Economic Warfare And Crisis Contingency Planning: A Historical Perspective

>> John Taylor: We have the honor of hearing Hugo Bromley, and Eyck Freeman speak, and the title is Economic Warfare and Crisis Continuously Planning Historical Perspective. So we look forward to your, we have a lot of people comment. So your presentation. Are you gonna start?

>> Eyck Freema: Yeah, I'll kick us off.

>> John Taylor: Okay.

>> Eyck Freema: The great thing about this is it's a really quiet time and trade policy, so we can have a broad discussion that isn't tied to the news. I think we're all still reeling a bit. We're gonna give this talk as we had intended to give it because we think the themes and concepts we're talking about still apply.

But feel free to jump in and tie things to today's news, last week's news, last minute's news, as often as. We are not economists, and this is not a conventional economic history talk. We are historians of political institutions and political statecraft, in Ike's case, focused on the PRC.

In my case, focused on Britain and to a lesser extent, the United States. Our source base is qualitative rather than quantitative. In my case, it's a lot of UK And US Government sources. In Ike's case, it's a mixture of Chinese government sources, think tanks, academia. However, we hope our work and believe our work is informed by an understanding of economic theory and economic realities.

And we believe that in a time of increasing geopolitical uncertainty, increasing trade uncertainty, and when there is a high risk of confrontation in the Taiwan Strait, history can provide value to economists when thinking about these issues. And most importantly, history can act as a bridge between the world of economics and the national security community.

And that's a point I'm going to return to later on. So the way we're going to structure this, looking at economic warfare, economic statecraft, economic contingency planning, all things that many in this room may find uncomfortable is we want to first look at where the United States contingency planning is now, the models, the processes that underpin it.

Then we're going to look at the view from Beijing and how they perceive these issues. And finally, we're going to go through some broader historical themes, drawing on Anglo American historical research that suggest potential directions where economists and historians can work together to develop approaches that reflect the economic understanding in this room.

 

 

>> Hugo Bromley: So I'm going to kick us off by surveying the landscape of contingency planning for economic warfare in the United States today. And if I'm to describe it in one word, that word is unprepared. This quote comes from a report published by the House Select Committee on Competition with the CCP was published in December 2023.

They held some war games in New York with financiers, captains of industry, and they concluded very bluntly that the United States lacks a contingency plan for the economic and financial impacts of conflict with the PRC, full stop. But it gets worse because they also said that no office in the US Government bears primary responsibility for assessing the costs and no one is doing the contingency planning.

There is no one person whose job it is to figure this out. I think we are overdue for a correction here. And I'm not sure that the US Government has fully self reflected on the analytical errors that went into the design and implementation of sanctions on Russia. Throughout late 2021 into 2022 and indeed throughout the war, we have seen periodic statements from US government officials, predictions from sell side shops and so forth that the Russian economy is headed towards collapse.

And yet, in our opinion, the most telling chart is this, which shows inflation, the ruble, dollar exchange rate and Russia's benchmark interest rate before, during and after the February 2022 full scale invasion. What we saw in the aftermath of that invasion was G7 action to sanction the central bank of Russia, an unprecedented step which caused the ruble to lose roughly half its value against the dollar in a matter of days.

Inflation spiked in Russia. There was a risk of a financial crisis, but the central bank stepped in, it hiked rates, the government imposed capital controls, a variety of other measures that stabilized markets within a matter of weeks. Russia's financial system never did collapse. Inflation slowly began to creep down.

And while Russia's economy today is far from normal, it seems relatively stable. Please.

>> Speaker 4: When thinking about this some extent, how much is this within the control of the United States in the sense that part of Russia's ability to survive the sanctions is also cooperation from China and from other countries.

And so, when the US is designing response to innovation in Taiwan, it seems like an open question, how much do we just do this unilaterally, that is multilaterally? If we've been able to persuade China to join the sanctions, surely we would have been much more effective in terms of the Russian economy.

Just wondering how you're gonna think about those types of questions in terms of U.S. strategy.

>> Hugo Bromley: Terrific question. It has largely to do with how we deal with neutrals. And that is the crux of Hugo's section of the talk. So I think the point I want to foot stomp here is that far from learning the lessons of the analytical errors committed in the design of the Russia sanctions.

The prevailing view is that if a crisis breaks out with China, we need to go harder. So this is some text from what's called the Stand with Taiwan Act. It has bipartisan co sponsorship in the Senate and it would impose, quote, devastating comprehensive economic, energy, financial and other sanctions on China in the event of military aggression against Taiwan.

The idea is these would be automatically triggering and across the board and as some very thoughtful experts have written, if this turned into a kinetic fight, if US Forces were actually engaged in a war over Taiwan, the sanctions would be not only severe bilaterally, but the United States might coordinate with or even compel major allies to join the sanctions.

And if other allies, the Europeans decide they want to resist or hold back, Washington might present them with a binary choice. They might otherwise hope to avoid the problem in our opinion. And there are many problems. But the first problem that I emphasize is that while we don't know precisely what the economic impact would be on these allies, we would be trying to strong arm.

To a first approximation, we can imagine it would be quite large. When Bloomberg Economics modeled this, they assumed a complete. Shut off in trade in and out of China and Taiwan for a year following the outbreak of a potential crisis. You can debate whether those are realistic assumptions.

I think they're probably not that realistic. But the key point is that as devastating as this would be for the United states, with the GDP hit on the order of 8% of GDP in the first year. Largely coming from disruptions in chip supply chains, the point is that Taiwan, South Korea, South Southeast Asia, Japan, are key regional allies whose cooperation would be absolutely essential in the crisis would be hit vastly harder.

And this would introduce a severe coalition management problem. And then there's the question of transshipment, an age old question in economic conflicts between great powers or as far back as we have records, which is that one state imposes restrictions on commerce with another and trade reroutes. We've seen this in the Russia case, and I'll show you in a minute some evidence that this is what China anticipates.

If there were a US China rupture, the question is, would trade actually go to zero or would China find ways round whatever restrictions, physical or financial, we were able to impose? The final point I want to hit on in this section is that the questions that we are raising here are just assumed away in the design of the war games that our military and political and business leaders are playing when they try to understand this crisis.

Please, John.

>> Speaker 5: You have a scenario where China invades Taiwan, we impose sanctions, and all of our trusty allies come in with us, maybe restricted only by their own GDP losses. It strikes me that some of the effects of the trade noise since you wrote this is that our allies are really pissed off with us and much more likely to say, screw you, you're on your own for this one.

>> Hugo Bromley: Absolutely. And this is a key point. This is why we included this chart. It's that we have to ask from a domestic politics perspective, if Japan confronts the reality of, of what a full stoppage of trade or something like a full stoppage of trade would involve, especially.

Since we just tariffed Japan. Especially if it appears that the United States is bringing the problem on them, not China, how will coalition politics in Japan play out? How will corporate Japan respond? How will Japanese labor unions, such as they are, respond? We can only imagine how these might play out, but I'd suspect it's not.

