LEC7: Advanced Topics in Economic Warfare

Question 1

What are Dual-use goods?

Answer 1

Goods, software, and technology with both civilian and military application

Question 2

What is the problem with Dual Use Technology and Sanction Evasion

Answer 2

Smuggling

Objective: Russia would love to buy a dual use machine that is banned by sanctioning

Problem: US and EU banned export of dual use goods to russia

Scheme: Russians hired intermediaries to re-export to Russia

Question 3

What is the wider battle for russia?

Answer 3

oUnprecedented sanctions: > 20,000 sanction orders, including against the National Central Bank of Russia

oExport controls: > 900 legal persons added to U.S. Commerce Department’s “entity list”

oSWIFT* restrictions: Multiple Russian banks barred from using the world’s interbank messaging platfor

Question 4

What were the most important moments in global economic linkage?

Answer 4

Question 5

What were the most important neoliberalism policies in economic globalization in the late 20 early 21th century?

Answer 5

oFree trade/capital flows: Elimination of barriers to the import or export of goods or the movement of capital across borders

oDeregulation: Elimination or limitation of government regulations on economic activity

oPrivatization: Transition of state-owned enterprise to private industry

▪Washington Consensus: neoliberal policies were promoted by international organizations like the World Bank, IMF, and WTO

Question 6

What were the consequences of globalization?

Answer 6

o2008 Global Financial Crisis: Reduced confidence in deregulation
oInequality: Historic levels of income inequality exceeding the Victorian era
oJob Displacement: Offshoring has in many countries reduced economic opportunities for domestic workers (e.g., manufacturin

Question 7

What is the current state of globalization?/

Answer 7

The Second Wave of Globalization has, by at least some metrics, slowed down

Despite this slow down, we remain in an era where there are deep economic linkages ripe for weaponizatio

Question 8

What are the forms of economic warfare?

Answer 8

Question 9

What is economic warfare?

Answer 9

Using (or threatening to use) trade, finance, and other economic mechanisms to (a) reduce the power of another state and/or (b) force another state to undertake, cease, or alter some policy

Question 10

Explain the foundations of Economic Trade Theory?

Answer 10

Absolute Advantage: Situation where one country can produce a unit of good or service at a lower cost than another country
oSpecialization: countries should specialize in goods/services where they have an absolute advantage and tradefor those where they do not

Comparative Advantage: Situation where one country can produce a unit of good or service at a lower opportunity cost than another country.
oOpportunity Cost: Opportunity foregone by choosing one option over anotherDavid Ricardo

Question 11

What is the Comparitive Advantage?

Answer 11

Question 12

What are the implications of trade for security?

Answer 12

Exporting certain goods, services, or intangible assets can help other states develop:
oConventional weapons (e.g., firearms, tanks, munitions)
oWeapons of Mass Destruction (WMDs): nuclear, radiological, chemical, biological, or other device that are intended to harm a large number of people
oCyberweapons: malware, viruses, spyware, and other software/hardware used to engage in cyberattack

Solution: Export Controls

Question 13

What are the forms of Export Controls

Answer 13

• Unilateral and Multilateral

Unilateral Export Controls
▪National controls on the export of specific goods, services, and/or technology to another nation
▪Example: U.S. Advanced Computing/Supercomputing Interim Final Rule (AC/S IFR)
oTarget: China
oProvisions: Limits China’s access to advanced microchips and the materials necessary to manufacture those microchip

Multilateral Export Controls
▪Multilateral arrangements to harmonize export control lists and more effectively limit the export of certain goods

Wassenaar Arrangement: Established in 1996 near The Hague to coordinate international lists of “controlled goods”

Nuclear Suppliers Group: Coordinates controls among members to prevent the proliferation of nuclear weapons

EU Export Control Regime: Harmonizes export controls among EU states

Question 14

What is the history of export controls on china by the us.

Answer 14

Cold War: The U.S. placed export controls on Russia, China, and other Communist states with the explicit goal of slowing down their military capabilities

Reversal in 1990s: Clinton Administration, as part of a neoliberal policy push, reduced controls on the export of advanced technology (including to China)

Current Era of Great Power Competition: U.S. is seeking to maintain its technological lead over China and slow its progress as a rising power
▪Advanced Semiconductors
▪Artificial Intelligence
▪Quantum Computing

Question 15

What is the role of rims in trade wars?

