that they haven't had significant costs from colonialism and that they continue to have significant costs from very corrupt regimes that use the benefits of that system to their advantage, right? So the CFA franc essentially means that countries in that system lose monetary sovereignty. They don't get to set their own central bank interest rate policies. They even export some of their savings directly to the French treasury to be managed under this system.
01:01:52
Speaker
Now, that is a headline, something that appears to be a exchange of sovereignty. In fact, in my view, it is. But the benefits it brings in terms of stable investment and open capital system, I think are ones that far outweigh it. Now, if you have
01:02:10
Speaker
most of the resources, you know, traditionally going to France in part because of, you know, historical ties there. It's very easy for populist, cool leaders to bring up every time, even though they don't change the system because it's to their benefit and they want to buy nice houses in Paris.
01:02:25
Speaker
Now, I think it's very important that we have an improved understanding of this on both these sides, because I think if France did a lot more, and then the European Union, which really sort of oversees the system now, did a lot more to counter that understanding by actually engaging in anti-kleptocracy efforts, holding not only the regime leaders in those countries to account for corruption, but their own companies that go in and have port concessions and the like, also bringing them up to
01:02:53
Speaker
more humane standards of business practices, both in corruption and employment, could have real benefits. And instead, now, because there's this very poor understanding, it's used as something where not only are Russian flags waived, but sometimes Wagner has brought in under the auspices of criticizing that system.
01:03:10
Speaker
Now, America is the worst at understanding its geo-economic position by far. This year alone, we've had debt ceiling shutdowns, government threats. The US defaulting on its debt would be disastrous for this system. I think certainly if it was sustained, maybe it was a very short default.
01:03:28
Speaker
but for the overall global monetary system and something that I cannot believe the U.S. would ever flirt with because I really see the U.S.'s debt issuance as its geopolitical strength at the core of its power, right? It's not just China that's the largest holder, it's Japan that's the second largest holder.
01:03:43
Speaker
And 30 years ago, people thought that Japan was going to be the new rising geopolitical power because of how well it was doing in trade. America has threatened to get rid of its own export-import bank that we need to support Boeing, of course, the competitor to Airbus. These kind of industries can't exist without government support in the right places. And so I think really improving the understanding is first and foremost. And just to finish, I think that
01:04:10
Speaker
From this conversation alone and my experiences in the more American and Anglo side of this academy, the French have a far better job, have done a far better job at engaging with these questions over history, and I think that there's a lot we could learn from Nicholas and his colleagues' framework. But yeah, I think the first step in understanding it needs to be using this framework to understand our economic and political interests and how they overlap, because with
01:04:36
Speaker
without the right understanding at the middle of the time where there's great political crises and military crises brewing all over the world, the US Congress has shut down because it can't agree on a new speaker because they threw out the last one because he didn't want the government to run out of money.
01:04:55
Speaker
If I may add to what Max has just said, I was thinking while you were talking, Max, and I thought that there is a very non-economic element that is missing in Europe and that I think is weakening much of the European industrial power and the entire economic system. It's the fact that European institutions are
01:05:20
Speaker
considering that some of the basis, some of the philosophical basis of how the European Union has been built are set in stone, that they should not be touched upon, that we should not rethink them. I'm thinking in particular about the fight against monopolies. There is a very interesting example, which I think is another massively suicidal move by the European Commission, is the fact that
01:05:48
Speaker
the Commission forbade the projected merger between Alstom Rail and Siemens of Germany. Here you have two local champions in rail building in Europe that are under threat from Chinese builders, which are coming
01:06:07
Speaker
very hard with much lower labor cost, much higher margins, a lot of help from their own government, massive production capacities, technology almost on par with what we are able to produce. And by the way, thanks to technology transfers that Alstom and Siemens did back in the 1990s. And here you have this proposal to merge those two local champions to make one mammoth of a player in Europe
01:06:36
Speaker
and the European Commission forbids it on the grounds that it will distort market mechanisms. Come on. This is 2023. We need to rethink this religion of liberal market capitalism. The conditions have changed.