It's not too encouraging. But to double click on this war game in question for a moment and we have Jackie Schneider here who I hope we can bring in at some point in the discussion. I really want to emphasize the level of analytical sophistication underlying these economic war games, I believe the economists in this room would find shockingly, shockingly low.

So here is part of the readout of what is regarded as the creme de la creme of analytical sophistication for economic war gaming. It was run by a friend of ours, Eric Hegenbotham at mit, who really did the best he could to pull together insight from this based on what his budget would allow.

And they found that both sides considered and came close to adopting murder suicide options that would have caused extreme damage to their own economies and the adversaries. But the assumptions that went into this imagining what murder suicide would be were essentially based on made up numbers. They used general equilibrium models.

There were only three turns in the game. There was no assumption that financial markets would behave dynamically as threats were issued or pulled back. There was no idea of how private industry would respond, whether there would be layoffs and so forth in between turns. This was, this was the crudest of all models.

We are not experts on economic modeling, but we suspect that these are not appropriate models to apply.

>> Speaker 5: Why do you say that?

>> Eyck Freymann: I would simply say, firstly, they have no model to account for compliance. So there is a policy that is announced and they estimate the effects of the perfect function of that policy.

But as we've seen in the Russia case, and I'll get back to this, one of the great challenges of this is you lose track of the extent to which your policy is having a reasonable effect. They also struggle to account for the adaptation of neutral states. And again, this comes back to your question, and we'll get into this in much more detail.

 

The number of active agents in any such game is extremely limited. Whereas in fact, you need every country in the world to be an active agent to make this work.

>> Hugo Bromley: Exactly, and-

>> Speaker 6: So, your sense is they're overstating the impact because of all these other mechanisms or you don't think we have any idea?

>> Eyck Freymann: I don't think we have any idea. And I think that not only that, we can't have any idea without accounting for a bunch of human political elements in how third states respond that are just structurally very hard to build into this kind of thing.

>> Hugo Bromley: Yeah, so the way these games are designed is there's three turns, right?

So there's, you assume the crisis starts in 2025 and then there's a move in 2026, move in 2027, right? And in between you have a white cell of some economists who plug the murder suicide options into the model and spit out here's what happens. But there's no rigorous modeling of central bank behavior.

There's no suggestion that imposing across the board sanctions on China might lead to some exploration of alternatives to the dollar. There's no hypothesis that in between 2026 and 2027 you might see a blow up in the bond market. All of these risks or scenarios are simply assumed away.

>> Speaker 4: It's a dynamic game with the 200 countries of the world. Should we have more of that sophisticated?

>> Eyck Freymann: No.

>> Hugo Bromley: Well, that's part of what we are suggesting is the outcome of this conversation. Bearing in mind the art of the possible, how we can work towards models that more accurately reflect some of these themes that we think are likely.

>> Speaker 4: Some economic models that give you a good handle on some thing,s like the real impact of trade disruption, like Ben Mall during Russia, Ukraine war. Sort of class of recent network models by Hakim Fahi, which on the real side of the economy, if you see trade shares, you have some estimates that can give you rough.

Sense of the order of magnitude disrupting particular trade flow to the power of countries making some assumptions about elasticities which tell you about substitution to other nations. But so we know some bits of the economy reasonably well. But to do the whole thing with financial markets, that seems much more demanding.

 

 

>> Hugo Bromley: It is. And it's not just financial markets because it's also. It's the market psychology that influences institutions and political leaders. And it's the responses of central banks. And it's the possibility that you see a combination of events leading to a paradigm shift, such as mass movement out of dollar systems or so on and so forth, so.

>> Speaker 7: Thinking about a journey of equilibrium multicountry, multisector model of the real and financial side of an economy is really beyond what typically even computational economists use and spray. Could you spend a few words describing what is a typical economic model embedded in this war game simulations?

>> Eyck Freymann: They use the Oxford Economics general equilibrium model.

That's what we were told. So Oxford Economics as I understand it has a, has a model of general equilibrium in the non crisis world and they said well that's the best we've got.

>> Speaker 4: I think as economists who have some unfortunate familiarity with this model. Especially models fit to peacetime and growth being asked to forecast something five standard deviations outside of the training data.

I would encourage you to be historians.

>> Eyck Freymann: And you know that's, that's the point we're making.

>> Speaker 4: August 1914 is going to tell you a lot more.

>> Eyck Freymann: We're gonna get to that.

>> Hugo Bromley: We're getting there. Our point is our, our point is that these models are being used in the absence of anything better to give an artificial sense of certainty and precision to our policymakers suggesting that economists actually have their arms around what this would involve.

And our contention is I think the same as what we're hearing from all of you which is many of these things are just less knowable due to the number of variables at play.

>> Speaker 8: Are economists standing up and saying no. So they're saying these economists exist without.

>> Hugo Bromley: Economists aren't in the room economists.

This is what, yeah.

>> Speaker 8: So you're saying policy, a lot of these are not economists. Who do you. Sorry, I came away because. Who do you have in mind?

>> Eyck Freymann: Who should be or who is.

>> Speaker 8: You got a model of what's gonna happen? They are getting a false.

 

>> Eyck Freymann: So, perhaps one way to talk about this is to look at the institutions of the US state and we'll get round to this. But the contingency planning for these scenarios are partly done in an ecosystem of think tanks into and out of partly done through Congress and then a lot of work is done in DoD and in the military structure.

That is not. Yeah, that is not a system that is brilliantly plugged in across the US state. In the UK context I could tell you a similar story. So part of this is. And we're going to get to this later in this part of this is a coordination problem within the interagency within.

Treasury there's a way of true.

>> Speaker 4: So when we were trying to clean up the SNLs Third World Evan Waste bank, part of the treasury called the Office of Act Most of the orders. They've been complaining for years about the excess bad debt deduction banks were trying to change the tax laws while the banks were under reserve.

Oracle were sued by the Justice Department for ambassadors antitrust purposes. Claiming that there were no alternatives when they acquired people softer than Oracle SCP-

>> Speaker 1: Microphone, please.

>> Speaker 4: The Procurement Office one floor above in the Justice Department bought an ERP system from a Canadian vendor. So this goes on all the time, just daily inside the government.

Even inside the.

>> Hugo Bromley: Yeah, it's a major problem. I had dinner last week in Washington with a Treasury Department official who is saying that there are three different bureaus within treasury that could plausibly have responsibility for this. And so good luck even having the conversation with them because it will just start infighting about who's responsible.

>> Speaker 5: Worse yet, even when there's some experience worth conveying to the new political appointees offering isn't. So I had a bad experience with that. In 2007, Hank Paulson wanted to be an effort to reform the corporate tax. So Marty felt I were asked to be the keynote speakers at the conference.

We had breakfast and I asked him whether he had had any briefing about why we did what we did with the Resolution Trust Corporation and Brady Bonds, et cetera, what worked, what didn't, what we could have done better. He said no, go talk to Bob Steele who's the undersecretary for domestic finance.

