On Day One: An Economic Contingency Plan For A Taiwan Crisis

Glenn Tiffert: Hello and welcome. I'm Glenn Tiffert, a distinguished research fellow at the Hoover Institution, where I co-chair its program on the United States, China, and the world. Today we're sitting down for a conversation about a new report that our program sponsored entitled on day one, an economic contingency plan for a Taiwan crisis.

This report takes a sober look at our existing toolkit of economic statecraft and judges it wanting. It then invites us, while we have the luxury of time, to think outside of the box and develop more impactful alternatives, so that in the event of a crisis. We've done the hard strategizing and thought through the second and third order consequences of our choices in advance.

We're joined today by the report's authors, doctors Hugo Bromley and Eyck Freymann, and a special guest, Doctor Rozlyn Engel. Eyck Freymann's a Hoover fellow at the Hoover Institution at Stanford and a non resident fellow at the China Maritime Studies Institute at the US Naval War College. Hugo Bromley is a research associate at the center for Geopolitics at Cambridge University in the UK, and an affiliated research associate at Robinson College, Cambridge.

He's a historian of British manufacturing and global economic statecraft. And Rozlyn Engel is managing director of the Treasury, Economics and Commerce division at the Mitre Corporation. She leads Mitre's efforts to support the economic policy community, while also working to strengthen the integration of economic considerations into national security and policy development.

Roz joined Mitre after a long career at the intersection of economics and national security. Thank you all for joining us. We're gonna begin today with a presentation of the basic points of the report. Roz has some reflections. Afterwards, there'll be a moderated conversation, and then we hope to have audience Q&A towards the end, followed by a reception.

So that's the basic format of today's event, and I'd like to turn it over to Hugo and Eyck.

Hugo Bromley: Thanks so much, Glenn. Good evening, everyone. It's great to be here, and it's great to see so many here for this discussion. Work on this report began a couple of years ago.

With a growing concern that there exist break glass scenarios in the future where there is a consensus in Washington that a severe change in the US China economic relationship is necessary. And continued dependence on the Chinese market is no longer viable. And when we think about potential economic responses to Taiwan crisis scenarios, so often we're caught in a binary between symbolic actions that are designed to signify displeasure and concern.

But are not designed to have severe economic impact. And the sanctions playbook that we've used and developed over the last 40 years, what one might call Russia plus, right? The suite of financial blocking sanctions and similar measures designed to disrupt a country's trade with the rest of the global economy.

And our starting point for this report is really that, that binary presents some fundamental challenges, and we need to try and rethink it. We need to come up with new and different pathways of economic statecraft to respond to the moment of great power competition we're in. And we see this very much as the start of a conversation, not some kind of great answer to the question.

We're keen to have as much dialogue as possible on these issues, and we look forward to getting into a dialogue with you all this evening. What we're gonna do is as follows, we're gonna explore some of the challenges with the current playbook as we understand it, with a particular emphasis on how China perceives the threat of economic sanctions.

We're then gonna talk about the principles that might guide Washington and America's closest allies to a broad consensus on what economic contingency planning could look like. And then we're gonna think about some ideas that could operationalize that over time.

Eyck Freymann: I think the way to begin this conversation is by exercising some creativity and thinking about what a day one crisis would be like financially and macroeconomically.

The world has not seen a rupture like the way the United States and China would rupture since the outbreak of World War I in 1914. And as we know from looking at the archives at that time, financial markets and economic practitioners said, as the UK secretary of the treasury wrote to the prime minister, a feeling of paralysis.

The future was so uncertain, not only how the war would develop, but what that might mean for the post war economic order, that private actors didn't know what to do. And in a context in which global trade is more interconnected than ever before, and the world is more financialized than ever before, we believe that the paralysis could go much deeper than it did in 1914.

So in that context, we think a bit about US interests that would be relevant. In a context in which China is firing on US forces, or there has been a similar, a similar provocation, there will undoubtedly be a political temptation to throw the book at China, to use everything we have from the punitive toolbox.

And I think reflecting on interest is important because it reminds us that we would have other relevant interests and so would our allies and partners in that context, that would also deserve consideration. The United States would not have an interest in breaking the global financial system. The United States would not have an interest in causing mass unemployment, shortages of essential goods like medicines, and it would not have an interest in dividing its positions from that of its allies.

At the same time, it would need to break its dependence on China's market. It would need to help its allies and partners break their own dependence on China's market. It would have to do what it could to preserve the fundamental position of the US dollar in the global trading and financial system, which affords so many benefits to American, Geopolitical power and American way of life.

It would have to preserve whatever it could of a rules based trading system so that when the dust settled, the United States and its partners could continue to trade with one another. So, in this context, we then look at what prominent chinese sources are saying about this problem, because since 2018, they have begun to work this problem set very hard.

A lot of this commentary exists in the public domain. These are commentators who have held senior positions as financial regulators. They are professors of economic and finance at top party institutions, think tanks, universities. Many of them have served as the chief economists of major state banks. They are respected people, serious people, and they are engaged in a debate that we can peer into.

So, based on this analysis of the Chinese sources, we come to a couple of conclusions. First of all, China is worried that if a crisis broke out and we slammed them with sanctions, there would be some degree of risk to China's financial stability. This has been a top focus for Xi Jinping over the last five or six years, and it will likely continue to be.

On the other hand, we detect growing confidence that China is rapidly building resilience to this sanctions playbook. And as China builds resilience, we detect a clear sense of growing confidence that this initial shock is something that China could survive. And indeed, if China did survive, and then us forces began to falter.

In a kinetic fight, the United States paramount position on the global stage could be badly undercut. China's assumption, in other words, is that it has reached a position so central to global supply chains that most neutral countries would feel no choice but to keep trading with China, even through a sanctions regime or a blockade.