01:06:57
Speaker
Let me take another parallel example. At the same time that the European Commission was forbidding this merger between Alstom and Siemens in rail, the Koreans are consolidating their shipbuilding industry. The Korean Development Bank, which is a public financing body,
01:07:17
Speaker
accepted to sell their shares, if I'm not mistaken, in Daewoo Heavy so that they could be consolidated with Hyundai Heavy to create one mammoth of a shipbuilding company in South Korea that could take on China and Japan. I mean, last time I checked, South Korea is still a fairly liberal economy.
01:07:39
Speaker
But they are not setting that in stone, that market liberal practices in stone. It has not become a religion for them. So they are willing to adapt to a new reality, which is that there is this country, China, from which mammoths of companies are coming out that will roll out in our backyard. And if we don't consolidate somehow,
01:08:01
Speaker
we will not be able to resist. So I think this is also what is missing amongst our political elites on top of political will and patriotism and all that. This willingness to rethink some of the basis and to consider that the name of the game has changed, the players have changed, the rules have changed, and we need to adapt to that.
01:08:25
Speaker
Yeah, once again, I find myself in full agreement. And what I would say is both Alstom and Siemens are the idea that this is some sort of liberal market structure competition birthing their success is already complete nonsense. Both Alstom and Siemens for their global export contracts rely on support from the EBRD European Investment Bank, whether that be in terms of direct financing or risk guarantees.
01:08:52
Speaker
And that business is actually profitable for the state, by the way. And in the US, it is even more profitable, and we have even stronger shibboleths about all this stuff. As I said, it wasn't that many years ago that Congress was regularly voting to actually get rid of the Export-Import Bank.
01:09:10
Speaker
And I think that this idea of national champions is one that both needs to be harnessed and in areas in the US in particular where there are emerging risks, it needs to be dealt with. Despite my conversation earlier about Elon Musk's misadventures with Chinese capital, his companies have undoubtable geopolitical influence.
01:09:33
Speaker
We saw all the stories recently about Starlink and its role in the conflict in Ukraine, and I think it's nonsense for the government to say that, oh, we need to allow competition in this, and we're not going to regulate and say what he can and can't do for the geopolitical interest. Elon Musk is not going to stop selling Teslas in the United States because the US government tells him to do X or Y with Starlink.
01:09:58
Speaker
I completely agree that there needs to be real rethinking on the whole shibboleths around these and how state power in particular is already wound up in markets and can play a big role. The failures on this have been a key example of something that has also had very negative political ramifications. I am pro free trade.
01:10:25
Speaker
however, have great misgivings about how NAFTA was passed in the 1990s and its impacts and the way it was structured. And of course, the impact that that had on U.S. workers is something that Trump harnessed on and it played a big role in his rise today. You know, we all there's sort of broad support for the fact that it was reform that an understanding that it was a mistake. There isn't any interest on big global free trade agreements on either side of the political divide in the United States anymore.
01:10:52
Speaker
But I think we need to focus more on the idea of how the rules are shaped. I would rather do less trade under more beneficial rules than more trade under a damaging system, whether that be in terms of the domestic political impacts it's had or China's membership in the World Trade Organization.
01:11:12
Speaker
its ability through that to then access and tap new markets. I think overall trade and economic integration across the world is good and something that is very much the example of a rising tide having the ability to lift all ships, but that doesn't mean that we should get stuck in sort of these myths and simplistic fairy tales that often come out of more of the economics school than the geopolitics school on the geo-economic side of thinking.
01:11:43
Speaker
If we can drop down to the level of corporations, let's say I'm the CEO of a company and I find myself being squeezed as part of an economic competition between two states.

Multinational Corporations in Economic Warfare

01:11:54
Speaker
How can I protect myself? How can I protect my company? What can I do to adapt to this new age of increased competition we're witnessing in the economic space?
01:12:04
Speaker
First of all, I would like to warn our listeners. It may sound a little bit disappointing as the beginning of an answer, but in many cases, you won't be able to. Many of the cases that we see of economic warfare where corporates are being taken in the middle, it's really a case of doomed if you do, doomed if you don't.