So I went there and he was late for meetings, we talked for five minutes. They had nothing briefed about. Not that I expect anything as bad as what happened in the financial crisis. They hadn't even briefed on that. The last major problem.

>> Hugo Bromley: The analytical capacity doesn't exist.

>> Speaker 5: That too, but you can have great analysis, but it doesn't convey that people making decisions, it's pretty useless.

>> Hugo Bromley: I think that's exactly right.

>> Speaker 9: Yeah, if I can just interject just as a factual matter. I actually have some knowledge about how this contingency planning work has been done now and.

And in the. At the end of the last administration. And your assertion is correct. So there's no need to get into the details of exactly who did what. I just want to come in without going to analogies or talking about abstract and principle treasuries cut out like, you know, the, the factual statement you made about the planning that's being made on this exact project problem is factually correct to my knowledge.

>> Hugo Bromley: And I'll move on. But I just want to say there's a conversation to be had about the correct structure for an interagency coordinating group to understand this. Because there are scenarios in which U.S armed forces may be called upon to take certain actions which will have market consequences, potentially very significant market consequences.

And we need to make sure that the commanders in charge are effectively coordinating with treasury, possibly with the Fed, with others across the US Government. So hopefully that's a question that we can come back to. We're eager to hear your thoughts on that. So let me just run briefly through some takeaways from the PRC literature, which is something I've been pretty immersed in.

What has happened since Liberation Day has surprised many Americans. It has not surprised Beijing. They anticipated even before Donald Trump's election. And I'll just run through a few quotes that I think are indicative. That the United States operates by triggering financial worse. So Chaoyang is a very famous and provocative colonel.

He wrote a book, well, as a colonel that made him famous. Now he's a major general and he's said most of the financial wars we have seen since the end of Bretton woods have been state actions launched by one country, the United States. And US Financial worker is characterized by the creation of trends.

So when a trend is formed, financial speculators, they mean Soros here, financial speculators make profits for themselves while enabling the US to achieve its strategic interests. That is, in one quote, the perspective of the more ideologically oriented PLA folks within the system. Then there's a more technocratic element, mainly economists associated with leading universities.

Huang Yiping is a famous example. And they come to the same basic diagnosis of the geopolitics, which is that economic conflict with the US Is likely to continue for the long term. It won't just be about trade, it will be the full range. And therefore, because the United States is taking a long term policy orientation towards confrontation, China has to adopt its institution, adapt its institutions to prepare for this new reality.

The key disagreement is essentially on ideological lines. What is the US Capable of? What is the US seeking Seek to achieve. It's not really that much disagreement about what China ought to do. This is an interesting theme that recurs through the discussion. Is that China's FX reserves are the primary battlefield of the financial war.

That the United States may intervene through the FX market manipulating the value of the RMB. There's a belief that this is how the US torpedoed Japan's rise in the 80s through the Plaza Accord and that something similar may be underway in the US trade financial war. China's actions very closely match this pattern of statements.

This is Brad Setzer's analysis showing that China has been secretly accumulating vast quantities of foreign exchange by manipulating its customs data. Now, there's a number of reasons they may have done this. They want to understate the scale of their rapidly growing current account surplus. But I think it also has to do with acquiring more firepower to protect the RMB in the event of a financial sniping attack.

>> Speaker 4: Excuse me, what did the Plaza Agreement have to do with China? It was in September 1985 and it was meant to bring down the value of the law, which had been appreciating since the end of '79. And in trade weighted terms, it had gone up by 50%.

And so it was the G5 at the time that agreed to change their policies to try and bring the dollar back down. What did that have to do with China?

>> Hugo Bromley: This is Marxist financial historiography.

>> Speaker 9: It's an argument about Japan. It's an argument about what we did to Japan, not an argument about what we did to China.

>> Speaker 8: It doesn't explain, even if you take the analogy to China, it doesn't explain why China would want to accumulate more foreign exchange reserves to protect from US efforts to present the US dollar from appreciating.

>> Hugo Bromley: They're afraid of sharp movements in their exchange rate in either direction and they have gamed out both possibilities.

>> Speaker 8: Okay, well there are many countries that have been in that situation especially.

>> Speaker 4: So they would have welcomed the Plaza Agreement. By the way, it was the Plaza Agreement, not the plaza accord.

>> Hugo Bromley: Yeah.

>> Speaker 4: 1960, 1987 saw the Plaza Accord. That was the accord, not the agreement.

 

Just for-

>> Speaker 5: So they bought a bunch of dollar denominated securities that will take a bath if we inflate or devalue. I think the number one thing is we put a ton of stuff on boats, you gave us a bunch of paper that paper might be worthless.

>> Hugo Bromley: Indeed, I'm not sure, they're only accumulating dollars.

I'd suspect Euros, yen and a whole lot of gold.

>> Speaker 5: You're making us less worried about China's planning capacity if this is their leading policy.

>> Hugo Bromley: This is a theme that I want to close out this section on.

>> Speaker 5: Great planners still on target.

>> Speaker 8: Yes, yes, exactly.

>> Hugo Bromley: So my closing question in this section is going to be whether either side is behaving particularly rationally.

>> Speaker 8: They said, I'll just go here and just Peter Navarro. Exactly.

>> Speaker 9: More opposite than you realize.

>> Speaker 4: There are people in our government now and historically who have worried about China using their reserves to cause US problems by dumping dollars.

So it's somewhat symmetric, although perhaps not as ideological.

>> Hugo Bromley: Yes, absolutely. We want to move on because we have some. Hugo has some thoughts. We both have some thoughts about historical lessons. So the point I want to emphasize here is that there is a fear in Beijing that has been developing for almost a decade now that the United States has a modus operandi of creating financial crises in order to contain its competitors.

And therefore, that the escalation of trade war into financial war or something broader is likely, if not inevitable. And if you watch Xi Jinping's patterns of behavior in setting up new financial regulators, consolidating control over the system, tightening capital controls. Talking a lot about R& B internationalization, but not actually liberalizing the capital account, all of this matches a fact.

This whole fact pattern matches a diagnosis of the situation where the US And China are two superpowers barreling towards some kind of financial war. And Xi Jinping has actually spoken about this in the most significant context possible, which is in his work report at the 20th Party Congress in 2022, where he says we must be prepared for worst case and extreme scenarios and be ready to withstand the major test of high winds, choppy waters, and even dangerous storms.

And his statement is, we should strive to ensure normal operation of the national economy under extreme circumstances. That term, extreme circumstances is now all over China's financial media. And you can see it manifest in all kinds of ways, including the ndrc, which just announced last month an enormous effort to expand and accelerate the stockpiling of strategic goods, yes.

>> Speaker 4: The standard story when people worry about China is that, China has this excess capacity and it's gonna export its way out of blah, blah, blah. So I would think closing off their export markets would be a major shock. But they. So this doesn't jive with that, the idea right now is to have lots of exports to keep domestic demand up.