If necessary, by breaking through US, breaking away from the dollar based payment systems upon which most of international trade is settled, and, if necessary, finding indirect supply chains to continue to trade with China. So based on that rather grim diagnosis we set about thinking about alternative ideas that might strengthen deterrence.

Because they're drawn from China's own ideas of where its vulnerabilities might lie. As well as ideas for a contingency plan that might advance all, not just some of our relevant interests. And Hugo will now say a bit about what those principles are.

Hugo Bromley: Sure, so as a historian and a historian of Britain and America, I'm always drawn to Churchill and Roosevelt in the Atlantic Charter.

And one of the things that made that so striking was not that it was about punishment. But that it was about establishing an affirmative vision for what the economy should look like and some fundamental and basic principles that could underpin it. And I think going back to what Ike was saying about the sense of paralysis and fear.

This is a moment when the global economy, when third countries, countries that have failed to support us in the case of Russia sanctions in so many ways, will be looking to the United States for leadership. And in that context, we think about four basic principles. The first is not to break non-critical supply chains on day one.

There is gonna be a huge and right push over the next few years to continue to reshore critical production. And many of the things you hear in the news at the moment, car batteries, chips, things like that. But we're not talking about that here. We're talking about the broad suite of dependence on the Chinese market.

The second principle is the enormity of the significance of the position of the dollar, and that maintaining dollar hegemony is a vital underpinning point for the United States and its allies, countries like my own country, the UK. The third is that it is not viable to ask third countries to cease their own trade with China, and that the US should present its actions on day one as actions of crisis response and recovery, rather than punishment and sanctions.

Finally, any attempt to break our dependence on the Chinese market is going to involve discriminatory trade policy. And that gives you a fundamental problem with transshipment. This is a very simple idea, right? I make a product in China. I can't sell it to the United States. So I send it to a third country, insert name here, change the logo, ship it on, right?

And the incentives to do that are enormous. So if we're going to break our dependence on the Chinese market in a sustained way, we need to create some kind of incentive structure that will facilitate third countries to be as honest as possible in their trade reporting. We think of this as the minimum bar.

And so from those principles, we begin to outline some ideas of where the United States could go in its economic statecraft. And these are hugely challenging conversations to have. But the more seriously we have them, the more honestly we have them, the greater we are strengthening deterrence.

Eyck Freymann: To articulate the principles that Hugo just described in a slogan which we capture through a somewhat provocative image on the cover of our report, you might call what we're proposing avalanche decoupling.

So our analysis proceeds from the following supposition. Suppose China acts in such a way that the United States decides it can no longer have an economic relationship with China. But suppose also that for political or strategic reasons, the United States decides that a hard, sudden rupture is not possible or politically acceptable.

Well, what then do we do? And the answer in principle we argue, is that the United States should design a process which it could trigger unilaterally on day one of a crisis which would not destabilize the global economy on day one. Which would focus on economic recovery and support on day one.

But which would nevertheless set in motion a series of processes which would build on incentives. And therefore lead to an accelerating decoupling from China over time, driven mostly by private actors making rational, efficient capital allocation decisions. So we are gonna explore three pathways. We wanna emphasize that these are not policy recommendations.

We are historians, we are neither lawyers nor economists. And this is going to be a longer term conversation that involves folks from across the interagency, from across Congress. But we want to put these out as ideas for one way that avalanche decoupling could be achieved. The first policy pathway is a ratcheting discriminatory trade regime.

Essentially, we say, we're going to take our trade with China and we're gonna phase it out over a period of years. Congress could decide that the narrower the window, the shorter the window, the more disruption there would be in the process, but the quicker China would experience the pain.

This would be a political question to be discovered only in the event. But in principle, it would be relatively simple. Tariffs that ratcheted up or quotas that ratcheted down, moving slowly enough that firms that currently produce in China could figure out the most effective way to pull their production out.

The second idea is not necessary to achieving trade decoupling. It is optional and it is not a viable standalone option. We wanna emphasize this. But we think it would, if implemented and if successful, strengthen the US hand in the process of avalanche decoupling. And that would be a unilateral currency intervention against the RMB in global currency markets.

So essentially, Congress would authorize the treasury to do this as a prolonged operation. The goal would not be to bring the exchange rate to zero, that's not possible. The currency has a fundamental value. But the idea would be to force China to spend a significant chunk of its foreign exchange reserves and make the offshore currency, the CNH, not viable as a medium of exchange.

And essentially by rendering it a poor store of value, disincentivize China's counterparties, specifically major global financial institutions and central banks, from holding too much of China's currency. In essence, to lock China into the dollar system while we figure out what to do in the trade domain.

Hugo Bromley: I want to emphasize that all of these are things the United States should be conceiving of doing either unilaterally or with a small group of core allies in which I'm sure my own country would play a role.

Because what we're trying to do here is create a suite that does not demand other countries follow, but says that the United States and its allies are taking unilateral actions. And then we are gonna create incentives to build that out into the global economy. And that brings us back to that transshipment problem I mentioned earlier.

So one way of tackling that is you create a thing, call it an economic security cooperation board, and you give it two mandates, you intertwine. One is, it's going to be the United States vehicle of crisis response. And we've seen the United States extraordinary capacity for crisis response in 2008 through COVID and many other areas.

But the second, is it's going to have a mandate to support honesty of trade reporting and customs enforcement. We think that the discriminatory trade policies Ike outlined are compatible with WTO rules, and with my own country's definition of WTO rules at that. But nevertheless, they're going beyond it in meaningful ways.

So, it's important to have some system of reassurance that they're gonna be enforced in a rules based way. But it is also vital to create some system of carrots and sticks to ensure states hit that minimum bar. Okay, I want to stop talking because this works best as a conversation and a dialogue, and I can hear some squeaking when I talk, so I hope you can all hear me.