01:12:26
Speaker
Take the example, for example, of the squabble between Western countries and China over Xinjiang and over the fact of whether or not there is indeed slave labor picking cotton in Xinjiang. You're, for example, Uniqlo, the Japanese textile company. What do you do? You continue sourcing from Xinjiang. You're running the risk of
01:12:50
Speaker
seeing a boycott call against you in Japan all over the West. Your investors will need to get out because using slave labor is not exactly ESG compatible. But then if you get out of China and if you announce that, okay, I'm going to stop sourcing from China just in case, then the boycotts against you are going to be in China, which, by the way, is one of your largest markets as well.
01:13:16
Speaker
Then you will have the Chinese authorities closing down all your stores because according to them, you're playing in the hands of the opposite narratives. So in many cases, it's doomed if you do, doomed if you don't. HSBC. What can you do when you're HSBC and you're forced by the DOJ to freeze assets of Hong Kong officials because the anti-the national security legislation turned really nasty?
01:13:44
Speaker
And at the same time, China forces you to freeze assets and bank accounts of the leaders of demonstrations. You're an international bank. You're being ordered by two opposing states to freeze accounts of pretty much all of your customers. What do you do? And the results for HSBC, by the way, is very serious because if some of you have been following the latest news on that front, the latest shareholders meetings, which was held, I think, I believe in Manchester recently,
01:14:13
Speaker
HSBC's largest shareholder, Ping An Insurance, the Chinese insurance company, actually proposed a motion which was defeated very narrowly and they will propose it again next year. The motion is that HSBC be split into two different banks that have no connection with one another anymore. HSBC China on one hand and HSBC International. We are starting to see more and more examples of multinational companies that are being torn apart
01:14:43
Speaker
by this economic war between different states because they are being weaponized, because of the flag that is waved upon their headquarters. And HSBC, I remind listeners, is both headquartered in London and in Hong Kong, listed in London and in Hong Kong. And it is one of the three banks that prints money in Hong Kong. So you have those examples where
01:15:09
Speaker
There is not much that can be done at one point. Now, if we try to be a little bit more optimistic, I think one of the keys for those companies to try and prevent more damage, and this is what basically I advise clients to do, is first of all to redefine your ecosystem. Redefine the nature of your stakeholders. Way too often, we see companies that have a very narrow definition of who their stakeholders are.
01:15:35
Speaker
my employees, my clients, my suppliers, maybe the legislator of where I'm doing business, and that's it. And I'm telling them, no, no, no. Your stakeholders are much... The variety is much wider than this. You need to take into account the entire civil society around you because most of the attacks on your interests will come through civil society. I mean, there are countless examples. We wouldn't have time to list them all today. There are countless examples where
01:16:04
Speaker
Major industrial interests are being weaponized through civil society, through NGOs, concerned citizens, that annoying Instagram influencer that is bad-mouthing your company all the time, for example. So you need to have that very wide view of who your stakeholders are. You need to engage with them. And again, I insist you need to control the narrative. So you need to do your own form of cognitive encirclement.
01:16:30
Speaker
You need to define the terms, make sure that the terms that are being used about your business, about anything that you do, are defined by you. This is not propaganda. Propaganda is a lie repeated over and over. I'm talking about narrative, something that is verifiable by the public to a certain extent, that they can relate to. The thinking process, they can relate to it. They can say, yes, it makes sense, and I've verified some of it.
01:16:54
Speaker
It is actually a reflection of reality. Companies need to be aware of the fact that they must be proactive. It needs to be offensive business intelligence that they do, not just defensive. Don't wait until the bomb explodes to do something. For them to do that, understand your ecosystem and control the narratives and control the cognitive sphere.
01:17:22
Speaker
Yeah, I would say my first piece of advice would be to either email Nicholas or I, preferably both, and then we'll come back to you. But secondly on from that, well, one is there are some things that companies can do, at least in terms of key trading partners and the like. You can get political risk insurance. Again, that's a world that I've done a lot of work in, usually used by very large businesses, but something that does exist.
01:17:49
Speaker
Certainly, it's not something that can assure you against all risks and all possibilities in the major waves, both one way or the other, that things can shift. What I would say is firstly,
01:18:00
Speaker
on the sort of biggest risks and the most immediate ones. Yes, the points such as HSBC and its potential future and getting caught up in these issues are critical ones for it, but for the continued functioning of the business, whether it be HSBC or one of France's largest banks, BNP Paribas, their largest ever single fines have come for violating US sanctions. So one, I would say be a good citizen of the system that you are a part of.
