October 8, 2024 • 65 mins
In the debut episode of Coercive Capital, Elaine Dezenski hosts Juan Zarate, who served as the Deputy National Security Advisor for Counterterrorism in the George W. Bush administration and is also the Co-Founder and Chairman of the Center on Economic and Financial Power at the Foundation for Defense of Democracies. In a wide-ranging discussion, Elaine and Juan discuss today’s economic security landscape, America’s complex and vulnerable relationship with China, and the growing weaponization of trade. They also discuss transparency, ally-shoring, and new economic alliances as well as the critical role that private capital and American companies play in the global economic realignment that is shaping our world.
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Speaker 1 (00:00):
Coercive Capital is proudly supported by Hummingbird. Hummingbird is a
modern compliance platform designed to make financial crime investigations smarter, faster,
and more effective. Because today's financial criminals are sophisticated, savvy,
and agile, meaning the tools used to fight them should
be too. Learn Moore at hummingbird dot Co. Welcome to
(00:25):
Coercive Capital. I'm Elaine Dezenski. I'm excited to be launching
this podcast on the Illicit Edge Network. For over two decades,
I've led major initiatives and national security, anti corruption and
risk management at the Department of Homeland Security, the World
Economic Forum, and now at the Foundation for Defensive Democracies.
And with every episode, my goal is to provide you
(00:48):
with fresh ideas on the most pressing economic and national
security challenges of our time. We face a complicated set
of security threats, but we have many opportunities to address them.
Radical transparency in finance, trade and investment, and strengthening key
economic alliances and partnerships must be cornerstones of our national
security agenda. I'll speak with leading experts in the field,
(01:12):
those that have helped guide and shape this country's thinking
on national and economic security and those who fight the
good fight to keep America safe from foreign adversaries. One
such expert as Wanzerate, the former Deputy National Security Advisor
and author of Treasury's War, a book that documents the
evolution of the US Department of Treasury's role in economic
(01:33):
warfare in the wake of nine to eleven. In our
wide ranging conversation, one and I discussed today's economic security landscape,
our complex relationship with China, ally shoring, and the growing
weaponization of trade. Without further ado, let's get into it
with Wanzerate. I know a lot of folks are familiar
(01:54):
with your background and all the amazing work that you've
done as Deputy National Security Advisor for Combating Terrorism at
the White House under the George W. Bush administration. Prior
to that, serving as the Assistant Secretary for terrorst Financing.
I think you were the first person to have that job.
After nine to eleven, and since leaving government, you've been
(02:15):
an entrepreneur. You formed the Financial Integrity Network. Hard to
believe it was more than ten years ago. Of course,
that's now part of the K two Integrity family. You've
also served as an academic teaching for eight years at
Harvard law School and have many affiliations, including the one
that's closest to my heart, which is serving as co
(02:37):
founder and chair of the Center on Economic and Financial
Power at FDD, where I'm running the center as senior Director.
So wonderful to have you here.
Speaker 2 (02:47):
And by the way, that makes me feel very old.
Speaker 3 (02:50):
All that stuff feels long ago service.
Speaker 2 (02:54):
I got a lot of gray and less hair.
Speaker 1 (02:56):
But anyway, but you know, it's all good, and it
is I think helpful for this conversation that we can
go back twenty years. Hard to believe it's been twenty years,
but since that time when we were both serving in
the government after nine to eleven, you were at Treasury,
I was at Homeland, and you were charting some new
(03:19):
pathways with respect to how the government was thinking about
and continues to think about, dealing with nonstate actors, asymmetric threats,
the rise of authoritarianism. Now we're in a slightly different
moment here, this post COVID moment I might call it,
but I thought maybe it would be help for our
readers to root this conversation in the post nine to
(03:44):
eleven environment. So what we were facing really a generation
ago in terms of rethinking how to use economic and
financial tools to push back against a new class of
foreign adversaries. And starting there makes some sense because what
we're facing now in the toolkit that we have now
is largely based on a lot of that investment. But
(04:08):
we're also in a moment where we need to move
into a new phase of how we think about protecting
our systems. So maybe we can just kick it off
with kind of the basics around how you think about
this convergence of economic security and national security. What are
we facing today in terms of exposure, particularly exposure of
(04:31):
our economic and financial system to arising authoritarian threats. How
should we think about that convergence.
Speaker 3 (04:39):
Yeah, Elann, I'm so happy you have this podcast for
precisely these issues and themes, because I think the question
of our national economic security is now in many ways
taking pride of place as we talk about where geopolitically
and geoeconomically the United States sits and the challenges we
face with China and Russia shifting a lot is the
(05:01):
expansion of.