I wanna conclude on this point, which is that there's a lot of people right now thinking about the question of deterrence, and military deterrence in the Taiwan Strait. And there's been some outstanding work, particularly coming from the China Global Shark power program with Matt Pottinger's book and other things.

But if our economic posture is either underdeveloped, or based on threats that Beijing does not believe would work, we run real risks that Xi Jinping will make a gamble on the basis that we haven't thought this through properly. So, what we're urging more than any principle, more than any policy pathway, is for a serious, sober public debate about what that contingency plan could be.

The principles that could underpin it, and how it could work. And just having that conversation, in our view, strengthens the deterrence, reassures our allies. And we've heard a lot of concern about some of the sanctions ideas that are floating around at the moment from allies, from countries like mine.

And gives the United States the best possible chance of strengthening and embedding integrated deterrence. All right, I'll stop there.

Glenn Tiffert: Thank you, Eyck and Hugo. I wanna give Roz an opportunity for her thoughts on what she's just heard and on the report.

Dr. Rozlyn Engel: Sure, well, first of all, congratulations.

It was a big report, a lot of thinking, a lot of bold ideas, so I really compliment you on all of the work that went into it. I'm gonna say something about a couple strengths that I saw, and then I'm really just gonna kind of jump off with a couple questions for you to maybe kind of get it going.

And also make one point of my own, which I just have to do. So, first, I always wanna say I do think that the idea of contingency planning, economic contingency planning and using that, I think of it as pre positioning policy We were talking about it before, right?

It's like, how do you build a policy package that's very credible, that's painful, and that is pre announced, that creates deterrence. I think it's a really important idea to be thinking about, because we don't do enough to communicate what our intentions are. We don't communicate enough about what we think our capabilities could be.

We don't do enough to talk about the kinda path and the messaging that we wanna impart to both adversaries and allies. And I'm concerned we will get ourselves into a crisis and then be reacting versus being out in front of it and really communicating well what we think we would do.

I think there's some question I have a little bit about how to make it as credible as possible. Threats are only as good as the credibility behind them. So, I would like to hear a little bit more from you guys about how you think, how we can make them as credible as possible.

So that's just a question for you. On analysis, so, you guys did an incredible job thinking through historical parallels, thinking about the political dimensions. Thinking about institutions and mechanisms that could be used and developed. So, all amazing on that. I will say, as an economist, I think the economics discipline could also bring a lot to this debate, to this whole fight.

And that's why, I think I might actually jump off and talk for a little bit about that. And this is where I'm gonna make the plea for interdisciplinary, right? We're not gonna have all the right answers in political science, and history, and geopolitics, and international relations. We're not gonna have all the answers in economics.

Truly, we need to be actually thinking about this in a much more integrated, interdisciplinary way. And one of the ways that I see that as most powerful is through scenarios. So, I really enjoyed reading the scenario and really thinking about the kind of story you are telling. Because what we really need is we need good political scientists, scientists, good historians, people who understand the adversary very well, to pull together the ideas, like, what do we think could happen?

What do we think are the true vulnerabilities that the US has? And then from there, we need to actually move that over to testing those ideas and testing those plans and policies through, I think, probably good modeling and simulation and good data work. And that's where I think the economists can bring a lot to bear.

So, for example, I'm at Mitre corporation, and we do a lot. We, if you don't know who we are, we operate what we call federally funded research and development centers, FFRDCs. They provide, we're nonprofit, they provide R and D services essentially to all different parts of the US government.

So, our job is to build kinda technical capability, systems engineering solutions, modeling and simulation tools, sandboxes, data science, technology assessments that help support USG. So we've been doing some modeling and simulation, and one of the things we've been thinking a lot about is supply chains. So on the trade question, for example, we've built a big global trade model to look at in a lot of detail the supply lines that US importers have vis a vis China.

And then estimating the reaction functions, essentially the elasticities of supply that US importers would have or would face. So if I pull a particular piece of the supply chain out, what happens? How hard is it for a us company to respond to that? And that we can estimate some of that using past and historical data.

We can create models that then describe past behavior, and then we can bring in shocks and we can say, okay, well, let's say we did something differently. Let's say we did some phased decoupling earlier. Let's say we had a trade agreement with a different set of countries. Would that put us in a better position later?

So I think the economics can be a great complement to and an important kind of analytic function for decision makers. So, I'll just say that that's my plug for a little bit of economics and a couple other things. So, I would have liked, I think I'm sort of interested a little bit also in hearing more about the escalation and retaliation and the dynamics.

So that's a question we get a lot from policymakers, which is, okay, we're going to do these things, how will they react? So I'd be curious to learn a little bit more, maybe you wanna share a little bit more of some of the retaliation and the escalation dynamics, cuz I think that's really important.

And then, finally, there were a lot of policy tools that you didn't really talk about. I'm thinking of export controls. You mentioned sanctions, but in the report you sort of downplay sanctions. So there's a lot of tools that could be brought to bear. So I'm curious why you chose trade as a particular focus and whether you considered other trade tool or other policy tools and what you think the complementarity between all of this might be.

Eyck Freymann: So, I think there's a couple of great Great points in here which deserve to be unpacked. And I wanna let Hugo jump in, but let me run through and try to answer each on the question of credibility. A threat is credible if it's something that you would want to do anyway, or if it's something that you can find a way to tie your hands in advance into doing.

And we believe that and we discussed many of the reasons for this in the report, not least the incredible dependence of US small businesses and US farmers on trade with China. That in the event, even in some extreme scenarios, there would be many voices in the United States, from Wall Street to Main Street.

Calling for us to go easy on the trade side of the relationship, rather with sanctions or any other barriers to trade because of the effects on the United States economy. And for that reason, we think that it is difficult for the US government, particularly in our current polarized environment, to tie its hands in advance by committing to do something that would be economically devastating at home.

