Henry Farrell and Abe Newman on Weaponized Interdependence

SUMMARY

Paul Krugman interviews Henry Farrell and Abraham Newman, leading scholars on weaponized interdependence, to discuss how centralized economic networks and global choke points have become tools of international coercion. The conversation explores the evolution of these dynamics, their escalation between major powers, and the risks and complexities facing policymakers in a world of increasing economic confrontation.

MAIN POINTS

• Farrell and Newman introduce the concept of weaponized interdependence, explaining how centralized global networks like SWIFT can be leveraged for international coercion. [1:30]
• The discussion highlights the post-9/11 shift in U.S. policy, where the Treasury began using financial networks to enhance national security, leading to broader applications against various actors. [6:00]
• China and other countries respond to U.S. tactics by developing their own methods of weaponizing interdependence, particularly through rare earths and intellectual property controls. [11:00]
• Krugman recalls historical debates over Soviet gas pipelines to Europe, noting the erosion of norms that once limited economic weaponization. [17:00]
• The conversation turns to the U.S. strategy of targeting major financial institutions and the challenges posed by the rise of crypto as an alternative to traditional banking networks. [24:00]
• Unintended consequences of sanctions and the complexity of global supply chains are discussed, including the impact on European industries and the risks of undermining bureaucratic expertise. [30:00]
• The panel examines the proliferation of choke points in sectors like semiconductors, emphasizing the need for nuanced risk assessment and the dangers of a 'choke point arms race.' [37:00]
• Attention shifts to emerging efforts at international coordination, such as Canada-EU partnerships, and the potential for new frameworks to manage economic interdependence. [41:00]
• The structural challenges facing the European Union in balancing economic and security policies are explored, highlighting internal divisions and external pressures from the U.S. and China. [45:00]
• The discussion concludes with cautious optimism about the EU's long-term ability to adapt, despite current geopolitical and institutional obstacles. [47:00]

DETAILED ANALYSIS

Weaponized interdependence describes a world in which the deep, centralized networks that underpin global commerce—such as financial messaging systems, technology supply chains, and critical raw materials—are increasingly used as instruments of state power. Henry Farrell and Abraham Newman, who developed the concept, trace its origins to their research on privacy disputes between the United States and the European Union, particularly focusing on the SWIFT banking network. SWIFT, while headquartered in Belgium, became a focal point for U.S. influence due to American personnel on its board and mirrored data centers in the United States.

After the September 11 attacks, the U.S. Treasury shifted from protecting the global financial system from national security overreach to actively leveraging it for counterterrorism, setting a precedent for broader application against adversaries like Iran, China, and even entities such as the International Criminal Court.

The central insight is that global economic networks are not flat or evenly distributed; rather, they are highly centralized, with choke points often controlled by American companies or subject to U.S. legal jurisdiction. This centralization allows the U.S. to exclude actors from key systems or monitor their activities, as revealed in the Snowden disclosures. The resulting dynamic is not stable: as the U.S. weaponizes these choke points, other powers seek to develop their own tools for economic coercion or to insulate themselves from American influence.

China’s response is illustrative. While it initially used rare earth export controls in a traditional trade war fashion, it has since adopted more sophisticated tactics, mirroring U.S. export controls and creating its own entities list. This escalation extends to intellectual property and physical goods, as China restricts access to processing technology and rare earths, learning from U.S. methods and amplifying the cycle of mutual weaponization.

Norms that once constrained the use of economic choke points are eroding. Previously, actions like weaponizing the Strait of Hormuz or imposing extraterritorial sanctions were seen as beyond the pale, either due to the hegemonic power of the U.S. or the perceived risks and uncertainties involved. Many policymakers, both in the U.S. and China, act in response to crises rather than following a grand strategy, often improvising without fully understanding the potential repercussions.

This improvisational approach can lead to unexpected outcomes, as complex systems react in nonlinear ways. For example, U.S. sanctions on a Russian oligarch’s aluminum empire inadvertently threatened a critical Irish factory, disrupting German car production and forcing a policy reversal.

The proliferation of choke points is not limited to finance or technology. The conversation references historical concerns over Soviet gas pipelines to Europe, where American fears of energy weaponization were ultimately validated. Today, the same logic applies to rare earths, semiconductors, and other sectors.

The U.S. dollar clearing system remains a uniquely powerful network-based platform, but overuse of such tools risks long-term erosion of their effectiveness. While alternatives like the yuan or euro face significant political and institutional barriers, the rise of shadow fleets, crypto transactions, and other workarounds is gradually undermining U.S. coercive power. Even if only a small percentage of global commerce bypasses traditional systems, it complicates enforcement and reduces the deterrent effect of exclusion.

The U.S. strategy has often involved targeting major financial institutions—'whale hunting'—to induce compliance throughout the system. Recent efforts to domesticate crypto exchanges, such as the settlement with Binance, reflect attempts to bring new financial actors under regulatory control. However, the increasing integration of crypto into the global economy makes it harder to monitor illicit flows, eroding the credibility of U.S. appeals for international cooperation against terrorism and crime.

The discussion raises the prospect of a future in which global economic flows are concealed within clan-like networks, as depicted in speculative fiction like William Gibson’s 'The Peripheral.'

Policymakers face significant challenges in adapting to this new environment. Bureaucracies were not originally designed for the fine-grained manipulation of market relations required by weaponized interdependence. Objectives have shifted from counterterrorism to nonproliferation, technology competition, and beyond, often without adequate expertise or risk assessment.

The complexity of global supply chains means that sanctions or export controls can have far-reaching and unintended effects, sometimes undermining the very bureaucratic capacity needed to manage these tools effectively. The risk is akin to taking apart an airplane engine mid-flight: new threats are emerging even as institutional knowledge is being dismantled.

The conversation also addresses the dangers of a 'choke point arms race,' where states invest in duplicative capacity and industrial policies to secure domestic alternatives, potentially leading to inefficiency and economic fragmentation. The semiconductor supply chain exemplifies the multiplicity of choke points and the difficulty of assigning clear advantage, as critical components and intellectual property are distributed across the Netherlands, the United States, and Taiwan. Effective risk assessment and the creation of new norms are seen as essential first steps, but progress has been slow, particularly in the European Union.

International coordination is emerging as a possible solution, with Canada and the EU exploring mutual systems for economic resilience. However, the EU faces structural challenges: while it excels at internal regulation and market power, its security policies remain fragmented at the national level. This division hampers its ability to respond cohesively to external threats or to leverage its economic strength in the same way as the U.S. or China.

Despite these obstacles, there is cautious optimism that the EU can adapt over the long term, building more robust forms of globalization that balance risk, redundancy, and openness. The discussion concludes with a recognition of the EU’s achievements in defanging economic weaponization internally, but also a warning that external intervention remains within its capacity, as demonstrated by the freezing of Russian central bank assets during the Ukraine conflict.

Ultimately, the world is moving from a vision of seamless, benign interdependence to one where every external dependency is scrutinized as a potential threat. The challenge for policymakers is to manage this transition without succumbing to paranoia or inefficiency, and to develop strategies that recognize both the dangers and the opportunities of weaponized interdependence.

LINKS

• Paul Krugman's Substack post featuring the interview with Henry Farrell and Abe Newman on weaponized interdependence.

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