Speaker 2 (05:01):
Bricks, et cetera.
Speaker 3 (05:03):
But I appreciate you recognizing that you know a lot
of the fundamentals of what we're facing and how the
US government is dealing with. Those sets of challenges in
the economic and financial domain were set in that post
nine to eleven period, and I think it bears mentioning
some of the fundamental shifts that happened right after nine
(05:24):
to eleven.
Speaker 2 (05:26):
That really does set the stage then for where we
are now.
Speaker 3 (05:31):
And I think most people tend to think of nine
to eleven through the lens of that tragic day, the
horrors of terrorism, the challenges of al Qaeda, and that's right.
But one of the things we did at the Treasury Department,
largely due to the urging of the President, was to
think more aggressively about how we used US economic and
(05:55):
financial might, and I would even say suasion, the ability
to influence, to not just punish Kaita, but to isolate
them from the financial system and to find ways of
dismantling terrast networks, dismantling their financial infrastructure, and ultimately to
(06:17):
not allow terrorist groups like al Qaeda and others that
have global ambitions to use the financial system and capital
and the elements of the commercial system to our disadvantage to.
Speaker 2 (06:30):
Attack the United States. And so the question was how
do you do that?
Speaker 3 (06:34):
And in many ways, the US has asymmetric power. We
are the largest economy of the world, the most attractive
capital markets. The dollar is the chief reserve currency, the
chief trade currency around the world. What the US says
and does in the economic domain usually matters in the
(06:55):
international system.
Speaker 2 (06:56):
The rules of the road.
Speaker 3 (06:58):
And so we then set out a strategy to use
that system that power to isolate not just aw Kainda,
but other rogue actors, and ultimately became of the mantra
and the strategy and the Treasure Department that we want
to make it harder, costlier, and riskier for America's enemies
to raise and move money around the world. That was
(07:20):
what we were doing, and we wanted to do that
in a way that was systemic, that was global, and
that leveraged US power in this domain. What we recognized
Elane was this was going to be a domain of conflict, right,
a domain of influence and power that was fundamental to
national security.
Speaker 2 (07:41):
And you could.
Speaker 3 (07:42):
Already begin to see that the financial rogues, those that
were being excluded from the system were beginning to align,
whether it was terrorist groups, criminal actors, rogue states like
North Korea, they were going to try to evade sanctions,
evade controls use the system to their advantage, and we've
(08:03):
continued to see that over time, such that what we're
facing now, in particular with the rise of China and
the state authoritarian capitalist model, is in essence a challenge
of systems, and where not only the US is potentially vulnerable.
It's financial system, commercial system, cybertex, the kinetics of threats,
(08:26):
a lot of which you worked on, but also the
systemic threats, which is to say, do you have a
group of economies, do you have a system Chinese commerce
payment rails, new crypto payment ecosystems that begin to rise
in a way that not only evade US sanctions and
(08:48):
Western scrutiny, but start to alter the standards by which
international finance and commerce operate so that things like transparency, traceability,
accountability may not matter as much, things like corruption may
be more douragor in the international system, and where in fact,
(09:09):
these other actors are able to gain access to capital, goods,
technology in a way that harms US national security. So
we're at a place now where everyone is recognizing that
economic security is now fundamental to national security, and that
creates all sorts of challenges which we can talk about,
(09:29):
but that's where we are now. The post Nylem period
in many ways set the stage for it. We are
now right in the heart of an economic and commercial
struggle with some of America's adversaries and rivals.
Speaker 1 (09:44):
I think it's a perfect framing for getting into some
of the questions we're facing today. And you've alluded to China,
and I want to go down that pathway a little
bit more because one thing that seems very clear is
that the integration of our economy or US economy with China,
(10:05):
which for probably two decades was seen as such a strength,
has now taken on a different lens. And some of
this is certainly a response to the situation during COVID,
where it was clear that our supply chain resilience wasn't
(10:25):
what it needed to be. We couldn't get Ppe into
the country. We were worried about critical materials and supplies,
and we continue to be worried about that. But it's
a fundamentally different conversation than, for example, how we were
thinking about the Russia thread in twenty fourteen, or the
threat of al Qaeda in the early two thousands, because
(10:46):
we're in a different position. We have influence as massive
consumers of Chinese product, and that's something we should pull
on a little bit more, maybe a little bit later,
but means that the way we apply sanctions, export controls,
the tools of economic warfare are probably a little bit different,
(11:08):
and we may need new tools. So maybe we could
dig into that a little bit more, because really, China
is now driving so much of this conversation around economic
security and how we build that level of resilience but
also use the power that we have in the marketplace
in different ways. But it's from a consumer perspective. It's
(11:29):
not as the primary trading partner for most countries in
the world. So these dynamics have shifted and this brings
up some interesting challenges for us.