And we think that is a big reason for the growing sense of confidence that we detect in the Chinese literature. So this is why we think it is so important, when we talk about credibility to build a package of actions that we would actually want to do anyway, and our partners and allies would actually want us to take anyway on day one.

And the way that we make that go from a set of high but ultimately pretty vague principles to actionable policy levers. Is we have to have that conversation across parties and between the United States and its key partners so that we are aligned on what we would need to do.

And then based on those conversations, develop some instruments that we can sketch out in advance, study model, and then if we develop confidence in them, write legislation, perhaps, and leave it on the shelf. As far as the role of the economics discipline, economists are gonna have an absolutely critical role in evaluating all of these policies.

We're historians, we come at all of this from historical sensibility, but we don't have all the answers either. So I think finding ways to explore cooperation, not just among political scientists, but between historians and economists, is exciting and should play a role in this conversation. And then to your third point, how should I say?

I think we talk about export controls in the first part of the report, because we think there's certain actions that the United States would do anyway in any crisis with China. Even if we decide the cost of decoupling is too great, or we don't have a political consensus to decouple, we're just going to do what we did in 1989 and do some largely symbolic sanctions, but find a way to continue to coexist with China.

We're going to do more focused work on export controls to make sure that dual use components aren't going to China. We're gonna try to tighten the screws in that department. We'll broaden the definition of criticality. And yes, we may use sanctions in very targeted ways if they're against PLA institutions, absolutely.

But our question is based on our analysis of sanctions in history and economic coercion in general in history. And here's where I will queue up Hugo, we really think there is a misapprehension about the ability of the United States to go it alone with economic actions that impoverish the rest of the world in the process of punishing China.

And it's based on that historical assessment that we, we don't think that sanctions can play a meaningful part of the solution. So why don't I hand this to Hugo, who's done the hard work.

Hugo Bromley: I would hope that you've done the hard work, too, or the report's gonna be really scary looking back over.

I have faith, ladies and gentlemen I have faith. Okay, thank you so much. I'm gonna make three points, one on interdisciplinarity, one on scenarios, and then one on why trade, on interdisciplinarity, I couldn't agree more. And I'm very, very lucky through my time thinking about this issue to have been able to engage with economists, to have been able to engage with political scientists and have those debates in academic institutions.

I think it's been really wonderful over the last five or six years. And there's a phrase called applied history you can look up to see history becoming part of those conversations, and to see historians being invited into those rooms to have those debates. It's really humbling to see it, and I hope it continues.

And that interdisciplinarity is something I just wholeheartedly agree with and support. One of the fascinating things about what happens when economists and historians talk to each other is that we have very different ways of thinking about the future. And the way that a historian thinks about the future is to see it as very unknowable, and to think about structures and incentives and processes and what like earlier described as historical sensibility.

And I think economists and I would defer to you entirely, seek scenarios and models and pathways. And those two methodologies are really interesting when they clash together. When you write a report like this, you do lots of drafts, and we had earlier drafts that got into the weeds of different Taiwan scenarios and how they might play in.

And we did some preliminary meetings in March. We talked to Glenn, who's been a huge help in shaping and developing this. And in the end we decided everyone's got their own idea of what's gonna happen. Everyone's got their idea of those pathways, and we can have a fascinating conversation about that.

And there's a risk that because everyone's got their own idea about a pathway, we forget that the fundamental premise of any of this is a bipartisan consensus that this cannot go on. And if you don't have that, you are not gonna get the support for the actions, any actions that we might take.

The best way to think about that consensus, though, is to contingency plan. And this is where I agree with you on having policy optionality, right? Contingency planning. And to have that dialogue about what people's interests are, what their incentives are, and what kind of package they could support so we don't get into the weeds.

The one caveat to that is in the grey zone, decoupling from China is not going to be politically viable, right? That's the overwhelming likelihood. However, if we have a credible economic contingency plan for what happens. If things do reach that point, that gives us confidence in the gray zone and that gives us what some would call escalation, dominance, right?

And above all, it reassures those allies on whom the US would absolutely be depending for support in that moment, that if the worst happens, the US is gonna look out for their economic interests beyond those of punishing China. So that's a big part of how we thought about this.

Why trade? I, some time ago did my PhD on the role of trade policy and borders in the formation of institutions. And the reason to think about that is that in times of great power competition, the dominant question is about national interests and national incentives and how you can work with them and not against them.

We're entering a unique moment in world history in that we're entering an era of great power competition after two things. One, globalization of a kind of a spurt of estopping. Astonishing size, right? One that puts the late 19th or 20th century globalization into the shade. But the second is a time of truly remarkable geopolitical diversity, when there are so many states with so many interests.

The complete opposite of where we were in the two world wars, by the way. And in that world, we have to find a way to respect national interests. And to me that means not trying to block trade taking place outside our national market, but saying, we are gonna think about what our market is doing and can do.

And that's what leads us to the trade space more than anything else. But I'd be fascinated by your thoughts on that.

Glenn Tiffert: Thank you all. So, now for the moderated Q and A, I wanna turn to Roz, who really has a sort of unparalleled perspective here as both a scholar and a practitioner working in this space.

And I wanna ask you, really, there are various lessons one can draw about the way our economic statecraft toolkit has worked, whether you look at, for example, North Korea, Iran, but of course, most recently Russia in the Ukraine war. And so I'd like to ask you to reflect, how is it doing in the current environment of geostrategic crisis right now, and what are the urgent needs for incremental reform that might make it more effective?

Because it seems like we're playing a cat and mouse game right now, chasing Russia around the world as it finds new ways to adapt to everything that we do. And then what are the opportunities for deeper reform if you wanna continue along that within the same paradigm?