This is the opposite.

>> Hugo Bromley: Well, it's not just exports. It's they're afraid of physical blockades, financial sanctions, other measures that could cut off their ability to import key raw materials, especially for a period of weeks to months. And that's the preparation for the extreme situations. So it's both on the export and the import side.

>> Speaker 5: Just listening to the talk as well. It's to what extent there's also this sort of perception that by both sides increasingly preparing for this geopolitical confrontation. It seems that one endogenously makes a confrontation more likely. There seem to be many parallels to Britain and Germany leading up to the first World War, right?

And so, as part of this contingency planning sort of both sides are engaged in mutual suspicion and there's potential for escalation, and this planning itself can help facilitate that. Is that sort of factored into thoughts at all?

>> Hugo Bromley: I find that scenario alarming. I'll let Hugo weigh in on that and maybe in the historical historical section I just want to give you before I wrap up, please let's ask a.

>> Speaker 10: Question about what they're stockpiling. They're stockpiling chips. They're stockpiling everything. Stockpiling chips. That makes it much more attractive for them to take out TSMC industrial part, maybe with massive cyber advance over instead of a physical invasion. It's not just that they're stockpiling them actually, they're building fabs, incredible capacity.

Time for those to produce stuff. I'm saying, if they have a stockpile and they have a short term hit that's gonna shut down TSMC for six months or a year or something.

>> Hugo Bromley: Yes. And it's the point I want to emphasize is it's not just chips and it's not just oil.

 

They are preparing for a full spectrum stoppage of imports. Here are just some statistics, some eye popping statistics. A doubling of the SPR to 950 million barrels. Rumors that they could double it again. Holding the vast majority of global grain reserves. New decision out last month to build a.

Equivalent stockpiles of cotton, sugar, meat, fertilizers, cobalt, copper, nickel, lithium, rare earth minerals. So what is it that they're preparing for? Well, this is a thought that I think is an instructive idea in thinking about this current confrontation this week. This analysis says that if Washington tries to sever the supply chains that connect these two large economies, it's going to lead to chaos.

But in the end it's survivable for China. There is a short term shock as supply chains are realigned, but eventually China and the developing world can form a complete system on their own. And that the United States, as it grapples with this fact, is regressing away from wanting to decouple to feeling it doesn't dare to decouple.

We'll talk in a few minutes about how the President's statements and actions in the last few days have maybe changed that analysis. But this is, I think, a very significant quote. The China Institutes of Contemporary International Relations is not a think tank. It is a front for the Ministry of State Security.

It is probably the organ within the Chinese party state that is responsible for doing their contingency planning. And this is a quote that comes from 2007 which says that if the United blockades have historically failed to achieve the goals of their enforcers. And if the US Wants to contain China through an oil embargo, this is just not possible because there's a single global energy market and any disruption in oil supply anywhere will have an impact on that market.

In other words, if the United States tries to restrain third countries from selling to China, it may be successful in the very short term, but structurally the supply chains will realign and China will be able to buy what it needs. And when it comes to financial sanctions, well, the diagnosis is actually pretty similar.

It's that US Financial sanctions are a very severe threat, but they're not invulnerable because if necessary, China can participate in asset settlements and currencies other than the dollar, as Russia and India has done. And in fact, the Iran case shows that other countries may be willing to help China find workarounds into the dollar system.

>> Speaker 7: Can I ask a question? Some of these statements, I wonder if there's economic statements or propaganda like statements because I think I read as an economist never stating of the US Ability to engage in a beneficial manner in trade and otherwise financial kind of wars. What I'm thinking is the difference between 50, 60 years ago and now is that we live in a world in which financial markets are extremely well developed and internationally integrated.

 

>> Speaker 1: Without talking about the interconnectedness, how interconnected the real economies are? And so this notion, I mean, it reminds me of game theoretical notions of money burning given the constraint of financial market price. Whatever you and I are doing, if we engage in something very reckless, it's not obvious to me that I'm only hurting you.

>> Hugo Bromley: Yes.

>> Speaker 7: But is it on their part a very sophisticated overstatement of the danger for purely domestic reasons, or they don't have a complete understanding of what a market economy, financially integrated world market economy.

>> Hugo Bromley: As an analyst, I'm limited by the sources we've got, but these, what I've just presented to you are statements from members of the group of a few dozen individuals who are the most prominent politically connected economists or politicos who work on economic policy in the system.

And this is from publications that were written for internal audiences. I found them on PRC databases. They were not widely disseminated. From what I can tell as an analyst, they're written for each other. Yes, they're affected through, or you have to read them through the filter of the language of how elites in China talk to each other.

But I think directionally they reflect basically the state of thinking, which is to say, not perfectly economically rational. But then again, neither is. Neither is Peter Navarro. So just to summarize what-

>> Speaker 7: The market will be sovereign to everyone.

>> Hugo Bromley: Yes. Well, we will see that play out in real time.

And I haven't checked Twitter, but we might be seeing it right now. So just to summarize what Beijing thinks and why it might miscalculate. So make sure that Hugo has time. Beijing understands that we have formidable capabilities. We have the ability to do sanctions, we have the ability to threaten all manner of extreme economic punishment, and they take the threat of financial war very seriously.

But the technocrats basically understand that the United States does not have an interest in detonating the global economy, which hurts itself and those of its allies. And I suspect that there are many within the system who calculate that we're bluffing and that even right now the President is bluffing, and that even if we're not bluffing, they might calculate that after a few months of pain and discipline imposed by the market, in the bond market or elsewhere, that third countries and even the American public will say, this is too much, bring me back to economic normalcy.

And if Beijing makes this calculation, they may conclude that we have no credible economic plan and that undermines all of our deterrence. So with that, let me hand it to Hugo.

>> Eyck Freymann: Sure. So so much of our work on this has been trying to design what that coherent plan could look like in partnership with economists.

But there's so much in motion right now that I think it's best for this talk to focus on the broad historical themes that we've found helpful in understanding economic statecraft in these moments and in framing and supporting a conversation between those focused on national security and economists. The first thing that we think about is that sanctions, the sanctions toolkit we have developed, particularly since the end of the Cold War, are fundamentally a tool of cooperation, not competition.

If you take this back to the beginning, the concept of sanctions as we understand them today emerged out of the end of World War I, when advocates of global governance, especially Woodrow Wilson and Lord Robert Cecil in the UK saw the potential a globalized economy for an economic weapon that could be wielded by great powers to enforce compliance with international norms.

That's why sanctions were essential to the League. And even when the United States withdraws from the League, there is still a faith in the efficacy of sanctions in embargoes, largely because in an imperial world, the number of neutral states was extremely small, so you could get to coordination much faster.

This led to embargoes on Mussolini's Italy, actions against Japan. Those actions, ironically, as Nick Mulder, Brennan Sims, others have arg, led to a desire and push for autarky among revisionist powers. But that was the framework for sanctions. And when we reach the end of the Cold War, we see a similar logic reemerge.