Speaker 2 (11:39):
Yeah, no, there's a lot in that question, Alane.
Speaker 3 (11:42):
You know, there's no question that the perception of China
and the economic relationship has shifted. Right the old paradigm
was we need to engage with China. We need to
get China into the international system, the World Trade Organization,
into FATA, into all all of the organs and systems,
in part to help them develop economically, but also to
(12:04):
open them up and also to create the entanglement that
would create elements of not just better relationships but also
dependencies which would create.
Speaker 2 (12:15):
Deterrent effects in the rest. And so that was.
Speaker 3 (12:18):
The paradigm for much of the last thirty years with
respect to China, and it frankly has led to massive
Chinese growth, massive investment in China, massive development of their.
Speaker 2 (12:31):
Manufacturing base, even their technologies.
Speaker 3 (12:35):
Huge advantage to China, but a recognition now that we've
moved to a different stage in part because of Chinese
behavior much more aggressive in the international domain, much clearer frankly,
as to what their ambitions are in terms of centralized
communist party control over the economy, over technology, over all
(12:56):
the elements of the national economy, to the point where
they've you know, they've cracked down on their tech giants
and their tech moguls. They've consolidated tech R and D,
for example in the quantum space. So we're seeing a
very different China internally and externally as they've grown more
aggressive in the South China see elsewhere. But a bears
(13:19):
mentioning in light of nine to eleven and where we've
been on sanctions, because in many ways the sanctions that
have been applied post nine to eleven were applied in
ways that were easier to apply if we were talking
about isolating actors from the international financial commercial system, because
you were talking about actors like O Kaida or maybe
(13:41):
even Hesblah or North Korea, or moving up to chain
Iran which was important to the oil sector but not
much else, and now Russia, which is a major G
twenty economy with lots of oil and lots of mineral wealth.
Speaker 2 (13:58):
And now the question of China.
Speaker 3 (14:00):
And so you've moved up the scale of targets, so
to speak, or of actors that have been the subjects
of sanctions and should be isolated, but incredibly difficult to
do with China. And so now the narrative with China
is how do we think about decoupling. That's now moved
to the narrative, how do we de risk, meaning how
(14:24):
do you unwind in ways that don't have us so
fundamentally dependent on Chinese supplies, supply chain, manufacturing. How do
we unwind so that we're not transferring our most exquisite.
Speaker 2 (14:39):
Technology, and how do we begin to.
Speaker 3 (14:42):
Restrict those things that China says that they need and
want for the advancement of not just their economy but
for their military. And they want that, and they say
explicitly in order to challenge the United States to push
us out of the region and in many ways to
re establish a new system along with its allies, including Russia.
(15:08):
And so we are now faced with a major global economy,
the number two economy in the world, one that's has
ambitions to be a technology giant, but also has military
and geoeconomic, geopolitical ambitions that in many ways are antithetical
to our interests. And so the question is, how then
(15:29):
do you constrain the Chinese economy without strangling it? And
how do you continue to have relations with a major
economy like China that we still rely on without giving
them unfair advantage in trade, in technology, and in capital. Yeah.
Speaker 1 (15:48):
Yeah, So the concept of ally shoring, or as the
Biden administration has turned it, friendshoring, is a really interesting
part of this, and picking up on your point about
decoupled or de risking, this idea of strategic decoupling across
as you say, the most exquisite technologies, the most valuable
(16:08):
of our advanced manufacturing opportunities, the areas where the jobs
will be produced in the future, bringing that back either
to our shores or working with democratic allies and partners.
Seems like it has to be part of this solution
because we're talking about a misalignment of rules and core values,
(16:33):
or at least that's my take on it, that is
driving this division in the marketplace. And you know, maybe
we need to be honest that it was always there,
but the fact that it's now weaponized at least I
think we would view it that way in terms of
how we've seen the Chinese Communist Party utilize its market
(16:56):
dominance right in ways that don't necessarily recognize the US
as a primary consumer of their goods and UH as
an integrated trading partner. You know, there are a lot
of threads here that are kind of working across purposes.
But at the end of the day, it seems like
creating a space where aligned partners and I'm talking about
(17:20):
democratically aligned UH governments have an opportunity to reinforce and
rebuild the trust around an open, rules based system that
that would be really important. And you know, maybe we're
at this point of a very serious rewiring of our
economic and UH financial trade trade systems. As a result,
(17:43):
it's also interesting that at this point the Chinese economy
is under some serious strain uh for the most part,
because they haven't been able to implement UH steady reforms
around their own systems. And you know, they're facing some
serious headwinds demographic headwinds, slow growth internally, this lack of
(18:09):
a consumer market to pick up a lot of the demand. Right,
So there's this focus on export driven growth, but it's
becoming harder and harder for them to manage that. So
this is also where as a major consumer of Chinese product,
the US and Europe as well. I think there's a
(18:30):
real opportunity to align the fundamentals around how we manage
this and bring a little bit of balance back into
the relationship. But easier said than done.