01:18:28
Speaker
Sometimes you do have to choose sides and on those ones where it's written in ink, it's pretty much necessary. The second sort of point that I would make though on that is
01:18:41
Speaker
The same way now that there's a lot of narrative about countries de-risking, primarily used in discussion between the West and China, really does affect individual companies very largely. And for a long time, the sort of basic model was lowest cost, fastest delivery is always what one went for, no matter how globalized that made a supply chain. I think that this doesn't mean we're past peak globalization, but at this point,
01:19:11
Speaker
The core narrative is really about building redundancies into supply chains and ensuring that a major crisis in any one place doesn't affect your ability to produce sell or gain financing. We saw a lot of discussion around that in the aftermath of covid and the lockdowns that ensued too so it's not necessarily something.
01:19:31
Speaker
that just comes into sharp tools but i think that's going to be a key political narrative and then you know particularly investing in building the supply chains in places that are reliable and have. Good and established relationships so you know i think if you are a german company today facing higher.
01:19:50
Speaker
costs because you use gas as an input or at least gas-powered electricity. You're now shifting a lot to the United States. There are big German chemicals companies. BASF is the one that comes to mind. That, of course, has its own political cost in Germany, something that German politicians then criticize you for, and then that reflects on a European level where there's discussion around, oh, is the US doing
01:20:17
Speaker
uh too much to do with green incentives is this going to bring them to an unfair advantage and you know all of those are questions that are very live and have to be dealt with what i would say is
01:20:28
Speaker
We need to remember on the policymaker level that the ability to move between those markets and to have trust and those establishments is far more important than any actual investment support or the guarantees you like, right? If a French company or a German company comes now because it's temporarily cheaper, they can get more incentives, doesn't mean they're going to come if in the future they think they won't be able to come back.
01:20:51
Speaker
both that and vice versa. So, you know, I think it's not about lobbying of practice I'm often very critical of, but it's really about economic actors, especially the sizable ones being able to work with their political parties to understand how geopolitical developments are shifting and how they can best incorporate into that system. And then particularly, you know, I think in the era of
01:21:19
Speaker
And in some ways this disappoints me because it's often a fun part of the world, but the area of super high risk emerging market frontier investing and like I think is past its prime, not only from these factors we've seen, but of course the current interest rate environment makes it very difficult to do so.
01:21:36
Speaker
But of course, that will have its own long-term political impacts and is something that risks opening new opportunities for Russia and China in the third world and again comes back to then where we need to think about, okay, how can our governments respond and be drivers of policy there rather than just be reactive to developments driven by China? Gentlemen, I'm going to ask you our final

European Strategic Autonomy and Cyber Warfare Concerns

01:21:59
Speaker
question. What keeps you up at night?
01:22:02
Speaker
Well, what keeps me up at night is what I'm seeing as the growing disconnect between announces that we are hearing, especially in Europe in terms of building strategic autonomy. I used to work a lot on the Indo-Pacific, so I'm hearing a lot of talk about the French Indo-Pacific strategy, the German Indo-Pacific strategy. The disconnect between this
01:22:26
Speaker
and the lack of resources put behind it. It does scare me and it does keep me awake at night because, as you know, the best way to kill a good idea is to mess up the implementation. This is the best way. If you want to kill for good the very idea of strategic autonomy, keep talking about it and don't put any cent behind it.
01:22:52
Speaker
People will laugh at you in five, six years when you even mention strategic autonomy. Oh, yeah, yeah, yeah. I've heard about that before. Yeah, I've seen the commercial. Thank you very much. Same with the Indo-Pacific policy. I mean, I was looking at the number of helicopters that we have, France, to cover from Reunion Island to French Polynesia, 14, 14, Indo-Pacific policy.
01:23:19
Speaker
So unless we rebuild a sizable, and I mean numbers here, because I think if there is one thing that the one Ukraine has taught everybody that in spite of technology, quantity is still a quality.
01:23:35
Speaker
quantity remains a quality. We need to put the men. Yeah, we may have AI and cyber and drones and whatever. We need the men on the grounds. We need the bullets. We need the bombs. We need the missiles. We need the free gates. We need the helicopters. In a number that is large enough to actually send a message, if the idea is to send a message to China in the Indo-Pacific, keep a free and open Indo-Pacific, okay, but where are the helicopters?