There's a famous debate in international relations literature in the early 1990s, do sanctions work? And I think it's worth dwelling on this quote from Kim Elliot in 1991. Optimism about the efficacy of sanctions is based on the fact that with the end of the Cold War, it may now be possible for the UN to take actions in defense of collective security and protect international norms.

This is the framing. And this gets back to your question earlier over time. And this is where the financial markets come in. The development of the position of the dollar has facilitated a world in which the United States can act quasi unilaterally in a sanction space as long as everyone goes along with the system as a whole.

And that was the underlying logic of the Obama sanctions, which heavily relied on UN support and implicitly on China's support. It's also the logic of the more unilateral approach taken by the Trump administration. I could talk about Instex and early ideas of how to get around them if people would like.

Ultimately, we are still dependent though, on critical nodes. And the problem with this literature on critical nodes is if the incentives are big enough, if we start applying these tools of what are essentially multilateral cooperation to great power competition, particularly with the prc, we are risking the centrality of those nodes themselves, whether that's U.S oversight of the dollar system or even the dollar system itself.

An important if counterintuitive point is this is also true of blockades. So actually the logic of blockade is the origin of the logic of sanctions. Cecil, who designs the concept of sanctions for the League in many ways was minister of blockade in the UK government during World War I.

And the idea here is it's kind of similar because it involves using military force to interdict global shipping lanes. In other words, not weaponizing your national market, but the global system that is setting you up directly into a conflict with neutrals. And I'm going to sort of circle back to that at the end of these themes.

But if we look at the recent examples of blockade like the Iraq Mio, those are under UN supervision and UN supported. The second theme is me with my sort of historical early modern hat on, which is that economic competition over time tends to undermine the structural quality of economic data.

And there's any number of reasons for that. But fundamentally, so much of the data we rely on comes from state collection of statistics on the global economy. And in these times of competition, which is also of dominant in the 18th century, which was my PhD many, many moons ago, there are three core reasons why the quality of that data becomes a real challenge.

Firstly, coercive measures and discriminatory trade policies change the incentives for honest trade reporting among firms. This is Amsterdam in 1700. The counting house in the center there was raided by officials because it contained a giant complex in the surrounding warehouse where people took French SE seals off textiles and put Dutch ones on for re-export into Britain to evade what were essentially competitive industrial policies

The second reason is that multilateral cooperation on trade reporting begins to break down. So many of the institutions that we rely on as historians, and I'm sure you rely on as economists, are multilateral fora, particularly the IMF and World Bank. And as these things get contested, that data, it becomes harder for them to coordinate.

And finally, as competitive economic narratives become much more important, states or actors within state bureaucracies are incentivized to lie or exaggerate data. And that's how we get to this model. So we've talked about Brad Setzer's chart on the right. That's German exports to Kyrgyzstan. Now, maybe there has been some massive transformation in the economy of Kyrgyzstan since the Russian invasion of Ukraine and I missed it, but I think more likely that's all transshipment, right?

So it's worth briefly thinking about how states have grappled with this problem. And traditionally when we're thinking about state formation, we think of two pathways. The first is the expansion and development of state power. This is an old conversation going back to the fiscal, military, state thesis, about Britain struggling with the conversation of seeing the economy in a time of competition by building out bureaucratic power and bureaucratic capacity, particularly in the customs and excise divisions and tied to the way it builds infrastructure.

There's an interesting conversation there about AI and state capacity that one could get into. The second is partnership with private firms. This is East India Doc. For most of the period of economic competition in the 18th century, the East India Company does its own trade reporting and its own tax filing using a bonded warehouse system where it doesn't have to pay tax until it sells goods.

So there's a general idea that if you can find structures to partner with industry, maybe you can boost that data reporting because we can't get to a point where we can do it by coercion. But the biggest problem with data and the biggest potential solution is to work with and conciliate neutral states.

And this is where I want to bring this back round. Because if there is one lesson from history, from Ike sources from the war gaming we talked about earlier, it's that neutrals don't face binary choices in times of economic competition and are incentivized to challenge elements of economic coercion by arbitraging differences in prices that those policies create.

And that always faces those powers trying to do economic coercion, economic statecraft, economic warfare, call it what you want. With a simple problem. Do I escalate or do I conciliate? That's not a binary. These are going to be complex negotiations, but they're negotiations in which the most important relationship here is between the belligerent and the neutral powers.

And it's getting access to and a cooperative relationship with neutral markets that's key. Here's the World War I binary. We've had a lot of World War I comparisons so far today. And what these two pictures show is the binary we're all used to when we think about World War I, which is that the United Kingdom works in a conciliatory manner with the neutral United States.

There's Mr. J.P. Morgan Jr. looking very splendid up there and build a financial relationship, continue to get access to the US markets. Meanwhile, Germany goes for escalation, confrontation, military violence against neutral shipping and a descending spiral into conflict. That's a familiar story. It very nearly was 180 degrees the opposite.

In fact it would have been the opposite if the Admiralty, which had had control over economic contingency planning before the crisis, was put in charge during the crisis because the Admiralty's plan for World War I involved a complete stoppage on all shipping and all US exports to neutral ports in Europe.

 

Now that leads to a fundamental crisis in Anglo American statecraft. And what we can see, and there's Nicholas Lambert's done work on this, there's some of it in published work from us, coming out soon is an internal debate within the UK state where you have national security officials pushing an extreme position.

You had the treasury pushing the opposite position, you have the Ministry of Foreign affairs pushing its own position. And eventually through a agonizing process of negotiation, the British state is brought to a more conciliatory posture that is ultimately essential to its state, corrupt. But that was a live debate and I'm not a German historian, but I suspect you could tell a similar story in the opposite direction within the German state.

And what that means is it's really important to understand these as relationships and trade offs. And we've seen that under the Biden administration as they begin to think about economic statecraft, economic coercion, we've seen waivers. Givers of ideas to ship us chip equipment, Samsung getting exemptions. But it also means we have to recalibrate our idea of what alignment and what partnership looks like.

In that sanctions cooperative world, it was much easier to draw rhetorical and political absolutes about who's on team and who isn't. That's trickier now because the economic and political context is trickier now. And our idea of what cooperation is and our idea of what partnership is, I think need to change.

And that needs to be central to the conversations we have going forward. We want to get into the Q and A, but let me close with some reflections to summarize what we're trying to do with this talk. It's to put forward history as a potential bridge mode for bringing together conversations between national security policymakers and economists that haven't been happening.

Historians don't do the modeling part, but we, I think, can help explain to policymakers that intervening in markets has consequences because markets are adaptable and they move fast. And I think this point about neutral country's agency is a key theme that has been missed in much of our war planning.

Historians can also help to interpret how the adversary thinks about economic statecraft by looking at the sorts of sources that I presented to you. There's a lot more there, and I think by reading them and studying changes in that debate through time, there's a helpful way to understand how an adversary who may not be perfectly rational is thinking about its own crisis contingency planning.

