Henry Farrell and Abe Newman on Weaponized Interdependence

SUMMARY

Paul Krugman hosts Henry Farrell and Abraham Newman to discuss the concept of weaponized interdependence and its implications for global economic and security dynamics. The conversation explores how centralized networks and economic choke points are increasingly used as tools of international coercion, with a focus on the evolving roles of the United States, China, and the European Union.

MAIN POINTS

• Farrell and Newman introduce the concept of weaponized interdependence, highlighting how centralized networks like SWIFT can be exploited for geopolitical leverage. [2:00]
• The post-9/11 shift in U.S. policy led to the Treasury Department actively leveraging financial networks for national security, reversing its previous protective stance. [7:00]
• China adopts and escalates the use of export controls and intellectual property restrictions in response to U.S. actions, normalizing the weaponization of economic choke points. [11:01]
• Krugman recounts historical concerns over Soviet gas pipelines to Europe, illustrating how norms against economic weaponization have eroded over time. [17:00]
• The emergence of alternative financial routes, such as crypto and shadow fleets, undermines the effectiveness of U.S. dollar-based sanctions and creates 'dark spaces' in the global economy. [22:01]
• The discussion turns to the risks posed by the rise of crypto and the potential for a fragmented, clan-based global order where financial flows are increasingly opaque. [27:02]
• The complexity of global supply chains and the proliferation of choke points mean that even minor players can wield significant economic power, complicating policy responses. [31:01]
• Farrell and Newman emphasize the need for risk assessment and strategic management of interdependencies, rather than simply seeking to duplicate capacity or engage in a 'choke point arms race.' [37:02]
• Efforts by the EU and Canada to build mutual economic security systems are highlighted as possible models for more robust international coordination. [41:01]
• The institutional structure of the EU, with its split between economic and security competencies, creates challenges for coordinated responses to weaponized interdependence. [46:00]

DETAILED ANALYSIS

The discussion begins with an exploration of the origins and definition of 'weaponized interdependence,' a term developed by Henry Farrell and Abraham Newman to describe how states exploit centralized global networks—such as financial messaging systems or supply chains—as instruments of coercion. The SWIFT network, central to international banking, serves as a primary example, illustrating how the United States leveraged its influence over key nodes to exclude adversaries like Iran from the global financial system. This approach relies on two core conditions: the existence of centralized choke points within global networks, and the ability of a powerful state to exert control over those points, often through legal, institutional, or technological means.

The conversation traces the evolution of U.S. policy, particularly after the September 11, 2001 attacks. Prior to 9/11, U.S. Treasury officials often resisted national security demands that threatened the stability of global financial systems.

However, the attacks prompted a dramatic shift, with the Treasury and other agencies increasingly viewing financial networks as tools for counterterrorism and broader strategic objectives. This institutional transformation enabled the U.S. to impose sanctions, monitor transactions, and exert pressure on both state and non-state actors, setting a precedent for the use of economic networks as instruments of statecraft.

Farrell and Newman note that this dynamic is not static. As the U.S. and other powers weaponize choke points, targeted states adapt by developing their own tools and strategies. China, for instance, has mirrored U.S. export controls by creating its own entities list and leveraging its dominance in rare earth processing to restrict access to critical materials.

The normalization of such tactics has eroded previous norms that discouraged the use of economic interdependence as a weapon, leading to an escalatory environment where multiple actors seek to identify and exploit vulnerabilities in global networks.

The discussion highlights the complexity and unpredictability of these processes. Policymakers often act without full information, improvising responses to crises rather than following grand strategies. This improvisation can lead to unintended consequences, as seen in the ripple effects of sanctions on interconnected supply chains.

For example, U.S. sanctions targeting a Russian oligarch inadvertently threatened a key aluminum factory in Ireland, essential to German car manufacturing, forcing a policy reversal. Such incidents underscore the challenges of managing complex systems where actions at one node can have far-reaching and unforeseen impacts.

Krugman provides historical context by recalling debates over Soviet gas pipelines to Western Europe during the Reagan administration. At that time, legal and normative constraints limited the use of economic sanctions, but these barriers have since weakened. The proliferation of choke points extends beyond finance and technology to include physical goods and critical infrastructure, with even smaller economies like Canada possessing unique leverage in specific sectors.

The rise of alternative financial mechanisms, such as cryptocurrencies and shadow fleets for oil transport, further complicates the landscape. These 'dark spaces' allow actors to circumvent traditional networks, reducing the effectiveness of U.S.-led sanctions and eroding the credibility of the global financial system. The Biden administration's attempts to regulate crypto exchanges and integrate them into existing compliance frameworks reflect ongoing efforts to reassert control, but the growing fragmentation of financial flows poses significant challenges.

Farrell and Newman warn of the dangers of a 'choke point arms race,' where states respond to perceived vulnerabilities by duplicating capacity, imposing tariffs, and pursuing industrial policies aimed at reducing dependence on foreign actors. While some redundancy can enhance resilience, indiscriminate efforts to localize production or control supply chains risk inefficiency and may not address the underlying complexities of global interdependence. Instead, the authors advocate for systematic risk assessment and the development of norms and institutions to manage interdependencies more strategically.

The European Union's experience illustrates both the potential and the limitations of collective action. Internally, the EU has succeeded in defanging economic weaponization among member states, but its ability to act externally is hampered by the division of economic and security competencies between EU institutions and national governments. This institutional fragmentation makes coordinated responses to external threats difficult, especially as the U.S. and China pursue divergent strategies and seek to influence European policy.

The conversation concludes with a recognition of the need for new forms of international cooperation and governance to navigate the risks of weaponized interdependence. While efforts by the EU and Canada to build mutual security systems are promising, the path to a more robust and resilient globalization remains uncertain, complicated by political divisions, shifting objectives, and the inherent messiness of complex global systems.

LINKS

• Henry Farrell's personal website
• Abraham Newman's profile at Georgetown
• Seminal 2019 paper on weaponized interdependence by Farrell and Newman
• Book: Underground Empire by Henry Farrell and Abraham Newman

KEYWORDS