Dr. Rozlyn Engel: So, I wanna pick up on something Hugo mentioned, which is globalization.

So we have been through a massive wave of globalization, and that interdependence has created a lot of complexity. And I think it's one of the reasons the US has been a little hesitant and a bit cautious in how we've deployed our economic toolkit. So, with the 2014 invasion or little green man invasion of Ukraine, the US was quite cautious.

And having been in government at that time, I can tell you it was literally we just didn't know if anything was gonna break. So these are not tools that were that comfortable using against large economies. So we had used sanctions and other types of policies, but against very small Cuba's and Burma's and North Korea's and disconnected economies.

To do this with large integrated economies, the blowback was unclear. And that has held the US back somewhat in terms of what we've been willing to do. I think that's still an issue, which is why I agree that we need really good historical narrative analysis. And we need really good analytic rigor.

I think analytic rigor, really understanding, is that really gonna cost us that much? Is it really gonna destabilize us? Some of the early analysis we've done is, yeah, it's costly, but there's gonna be no free lunch, right? I mean, in a conflict like this, there's going to be pain on all sides.

The question is, how long is the pain? How much pain? Do you know where the pain is gonna be? Can you alleviate and mitigate the pain? It's gonna be that set of questions that's gonna actually, I think, make the difference. And I think to give ourselves the best competitive advantage, the most agility and the greatest confidence as we make decisions.

It's gonna be about getting the analysis right, giving ourselves lots of good contingency plans, lots of things to think about. So I do think that going forward there's more and more emphasis on this, and I think there's more and more investment. I mean, you're seeing it in Congress slowly.

You're seeing it in the agencies. The US government has really begun to take, I think, the threat from China very, very seriously and is beginning to make the right investments. So I'd like to see those investments in what I. So Duleep Singh, the deputy national security advisor, has made a couple speeches, what he calls the analytic infrastructure of the economic statecraft enterprise.

Meaning how do we build out the data, the models, the simulation, the sandboxes, the simulation, the tools, how do we be more innovative with policy, develop new things? So if you remember, during the Russian sanctions, they weren't working particularly well. And because of the high prices of energy that were created, that we created a lot of revenue for the Russian government.

And so they ended up innovating quickly on the fly and doing some price caps. And so that kind of innovation, if we could get ahead of it and give ourselves more of these tools and understand them, and we had more things to kind of put out there, I think we'd be in a little bit better position.

Glenn Tiffert: I wanna ask you, Ike and Hugo, you speak a lot about the agency of third countries around the world, and it's so easy, I think, in a US context to focus on what the United States would do for US interests. But of course, US interests go beyond the borders of the United States.

And they're really, there's a competition, a global competition that will be determined by where the world goes. And we see this also with regard to the Russia sanctions and in particular in the oil market. How there has emerged a very large global appetite for Russian oil that has in many ways made it more challenging for the US and its allies to impose pain on Russia for invading Ukraine.

So I wonder if you could say a little bit about how the ideas that you've articulated would apply globally and perhaps create an incentive structure that would bring other countries onside. And in fact, instead of sort of fighting economic gravity by adopting US policies that would coerce them into doing things that are against their economic interest, instead kind of flipping that script and trying to harness market forces.

Hugo Bromley: What I'd say on that is that it's so fundamental to recognize that agency, because that agency is what's gonna determine how they behave as the crisis evolves. And China recognizes that agency, right? The PRC sees the agency of third states as its weapon and the reason it can be more confident in resisting what the US is doing.

And that's true in a Taiwan crisis today. And I would defer to someone who's written a book on one belt, one road for more details on that.

Glenn Tiffert: And that would be Eyck.

Hugo Bromley: And that would be Eyck. What I will say before I hand over is, what we need to do is show not only that we understand those incentives.

But also that we understand that the position of the US in the global economy, and maybe looking outside gives me a slightly strange perspective of this. But the position of the US in the global economy is one of huge power, but one that can be used through economic leadership, and through recognizing the significance of that position and working with it.

So when we look at things like the position of the dollar, the position of the US financial system, these are huge potential tools to use in any crisis scenario, they are tools of economic statecraft. They are tools because they work best, because they are more effective, they are more efficient, they have been established for a long time.

And so we have to think of ways of using them that encourage people to still use them. And in times of great power competition, something works. That's great if it works better, but to use it, I have to make other massive sacrifices in my own economy, in my own way of thinking, well, maybe that's not so attractive.

Maybe functionality is more important than optimization and compatibility with the broad suite of a country's interests, and understanding those incentives. Those national interests and those balances, is gonna be key to the US continuing to be in the position that people like me, countries like mine desperately want it to continue to be in.

Glenn Tiffert: I wanna ask you a different question, actually, because I'd like to move to the audience Q&A quickly. And that is what happens if we pull the lever, if we use the muscle memory that we've developed over three and four decades of economic sanctions, dollar sanctions. We pull it hard, we pull it twice is hard, we keep pulling it three times as hard, because China adapts, what happens to the rest of the world?

Is that actually functional, does it help our interests or does it drive them away? Talk about SIPs, for example, a little bit, talk about forcing them outside of the dollar system.

Eyck Freymann: Well, there is an econometric way of approaching this question, and I would love to hear Roz's response, because I'm sure she has seen models better than any that I have.

But from my own perspective, it seems to me, China has an idea, or rather, Xi Jinping has an idea, about what globalization means. And it means what Hugo described, which is a multipolar world in which there's lots of actors, each of which has agency. And China is telling a story, it began to tell this story with the announcement of the Belt and Road in 2013, it's been rebranded a couple of times.

But it's telling a story whereby the United States is an imperialist actor which is enforcing an essentially colonial model of institutions on the world, where the world is governed by a small number of developed countries. And that these countries that run the world go in and interfere in the domestic politics of smaller states, particularly developing countries, tell them how to run their own systems, tell them how they should write their domestic laws.