And finally, historians can urge humility. We don't have the answers, but we can say with some confidence that these precise point forecasts that are being used in these war games are probably suspect. Data quality, as Hugo has explained, is a serious problem during times of great power economic crisis.

 

There are break glass moments, and July, August of 1914 is one of them, where political forces take over and institutions are stretched to the edge, particularly multilateral institutions. And then when an economic conflict between great powers becomes protracted, the adaptive behavior and bargaining with neutrals doesn't stop because under conditions of prolonged uncertainty, that is inevitably how neutrals and markets will behave.

So what does a collaborative research agenda look like? I think the first question which is all the more relevant today is what do we want the international trading and financial system to look like? And in particular, what might it look like if this trade rupture with China turns into a broader geopolitical rupture?

How can American statecraft and allied statecraft help to preserve and reshape it in a way that advances our interests. To answer that question, we need to get more specific on definitions. We need an answer, we need some definitional criteria on what makes a product critical versus non critical.

We need to have this conversation about modeling. I don't think the perfect should be the enemy of the good. But if, if the current models being used are the best we've got, we need to rethink the methodology of how we're doing this war gaming because it's leading corporates and political decision makers to potentially misleading conclusions.

And that's probably part of a broader conversation about what is possible, what is affordable, what is realistic in how we make our economic war games more robust. And then finally the question is who should lead or how should we work together when we do contingency planning? We haven't talked much about central bankers today, but they would be extremely important in any of these rupture scenarios that we're discussing.

Is it appropriate for central bankers to become involved in these contingency planning discussions? If so, how? That's a question that I would leave to many of the members of this group who know much more about this than we do. But with those questions we'll conclude. Thank you for your attention.

>> Speaker 7: I'm obviously very sympathetic to anything that's looking at games. I've got a few thoughts and I don't kind of, I'm not sure kind of where you want to go with this. This is already a written paper, you're talking about including more research. First, when it comes to running games and the incredible evolution of economic models and games, I think no matter if you're asking a big question, the key is iteration, iteration and control.

And I think what Ike has highlighted is that there's actually a small amount, very finite amount of economic focus games and the games that are not economic focused but include economic variables have no kind of discussion about the control and assumptions. Those are two kind of basic solutions about running games.

 

But I want to push, since this is kind of a historians talking in an economic working group, a little bit on the historian kind of historiography side, because I think that what games don't do a great job of telling us what's going to happen, but games do a great job telling us about what we think is going to happen.

And here you highlighted one game which is run actually kind of outside of the traditional practitioner world. This is an MIT funded game, but we actually have a ton of data historically about how economics has been represented in games. We have computer models, for example, where they say exactly how they're adjudicating the economic aspect of the game.

We have information about what type of players they include in these games. And so I think if you go back, and I was just looking at kind of we brought in a ton of games into our war gaming collection here. And I went back and looked at games that were not officially titled economic games.

We have a bunch of economic variables inside of broader campaign games. And I think it's ripe for some historiography looking at how those assumptions and adjudication models of economics have changed or stayed the same over time. And I think it could help really reveal kind of how the US has thought about the use of economic statecraft within the context of campaign planning.

>> Eyck Freymann: There's little to say other than I couldn't agree more. And that would be a brilliant project to think about and do. I think you'd find some pretty scary conclusions. I don't know, but it would be fascinating to go through and use that. Use those war games and games as an archive.

>> Speaker 5: So let's set aside the problem of whether we're any better prepared militarily for a conflict over Taiwan and just focus on the economic case. It seems to me that this is as close as one can get to a natural experiment for a contingency situation over Taiwan. And in particular, I think it allows us to begin to look at the way actors and markets would behave as a crisis escalates to the brink of kinetic conflict.

Not necessarily kinetics, because kinetics changes the psychology of the players. And in this situation, apart from Japan, which could be directly involved in a kinetic conflict, all of the countries which we traditionally. Call our allies are actually remote errors and are in principle neutrals here, because even Article 5 only applies to Europe, it doesn't apply to defending the United States and Asia,.

And so it's a real question, I think, as we contemplate who would be on side the United States in a conflict over Taiwan and how markets and commodities and players would behave for us to take a look at what's happening right now and the choices, because I think in some ways it's a preview of what that might look like.

 

 

>> Hugo Bromley: I couldn't agree more, Glenn. And I think it's alarming for multiple reasons. So, I mean, Glenn helped us enormously last year as we wrote our paper on day one, an Economic Contingency Plan for a Taiwan Crisis. One of our foundational assumptions in that report was that it would be politically institutionally infeasible for the United States to pursue a sudden and total rupture in economic exchanges with China, even in a conflict scenario, let alone in peacetime.

We're in uncharted waters. I think one of the reasons that markets are not pricing in even more panic than they are is because many calculate that the president must be bluffing and this must be the first or the second step towards a rapid negotiated resolution. I think if we surveyed the room, we'd probably hear a diversity of views, but the reason why we recommended structuring a US Response to a crisis through a graduated way if we were going to use trade policy to achieve this goal of decoupling, to do it in a way with a tariff that moves slowly and predictably, so that firms in capital markets could look ahead and see the direction of travel.

This administration is now taking a very different approach, and it's taking a different approach at the same time as it's, at least until this morning, picking economic fights with our closest allies as well. So I think this introduces two very significant problems. First, I think it risks exposing as risk being a rude awakening to policymakers who haven't actually thought about the impacts on third countries.

Just how few countries are willing or interested to go along with the United States in this enterprise. And then I think it risks revealing that the financial market reaction or the financial stability shock that I still think is coming if these tariffs on China don't come off is something that would force the United States to back down.

And I think if we look into the abyss and we back away, that risks undermining our deterrence in another very profound way, which is it reveals, it would suggest to Beijing precisely what they may have suspected all along, which is that we don't have the guts to go through with what we've been threatening.

>> Eyck Freymann: I have nothing to add to that, I want to get some more questions.

>> Speaker 6: So a couple of observations. So the first thing that comes, I like this a lot. So congrats on that. But just trying to be constructive first. Start with Bob Gates famous comment that planning is useful.

As soon as you engage, the plan goes kaput and you got to do something else, right? So I'm a believer in scenarios in this context because easier for non-economists to understand. And then focus on the triggers that could cause you to move between or among the scenarios. Regime changes might be an economic modeling idea.

 

Elena and John made some points I think are worth mentioning, and Elena talking about the game theory. Well, this is N dimensional chess. When you bring in these other people, it's not just who will back us, but it's what happens to to their economies, what diversion will diverge from China and what won't, and it's an issue right now.

Can they sneak stuff into third parties as many states have done through Dubai that we don't like, etc? Okay, so that's really important. And John was kind of basically saying have wide standard errors, but I would have alternative scenarios that spanned 99.9% of the spectrum. You can. Okay, I think it's also important to emphasize that in practice in the real world.