Answer 15

Companies are caught in the crosshairs
▪ASML produces the world’s most advanced lithography systems for creating microchips
▪Trump administration placed pressure on Dutch authorities to prevent ASML from exporting its most advanced machines to China

But they are also political actors

Businesses generally oppose (and lobby against) export controls that do not suit their interest

Several U.S. chipmakers (e.g., Intel Corporation, Xilinx, and Qualcomm) lobbied against the [U.S. –China] tech war. Businesses’ underlying pursuit of profits and interest in maintaining global supply chains seemed to run counter to the state’s concern for protecting technology competitiveness and security.

Question 16

What are comprehensive and targeted sanctions

Answer 16

Question 17

What is the process of targeted sanctioning:

Answer 17

1. Listing of Entity or Sector
2. Legal Prohibition
3. Indirect inforcement

Question 18

What is the power of the U.S. Dollar

Answer 18

Bretton Woods: Postwar conference established USD as the world’s reserve currency (countries pegged their currencies’ value to US)

Question 19

What is the Eurodollar market?

Answer 19

Refers to the market for USD outside the U.S. (not about the Euro)

Enormous: >$12 trillion in value + >80% of trade and foreign exchange transactions occur in USD or USD-denominated Eurodollars

But Eurodollars are just entries on bank balance sheets which must be backed by physical dollars sitting in the U.S

Question 20

What is Correspondent Banking

Answer 20

Correspondent banking: Process by which Eurodollars are “cleared” through banks in the U.S.

Losing access is devastating for busines

Key point: U.S. sanctions cut targets off from the globalfinancial syste

Question 21

What are the implementation challenges of sanctions?

Answer 21

Targeted sanctions (even American) face implementation challenges
▪System is highly reliant on private financial institutions to enforce sanctionso

Conflict of interest: private firms may benefit financially from their relationships with sanctioned individuals or entitieso

$56 billion: Total fines imposed on private firms for Anti-Money Laundering and sanctions compliance failures from 2007-2022

Question 22

What is Weaponized Interdependence?

Answer 22

Weaponized Interdependence: states with political authority over the central nodes in the international networked structures through which money, goods, and information travel are uniquely positioned to impose costs on others (Farrell and Newman 2019)

Panopticon Effect: States that have physical access to or jurisdiction over hub nodes can use this influence to obtain information passing through the hub

Chokepoint Effect: Capacity of privileged states to limit or penalize the use of hubs by third partie

Question 23

What is the Panopticon Effect?

Answer 23

Panopticon Effect: States that have physical access to or jurisdiction over hub nodes can use this influence to obtain information passing through the hub

Panopticon Effect
▪Certain hubs offer exclusive access to strategically important information
▪Example: 70% of world internet traffic flows through “Data Center Alley” in Virginia
▪Leaks and reporting have confirmed that the U.S. National Security Agency (NSA) has obtained the capacity to surveil substantial portions of this global hub of internet traffi

Question 24

What are Supply Chains and Vertical and Horizontal Integration

Answer 24

Question 25

What is the Chokepoint Effect concerning Supply Chains?

Answer 25

But vertical and horizontal integration presents issues:

Expensive: Firms often find it economically prohibitive to vertically integrate

Concentration risk: Integration poses risks of monopolization which risks undersupply and artificially high prices for consumers
▪Solution: specialization to facilitate more efficient production of goods and services

Question 26

What is ASML’s chokepoint?

Answer 26

ASML chokepoint: Company has a complete monopoly on the world’s most advanced lithography systems

U.S. and Netherlands can choke off China’s access to advanced microchip production by imposing export controls on ASML’s producy

Question 27

Why does ASML comply with Dutch and US limitations to export?

Answer 27

Complex global supply chain: ASML machines require more than 100,000 separate components, many of which are exclusively made in the U.S.

oSanctions risk: ASML would not be able to trade for these components without access to the U.S. dollar clearing system and correspondent banking