And then preach and say, when Russia invades Ukraine, for example, you need to get with the program, and we can force you to do it if you don't want to, so it's moralizing but backed with a stick. China is of the opinion that there is a lot of resentment that has built up over decades of this behavior in the developing world.

And from my own analysis, having gone on the trail of the Belt and Road, spoken to countries that have had good and bad experiences with China, my assessment is that there is a lot of resentment. And so there is a political story to tell here, as well as an economic one.

But on the economic side, I think it's important to understand China is not just ten times as big as Russia in terms of its GDP, it's also fundamental to basically every global commodity market that you can think of. So, in the Russia crisis, we have been loathe to block Russia's ability to facilitate energy-related transactions because we're afraid of taking 13% of global oil supply offline.

Well, China buys more than 50% of copper, of soybeans, of many commodities that are traded around the world. So if you imagine a situation in which China's demand for these inputs is decreased by US action, that means that countries, regions of the world will lose their shirt. And in this context, China would point to the United States, and they'd say, we're doing an internal operation with respect to Taiwan, but it's the United States that's taking all these actions which are impoverishing you.

If you sign up with our program, we can force the United States to desist from this outrageous behavior. So there is a political story and the way that it would work in practice is insofar as third parties couldn't trade with China using dollar-based systems because we didn't let them with sanctions, they would devise other ways around.

And Hugo can give some wonderful examples from her historical work, and I hope we can get to this in the Q&A. But the lesson of history is that when countries want to trade with each other but there's a barrier, whether it's physical or technological, they find a way.

The lesson of our historical analysis, is we shouldn't underestimate the power of that adaptive pressure over the medium term. And we shouldn't underestimate China's belief in that adaptive pressure because of their own historiography of these past moments of geopolitical crisis.

Glenn Tiffert: Roz, reflections on that.

Dr. Rozlyn Engel: I have a question, actually.

Glenn Tiffert: Okay, sure.

Dr. Rozlyn Engel: I think it's a question I wanted to ask, and it's very pertinent to this and that is. So, a lot of what you're describing in terms of the phased decoupling and the high concern, which I fully understand, about third countries and wanting them to remain maybe a little bit more open to US engagement and leadership.

I'm wondering, really, what kind of cost China's gonna feel, I mean, how deterrent will this be if you think about it, right? We're saying we're gonna go slow, you guys can all continue to trade with China, what's the cost, I mean, why are they gonna be deterred?

Hugo Bromley: Sure, this is a fascinating conversation, right, and it gets at something that, again, goes back to history and to how we've seen Russia evolve over time.

Which is we're used to an idea of economic coercion and punishment, where you hit hard upfront and then there's a process of adaptability and response, right? States see the sanctions, they see how to respond. Maybe it works over in a very short period of time, and it causes enormous pain and enormous uncertainty, and we shouldn't underestimate that.

That sanctions can cause that huge uncertainty and panic in the short term, and then states adapt and build. What we're talking about here is flipping that script and saying we're gonna design, and that's why I don't have a report to wave you can see the big dramatic here we go, yes, all the snow going boom at the bottom.

We're talking about a process that you can set in motion on day one but that you can credibly commit to building and expanding over time, and that's where for us the credible deterrent lies. In other words, Xi can't be certain to say, okay, if I can survive the initial gut punch of sanctions then I can build resilience and dependence.

It's about saying we're not gonna fall for that trap, and we're gonna set in motion a set of incentives. That are gonna allow us to degrade China's terms of trade over a longer period and thus have a longer and more sustained threat to the system of political economy on which he depends.

I speak to an element of this and what I think he's gonna say is tied to a very simple point, which is that we have a really attractive offer in the long-term. And it's the fact that we have a market you can access, and we're not trying to dump product.

And if you look at countries across the world, the one thing they want to do is move up that development ladder, and we have a vision of what we can give to you that will support that. China remains dependent on export and overcapacity, and so that fundamental difference as I suspect Ike is about to describe, is really essential to how we see the deterrent effect playing out.

Eyck Freymann: That's absolutely right, let me just give a couple of numbers that illustrate the point. China is more dependent on manufacturing than any other economy in the world. Fully a third of its GDP, value added is manufacturing value added. 200 million workers in the PRC employed in manufacturing, 100 million making products for export that's between.

16 and 20% of GDP. China is running, if you believe Brad Setzer's calculations, close to a 4% of GDP current account surplus. That is a vast imbalance in the global economy, and the rest of the world has to absorb that output. So insofar as China is producing more than it consumes, the rest of the world has to consume more than it produces.

And this is not gonna stop because China's juggernaut continues. They still want to post more than 4% growth next year and the year after that and the year after that. So if you are Malaysia or Vietnam, if you are Brazil, if you want to move up the value chain.

There is no pathway for you to do that in a world in which China is integrated into global supply chains and continues to dump in this way. And so the offer, as we say in this report, can be crudely summarized as follows. The United States does not seek conflict over Taiwan, we simply seek to keep the peace.

But if the worst happens, we're going to take the manufacturing jobs back, would you like some?

Glenn Tiffert: On that note, let's turn to the audience Q and A, thank you for a great discussion. Please, over here.

K Jay Su: Yeah I'm K Jay Su from Global Taiwan Institute. Yeah, hello, yeah, I have a question, sir.

In terms of crisis or conflict, how do you know it's a time for US to do the tool for likely economic tool to do, might be too early or too late, yeah. Because maybe POA will push very hard or maybe it just slightly attack. So maybe the United States are not saying it worthy to support or do this very complicated policy with the third country.

So what do you think in this situation for day one?

Hugo Bromley: Thank you so much, I'd love to hear Ros thoughts on this because the pathways and ways through are really complex. What I would say is that there is currently a huge amount of tension in the Taiwan Strait, right?