Two things, I missed the first 50 minutes because I was teaching. So you may have mentioned this. Number one, whether this happens abruptly or gradually happens through a sequence of steps, which I'll get back to a second. And second, the personal relationships between the advisors and the President or Xi Liu had a good relationship with Xi Liu.

He's not around anymore, he's more sensible, the guy's there now and with each other, I'll give you two examples. One that I was involved with that George Schultz likes to talk about. So when Nixon was in trouble and they thought he might. There might be a crisis, not just a political crisis, but it might devolve into an economic crisis.

Henry Kissinger got a hold of George, who was Treasury Secretary, and they dragged Arthur Burnson. They made contingency plans quietly and secretly among the three of them. When Saddam Hussein invaded Kuwait, I got an urgent phone call from the President, I need you in the Oval Office right now.

And the National Security Advisor, Brent Scowcroft was in there demanding that we shut oil futures markets down. And if I hadn't had a good relationship with Bush, and he trusted me and he had been an econ major at Yale and he'd gone ahead, oil prices would have doubled again.

They were doubling because people were going nuts in the futures market. They've gone to 200 more. And I had to warn Scowcroft. Even if it ever gets out that's even being discussed, the futures market will go bonkers, okay? And so it was the trust that had been built that enabled that.

Now maybe it all would have worked out and only would have been a short term blip, etc. And he would have done what Trump did today on the pause, etc. But I think it's easy to underestimate that because all these are really busy people. They don't spend. There are groups in the Pentagon, etc, the Office of Net Assessment, people at War Game, etc.

The people inside the treasury are supposed to be doing this, maybe John wants to mention that. But in fact, if the principals aren't alert and involved and trust each other, it's gonna be very hard to get to a decision on how this unfolds. Take two scenarios. One, Beijing really launches an invasion of Taiwan or that that would entail, pardon me, take two.

 

Two different scenarios. One is Beijing really does launch a physical invasion. I understand the west coast of Taiwan is not very hospitable to amphibious assault, but let's say they launch an invasion. Right now the only options the President of the United States has is to send the Navy takes two weeks to get there from Pearl harbor to San Diego.

So his main option is do nothing or launch long range precision weapons to take out their ships and start World War III. So there has to be not just a coordination but in this planning you have to pre-plan and pre-position. So it puts a very big emphasis not just on economics, but the interaction, economics and military stuff about enhanced forward basing to deal with Taiwan.

So I think you can't separate the military and the, and the economics here and then. So I think that's really important. The other scenario is they decide to do something like apply much greater economic pressure. What do we do? We're not directly affected. In addition to psychological stuff, they're already doing trying to convince the electorate to have a more friendly acquisition by Beijing Etc.

And then they could do something like selective cyber and take down the Hsinchu Industrial Park, TSMC, stuff like that, okay? And this goes along and then that kind of disrupts us, but doesn't affects us only indirectly because we get chips from them. And so I personally think a ladder is much more likely this done in a series of steps that tries to weaken Taiwan and their will to defend itself and puts us in a harder position.

But I think those are very different scenarios because you have this iterative opportunity that was being talked about a moment ago. If it's being done slowly in a series of steps, it becomes much more obvious that additional steps are now much higher probability. So there's also the sequencing of all this as well.

You've probably already done that, I don't know.

>> Eyck Freymann: But I'll let Ike come in on scenarios and planning because he's really done this work to an extraordinary degree. Principles and principles. So we've had a lot of conversations about principals meetings recently. I couldn't agree more. In terms of individual relationships.

And that doesn't just go within the US side, it also goes within the US and key allies. The question then becomes what do we do as people who can't influence that in academia around academia around government? And one of the things we talk about a lot is going with a principles and concepts first approach rather than as well as getting into the specifics of planning.

So when we wrote on day one, with Glenn's input, with the input of others in this room, we talked a lot about what should be the underlying concepts of any contingency plan, such as it is inadvisable to break supply chains on day one, such as neutrals have agency and we cannot anchor our plan in the interdiction of third countries trade.

And if you can hammer these principles through, that can create the best possible context within which those individual relationships operate. But for that to work, and this goes to Glenn's question about what this, this trial run is, you have to have some kind of affirmative vision of where you want the global trading system to end up as you go into this.

Trump says he has one. We're all trying to work out what that could be. But if we're going into a fundamental crisis, we need to have a vision to third countries and to allies of what the end goal is we're trying to get to both during and after a Taiwan crisis that they can either live with or find attractive.

And if we don't have that, if there's no long term end in sight, we're going to find coordination incredibly hard, including, by the way, with the people of Taiwan. So that would be my response. But I want to leave the scenario question to Ike.

>> Hugo Bromley: There's many questions, so I just want to say two notes on this.

First of all, thank you. I completely agree on these institutional reactions on the scenarios. I think both of our views is that the most likely scenario is not an outright invasion. It's a blockade or something we might call a quarantine, which would be an attractive move for China precisely because it would put the burden of economic escalation on us.

So, I don't think that they would be trying to shut down TSMC. I think they would push that burden onto us because if we made the decision to shut down production at tsmc, devastating the economies of Japan, South Korea and others, our alliance management problem would become that much harder.

>> Speaker 4: This is great. You've used the word economic statecraft, which has been, as you know, the subject of a lot of debate around Hoover lately. And I like the way you're using it, how we prepare to survive a narrow crisis. Now, a lot of it, though, is preparing a larger thing.

And I'd like to get your thoughts and suggest some on this larger use of economic statecraft, which is a program of industrial policy, tariffs, subsidy decoupling, with a goal of win the strategic economic competition with China, whatever that means, not just get through war. Now, the economists have been a little bit suspicious of this program.

It brings a lot of what the Soviet Union tried to do for 70 years. It would lower GDP substantially, and it invites all sorts of wrap yourself in the flag protectionism. So a question and a suggestion. One is to this larger debate about how do we approach the competition with China.

 

I can't think of a successful historical example of a national security state, a state that walled itself off, tried to do it all by itself because of the coming, you know, got to make it through the coming thing. I think of, you know, Spain or many Latin American countries who put up huge barriers and never got anywhere under under national security guises.

Many more who tried to, you know, will put up barriers to import substitution. India for 50 years, that never worked. But whether is there a historical precedent to the national security, the comprehensive economic statecraft for national security other than the Soviet Union, that worked. And the suggestion which is, I think, something I want to celebrate in what you do, you have something to say to this larger debate.

So one of the important things to containing the spread of protection to everywhere is the insistence on specific scenarios. So if we're gonna protect the goose down industry. I was once a year young man and had to work on the goose down national security case because we don't want our boys fighting the Ruskis up in Canada to have to have goose downs.

The specific scenarios, when we think about, we're talking about we need to bring rare earths home to fight war because F35 batteries need lithium. Well, you know, how long is the war going to last? You actually need to mine your own stuff to make all the batteries that go into electric bikes so the F35s will fly.