01:24:04
Speaker
We have one aircraft carrier, okay, when it's under repair, it's in too long, blocked for one year. So this is what keeps me awake at night, this disconnect between the political talk of strategic autonomy and the lack of actual resource and political will and economic power to back it up with facts.
01:24:24
Speaker
Well, the first thing that keeps me awake at night I think are really the things that come outside my area of focus because I have less understanding of them, so that's perhaps only natural. And the one I really want to focus on is cyber. And how little cyber has actually been a major field of international competition between Russia and the West amid the conflict in Ukraine is something that has really surprised me.
01:24:51
Speaker
yes there have been incidents here and there but and you know i think we all expect more hacking and information leaky in the light ahead of the elections next year that we spoke about. But i do worry that.
01:25:04
Speaker
The balance of power in cyber is something that can shift very quickly and without understanding, except for real experts. And then certainly is something that I think sort of people on the strategy level haven't necessarily incorporated. I have yet to read good analyses of why cyber has been such a small impact in the current war. Is it because we have?
01:25:26
Speaker
essentially the ability to completely destroy Russia's cyber infrastructure but in turn they have the ability to destroy ours and if so that's something I do really worry about in terms of the you know escalation ladder out of that conflict and then you know additionally I think the
01:25:43
Speaker
One thing is in many ways a lot of the systems that we spoke about particularly the ones that I Focus on on the financial side are the things that have been the least disrupted by the internet and open more And open information, you know, I think Lewis you said at the beginning of our conversation that you know This is one area where there actually you know has been you know I would maybe dispute that sanctions themselves are more used today than they were in the past maybe the pure number of designations is the past but I
01:26:10
Speaker
As I said, bond bans and the like have been going on for a long time, but the US does have this power because of its large role in a lot of the key choke points of the global financial system, Europe as well, whether that be through clearing the process of sending money from one country to another or in the US dollar in the process of needing dollar reserves around the world to facilitate trade.
01:26:37
Speaker
So, I'm certainly not a fan of cryptocurrencies and the like, but I think there's a lot of... I think it's crazy that there are American politicians out there sort of promoting Bitcoin and other cryptocurrencies. Well, I don't think they'll work to disrupt the system in any way. Disrupting the system would vastly weaken American power, and it's the same way that there's some ridiculous examples out of the ESG debate that Nicholas so excellently highlighted.
01:27:02
Speaker
It's like, why on earth would you pass legislation to make something that is only potential benefit is to weaken the dollar system? And so sometimes I worry both about pure cyber and then the lack of understanding around
01:27:20
Speaker
these financial market issues and how they relate to them is quite significant and then where the disruption may come from. Well, I'm such a bear on crypto and think a lot of it is promoted by hucksters as recent legal developments in the United States may also show, but they also show that power, right?
01:27:41
Speaker
FTX and Alameda, Sam Bankman Freed's companies were set up in Hong Kong at first, incorporated in the Bahamas, didn't have a U.S. corporate. But of course now the U.S. is the justice system holding into account sort of that extraterritoriality of law. But that doesn't mean at some point there might not be something that is successful in really changing it just because I don't see it in the current environment now.
01:28:05
Speaker
And yeah, I think it's far more the failure to understand these things than any one actual development that keeps me up at night. Because also, it's not unrealistic that we'll wake up 30 days from now and the US government will shut down and not have a speaker to avert a default a little while later. So the biggest risks come from within and from without. Well, you've been listening to Max Hess and Nicholas Michelin discussing how to wage economic warfare. Max and Nicholas, thank you very much for joining us.
01:28:35
Speaker
Thank you. Thank you so much. I enjoyed this. Our producer for this episode was Edwin Tran. Research for the episode was done by Alex Smith, myself, Louis Adressand, and Colin Reed. To our audience, as always, thank you very much for listening. If you enjoyed this show, please consider checking out our other content at Encyclopedia Geopolitica. We'd also appreciate it if you could subscribe to the podcast, leave a review, or support us on Patreon. Thanks for listening.
01:29:06
Speaker
Why?