And that will only continue to evolve and change and shift over time. Our capacity to stand strong in those moments depends on the credibility of the hard work we've put in to what happens in the event of escalation. And this is sort of a point I was hinting at earlier.

So I'm a historian of manufacturing and trade, I am not a historian of Taiwan. I am not a risk analyst focused on the Strait. It is not for me to say the precise details of how that will evolve and where the US should draw the line. That's not my expertise or capacity, right, but the focus we have here is on contingency planning.

Eyck Freymann: I 100% agree, I'm also not a great Taiwan expert, especially on military contingencies. But I do agree so as we think about the ways in which different kinds of scenarios, whether quarantine blockade, partial, whatever the scenario is, we should be thinking through, what is it that we can do?

There must be some important person going by here.

Hugo Bromley: Very by the sound of it, my goodness.

Glenn Tiffert: We have an idea who that might be.

Eyck Freymann: Yeah, maybe we wanna wait a sec, I don't know.

Glenn Tiffert: Why don't we do that?

Attendant: Yes.

Glenn Tiffert: Yeah, and we can edit this moment out.

Hugo Bromley: That's denying political coverage.

Dr. Rozlyn Engel: It's very DC, so that's good. Wow, who is it?

Attendant: This is a big one.

Dr. Rozlyn Engel: Yeah.

Attendant: It sounds.

Hugo Bromley: They're not coming to our event, are they?

Dr. Rozlyn Engel: All right, we may be, okay.

Hugo Bromley: We're all good.

Glenn Tiffert: Okay, take it from the top.

Dr. Rozlyn Engel: So for example, the supply chain model that we worked through, right? We can look at the rerouting costs, we can look at the industry specific. If certain industries are more affected than others, we can look at how those sorts of effects might be mitigated. So I don't really know if I have a good answer in terms of exactly what I think or how I think that the actual specific scenario might play out.

But I do think that having multiple different plans with good detail and good analytic rigor behind them will absolutely help us get ahead of it, tell the story, have things pre-positioned, right? Know that if we're gonna pull this lever, we're likely to see this get in front of allies beforehand, share intelligence.

I mean, it's these sorts of things. You just need to know all your options. But it's hard to communicate those options if you don't have good analysis up front.

Glenn Tiffert: I might exercise the moderator's prerogative here and represent Hoover or the project in particular. To say that in many ways this report is a complimentary companion piece to a report that we briefed just a month ago.

It was a book edited by Matt Pottinger called the Boiling Moat, which addressed really the military dimension of deterrence in the Indo Pacific and the Taiwan Strait. And very often the discussion about deterrence focuses on that military dimension, who has how many ships, bombs, airplanes, landing craft. But of course, the battlefield is more than purely military, it's also economic.

And so a big thrust of this report really is to remind people of that and to remind people that an economic contingency plan plays a very important role in an integrated deterrence. And so while economics itself might not be enough to stop the bombs from flying, military will be very important, at least in the initial phase.

That ultimately, over time, we've seen with Russia, the economics piece is critical. And so really, it's the combination of the two that matters most.

Hugo Bromley: My goodness, okay.

Glenn Tiffert: Yes, over here in the middle, yes.

Dimitry: Yes, Dimitry I found your guiding principles intriguing to avoid hard decoupling on day one, but I wonder if it ignores the potential realities of what a military conflict would look like, right?

So one of the top priorities for the United States, if we're in an actual shooting war with China, would be to starve the Chinese military industrial base, because a conflict like this can go on for a long time, right? And the top five imports into China from the rest of the world are chips, oil, gas and various minerals, iron ore, gold and others.

All the things that you need to produce military equipment, but also all the things you need to produce exports that China develops, which are primarily phones, computers, vehicles, batteries and the like. So in an effort to curtail Chinese military industrial base, won't the US need to institute a blockade of all the critical components and minerals that China also needs to produce in terms of its outbound investment?

And the second piece that I think it might ignore is the agency of Taiwan in this conflict, right? So the Taiwanese, just like the Ukrainians, will not have the same priorities as we do. So the priority of the United States, for example, in the Russia Ukraine conflict, has been to not deny the export of oil from Russia in order not to jeopardize the global oil markets.

The Ukrainians have had no issues in hitting the oil infrastructure in Russia to cause them pain. And I think the Taiwanese would likely do the same things.

Hugo Bromley: Okay, I'm going to do two things. The first is I'm gonna come back to you on the second point. The second is I'm going to hand over to Ike with a shameless plug for an article on blockades coming out in international security very soon.

But over to Eyck on the critical supply point.

Eyck Freymann: Thanks thank you for the question, Dimitry. I think there's two parts to this, the first has to do with China's preparedness Blockade, the second has to do with how neutrals would respond. But in terms of China's preparedness, I think it's hard to underestimate how seriously China has been taking this risk and preparing for it, and for how long.

China has built a strategic petroleum reserve with roughly a billion barrels. It has built extraordinary stockpiles of food, of critical minerals, you name it, every commodity you can think of. And the Economist has a piece about this this week, I'm sure there's more that's not available in the open source.

The stockpiling behavior continues, it's been distorting commodity prices for years, it's likely to continue. And this tells you something about Xi Jinping's belief that he wants to be resilient to that. But I think it's also important to emphasize that countries under blockade are highly adaptable. And this goes back to Machar Olsson's famous work about Britain and Napoleonic wars, and the world wars.

When countries are blockaded, they find ways round. China already produces over 4 million barrels a day of oil, that is close to 10 times what it would need simply to fuel the PLA. And if they needed, they could put the country under lockdown and ration civilian supply. They also have the ability to import oil over the 14 countries with which they have land borders, including Russia and Kazakhstan, and to build new pipelines as necessary.