If the war is only a month or two, maybe you don't. So specific scenarios I think is very helpful to that larger debate, and of course that I think the larger debate we need to discipline it by limiting to things that plausibly matter in this specific scenario. I mean Chinese bicycle imports don't really threaten our ability to fight the war with Japan unless you're big into some.

We're gonna fight some nebulous mere cantalist war. And my final if you're going to subsidize stuff, put it on the defense budget has been my favorite suggestion. Guys, do you want a chip plant? Do you want 10 aircraft carriers? Up to you. There seems to be grand excuse to throw all sorts of stuff off the defense budget.

Anyway, your comments have a

>> Speaker 6: $100 billion in the defense budget has nothing to do with national security.

>> Speaker 4: Well, did that too. Anyway, this larger sense of economic statecraft and how your Narrow crisis management fits into that.

>> Eyck Freymann: Yeah, okay. Part of the end of your question is a conversation about the definition of criticality, which is up there.

I'll leave that one to Ike. I got to take your first question though, because it tees up my book and like any good academic, I love to plug a book. No, there is no significant example of a complete security state. But the state that I did my PhD on, work on, think about, is Britain before and during the Industrial Revolution.

 

And my answer to you would be no, there isn't. But it is a fact of statecraft rather than economics that in times of great power competition, the balance of political decision making moves and that national security, what we would now call national security officials, they certainly weren't called that in the early 18th century, play a greater role in in these decision making processes and you would call it wrap around the flag.

Patriotism and protectionism plays a greater role in these decision-making processes in democracies that is almost certainly cannonballs in the UK.

>> Speaker 4: It's not obvious we got to make the port in the uk.

>> Eyck Freymann: Exactly. And it's funny you should go to that because that is a classic example of this.

So if you look at the famous Ricardo Cannibals port thing, that dates back to the Methuen Treaty. It was passed in 1703, it was the subject to comprehensive lobbying on all sides. It was also underpinned by a very small and no doubt economically inefficient protective tariff on Portuguese on foreign textile imports to the United Kingdom.

My point is not to say that any of these policies are good. They are not. My point is to go back to what we said earlier about decision making processes. We're in a world now in which national security officials and we're in a world of competition. What we have to work out is how can we get people onto the same page.

So that the perspective of an economist such as yourself, who can point out that maybe there is not a national security imperative in goose down is able to line up the conversation with the rest of the state. Britain did that incredibly imperfectly in the 18th century, but it was able to do that in a way that was meaningfully different to mercantilist France, which was the argument of my PhD.

>> Speaker 4: You have to agree that the competition is not who can export more to somebody else.

>> Eyck Freymann: Absolutely, absolutely. But that requires a joined up conversation. And that's what we're saying history can play a role in doing.

>> Hugo Bromley: And just one more thought in terms of what we mean by statecraft and how we mean statecraft differently from others who may use the term.

We are less interested in this sort of domestic political economy of who makes the goose down or whose trade deficit is what on in what year. But we're interested in the question of how you structure a coalition of states or I know this is a dirty word these days, an order for international economic exchanges that allows your state to protect its own national interests while acknowledging that other states have their own economic interests.

 

And I think what we're grappling with now is the collapse of an old order. And the question that we should be grappling with is what does this new order look like? Whose interests need to be taken into account? How should they be balanced? What is the common denominator if the old formula of a rules based system is no longer politically viable?

>> Speaker 6: Yeah, you're exactly correct. And I've had that situation several times in my career, and I know a lot of friends around here or former people around here have had that exact same situation. And then what really happens is you're asked to help and you're trying to help in a way that does the least damage to John's first best, etc.

So that's exactly what happens, is the national security team takes over.

>> Speaker 9: Here's the last question. Two comments, first one follows up on what John said. An area where economists do have something to offer is what makes a product critical. There is a literature that's developed rapidly in recent years, it tends to be very abstract.

But people looking at input output structures, trying to talk about the consequences of cutting off this industry line or another. I think there's a useful role for economists to say what should you be stockpiling in the event of a national emergency either within a particular country or within a coalition of countries.

David Bakke, his name came up earlier, has worked on that with others. So as Matt Jackson, this work tends to be written for economists thus far, and so there's a real need to translate. But getting those people involved would be useful.

>> Hugo Bromley: Great.

>> Speaker 9: The second thing is.

>> Speaker 4: What was the second thing?

>> Speaker 9: Second, I'm going to talk about this Matt Jackson. He said, he's a Stanford GSB. He's actually got a paper, I think on industrial policy and national security or something along these lines. And Matt is somebody who was on the frontier in many of these areas but does have the capacity to speak beyond economists.

So he's a good person to hook up with. The second thing I wanted to say is a real unknown in my, I think in how a future crisis might play out with China is how effective will the financial sanctions be that the United States has brought to bear on Russia?

And that's a very difficult question to answer. But if I were trying to answer that question, it seems to me the best way to do it would be a close study of how the financial sanctions have played out since 2014 in Russia. My impression, and there are people who work on this, Olak Skokie, Lena Rybakova among others.

 

My impression is that they were initially quite powerful, but that over time Russia was able to remove the dependency of its economy on dollar based trading systems and credit systems. And so that these financial sanctions became less potent over time. 1 I would imagine that China is at least as capable as Russia of building alternatives to dollar based payment systems.

They've actually sought to do that, you've already pointed out that their capital controls work against that effort. But looking back, and this is so looking at the Russian experience is something that would involve both historical analysis and economic analysis.

>> Hugo Bromley: Yeah.

>> Speaker 9: But would inform us as to whether these kind of tools might have much bite going forward.

>> Speaker 4: The central useful threat is not we'll stop you from using dollars, it's because you can use Bitcoin or something else. It's if you take Bitcoin from Russia, we will freeze you out of the dollar system in other transactions. And that's the one that can follow.

>> Hugo Bromley: That was just, yeah, yeah.

>> Speaker 7: Just to follow up on the question. Close, I was just back from a miniature of National European Central Bank where the conversation with deputy governors was exactly about the strategic and digital vulnerability of EU economies within the sanction war, proxy war against Russia. And so when you were talking about war games, and I mean the central bank agent is not only an agent that responds but would like to know how to cope with this vulnerability.

>> John Taylor: Was the customer related to what Steve and John both said? Since the 1920s, we've had a dollar based system in economy. The more that you spread sanctions, the dollar system was based on free trade and open financial markets for the dollars and property rights.

>> Speaker 5: The distinction in the two scenarios that Steve laid out is that the answer to Russia's problems has largely been China as the backstop for the economy.

China's China.

>> Speaker 4: And India buying oil, yep.

>> Eyck Freymann: Yep.

>> Hugo Bromley: Yeah, there we go.

>> Eyck Freymann: Kind of one.

>> Speaker 6: Seriously?

>> Speaker 4: Yeah. No, it's a serious threat.

>> Speaker 8: Thank you guys.

>> Hugo Bromley: Thank you.