In terms of food, China seems to run a large current account deficit in food, particularly protein and soybeans, which they use to make animal feed, but that's an illusory dependence. Until 2000, China was completely self-sufficient in protein, they just got richer, so now they can import nice stuff.

But Xi Jinping has given a speech and he says, if we have to, we'll have insects. So, yes, in principle, there could come a time if you could build a giant wall around China and make it impossible for anyone to import stuff in or out. And you could persist in that operation longer than they could hold out the siege, then potentially you could starve them out.

But we're on the wrong side of that cost imposition contest, because Taiwan has less than two weeks of natural gas. And it's very likely that in any kinetic conflict, especially if we were blockading China. The PRC would use any of the thousands of cruise missiles that are within range of Taiwan to take out Taiwan's strategic energy reserves, its strategic food reserves, its refineries, and so forth.

So forget about Taiwan here, but how long could we hold out? Well, that depends on what neutral parties would do, and as Hugo will explain, they're gonna fight us if we try. I think I just wanna address your point about Taiwan's own military action.

Hugo Bromley: Because as a Brit who is profoundly supportive of Ukraine, I just massively admire what the Ukrainians have done and continue to do.

And speaking in a personal capacity would support what they are doing in terms of hitting infrastructure, and so forth. And we can have that conversation another time, in another space. I think it's important to stress the scale of China's market and the scale of its capacity to trade.

And there are some pretty clear limits on the extent to which you can mess around with that without further antagonizing neutrals to a truly extraordinary degree. I would refer to Gabe Collins work here, who's done a lot of thinking about these potential military interdiction scenarios and trying to use that kind of hard power.

The desire to trade round is huge, you very quickly get into some scenarios that are very illegal, particularly if you sta-t using z-mines, and things like that. So I would urge some caution on the capacity of military force to dictate that trade. Now, is there gonna be a massive cost to ensuring ships through any kinda crisis?

Absolutely, we don't know how long that crisis is gonna go on for, it's not knowable, it could be days, it could be weeks, months. I mean, I trust smarter people than me who work on this stuff to tell me, but we don't know. And so the best thing we can do is have a credible plan that we can put in place and can say we can put in place for that process.

Glenn Tiffert: Take one more question before the reception, young man with the glasses, thank you.

Philip Olson: Hi, thanks, Philip Olson, I'm a student at GSB, most of the time. I completely agree with what you've said about we have the ability to offer, we being the US and our core allies, to offer the neutrals something that the Chinese do not, which is effectively our ability to import.

And the flip side of that, our ability to be a net exporter of capital for countries who wanna climb the development ladder. What I worry about is countries going more the way of what I'd call the South Africa or the Emirates option in terms of Russia, where they say all the right things to our diplomats.

But then behind our backs say that they won't choose, as the Asian countries have been saying they won't choose for 20 years now. So respecting the agency of third parties, but also recognizing their incentives. Does that speak to more of a harsh in or out policy where we use more sticks than carrots for people who we see and maybe make an example of countries that we see trying to play both sides.

Hugo Bromley: Great question. I'd be fascinated to hear what work Mike has done on some of these questions, particularly in sanctions cases, about moving around and sort of that kind of false reporting. What I'd say is built into this report, not sort of given prime place on the pedestal is a hell of a stick, which is that if you are systemically trans-shipping, we will start to lock you out of the US market, right?

That's a really scary, really powerful stick, and we're gonna do it in a rules-based way and we're gonna do it in a proportionate way, and we're not trying to escalate. But yes, you're absolutely right, it's just incentives and you do have to have some kind of economic stick there.

But on the question of sort of moving these things around, I'd defer to others.

Dr. Rozlyn Engel: I don't think I have a whole lot to add, we have some work on coalition dynamics, which I think is a really important question, I think is where you're going. And we're trying to use some game theory to try to characterize some of this kind of multiplayer, multistage kinda game thing that we've got going here, but we're not there yet.

So I don't have a really great answer, except I really think it's an incredibly important question, which is what do we do to hold coalition together? And how do we think about the stability of the coalitions that we do build?

Glenn Tiffert: Mike, would you like the final word?

Eyck Freymann: I would just echo what Roz said, the United States is not going to be able to act alone in this scenario.

Eyck Freymann: If China moves in the way that we are imagining, this will no longer be the same world. It will be a situation without precedent in history that two countries that have been this intertwined in terms of trade and finance.

Two countries that are both nuclear-armed, are at such an impasse that they can no longer have a functional economic relationship. And China has a lot more carrots and a lot more sticks that it can use to build a coalition of its own than Russia has, or frankly any other country with which we have ever waged economic war.

And so I think we have to think in terms of concentric circles. There is going to be a core group of allies that cooperate in ways that we just cannot meaningfully cooperate with a broader group. And we have to think in advance about who those countries may be and start to have those consultations.

Because the level of integration and coordination, as we saw from the allies during World War II, might have to become very deep very quickly. But we also need to have a pitch for countries like the Emirates and like South Africa that are going to want to stay neutral for their own reasons.

And that will mean that they cooperate with us on some stuff and don't cooperate with us on others. And we're gonna need a vision for the stuff that's negotiable for us and the stuff that's non-negotiable. And the rules for enforcing the non-negotiables have to be fair, they have to be transparent because we don't just like talking about a rules-based system cuz we like the sound of it.

It's worked really well for us, it's maintained and preserved a world that advances US interests. And if we have a conflict with China, there's gonna be a world after the dust settles. I hope that we can build such an order for that world, but that's the conversation that we're trying to start.

Glenn Tiffert: Thank you all. So I encourage you, if you don't already have a copy, this is the report. And for those of you who watch this asynchronously, it's available on uver.org for download. So thank you very much for joining us, I hope you'll thank our guests as well.

Hugo Bromley: Thank you all for coming, thank you so much.