Speaker 3 (18:40):
Yeah, and I think we can get into the weakness
of the Chinese economy and system a bit more because
I think there are those who are are now saying, look,
you are you are seeing the decline of the Chinese
economy in a way that uh, you know, is happening
in a fast, sure way, in a more fundamental way
(19:02):
than most had anticipated.
Speaker 2 (19:04):
So I think I think this is China isn't a
ten foot giant.
Speaker 3 (19:08):
And I think all the indicators, whether it's foreign direct investment,
all the challenges on supply chain, consumer demand internally, the
real estate market, the the you know, the difficulties they're
having across the board, on debt at the local level.
You know, all of the fundamentals within China are creaky
(19:29):
or cracking.
Speaker 2 (19:30):
Uh. And I think that's that's really important to keep
in mind.
Speaker 3 (19:33):
This is not a this is not a ten foot giant,
and they're not poised to be the number one economy
in the world.
Speaker 2 (19:39):
The US still is.
Speaker 3 (19:40):
This still is the American century if the US handles
as properly and continues to grow and to handle its
fundamentals right. But I've given you a question. I want
to take a step back because for the listeners, I
think they may wonder, like, well, we're talking about a
lot of different things. We're talking about supply chains, we're
(20:01):
talking about sanctions, et cetera. I think one way of
thinking about, you know what we're talking about. And frankly,
I think a lot of the topics you're going to
cover in your podcast series over time is kind of
the spectrum of arenas, if you will, in the financial
and economic domain that are now subject to this conflict
(20:25):
and competition, largely with China.
Speaker 2 (20:28):
By China, but not just China.
Speaker 3 (20:29):
It's Russia, it's Iran, it's other actors, and it's the
full spectrum of things that you may not have ever
considered as part of national security. There are things like
sanctions that have always sort of been in the national
security orbit. The things like the anti money laundering system,
which requires you know, the banks and authorities to know
(20:52):
who and what is moving money in through the system,
so to speak. Right, there's the anti corruption system, which
you know, from a US perspective, tries to discipline the
markets so that it's not corroded by corruption and other
externalities that are not only deteriorating a society or a system,
(21:13):
but making things unfair.
Speaker 2 (21:15):
In the marketplace.
Speaker 3 (21:17):
Then there are things like export controls, which have taken
on even more importance in the Russia context because and
in China, because we are trying to restrict, for example,
high end semiconductors so that we can maintain an advantage
in that space and in the military context, and so
(21:39):
export controls now have an important role. You now have
investment security, both inbound and outbound. That is to say,
restrictions on who can own what in the US that's
through the Committee on Foreign Investment in the US that.
Speaker 2 (21:54):
Is that's been in existence since the seventies, but.
Speaker 3 (21:58):
Has taken on a more dominant role in protecting the
US system because we don't want the Russians, or the Chinese,
or the Venezuelan generals or the Iranians hiding their hand
to own sensitive technologies or properties, for example, next to
military facilities.
Speaker 2 (22:18):
And so there's more restriction.
Speaker 3 (22:19):
There, restriction on the outbound, both in Congress and from
the White House, restrictions on how US capital, this is
private investment can invest or what it can't invest in,
in particular in China, things like semiconductors, lasers, quantum computing AI,
(22:40):
and then trade and then supply chains, and so there's
an entire spectrum of activities and authorities that are now
implicated by everything you're mentioning Elaine. And with China, it's
the hardest problem, right because you have the entanglement of
the economies. You have a major economy that has its
(23:03):
own weight and.
Speaker 2 (23:05):
Gravity onto itself.
Speaker 3 (23:06):
And so the question is how do you use some
of these measures, if not all of them, to constrain
what we consider to be Chinese behavior that's dangerous or
threatening and that means everything from suppression of the wigers
in western China and use of slave labor in the
(23:28):
cotton fields, to suppression of human rights in Hong Kong,
to threatening our allies the Philippines and Japan in the
maritime context, or more broadly, their attempts to be the
dominant player in the most exquisite technologies in the world
for purposes of the military. So that then sets the
(23:51):
table for we shouldn't have deep dependencies on China. We
should find other ways of creating resilient in our supply chains.
To your point, we need to find more creative ways
of creating networks and alliances that benefit those that want
to trade and work with us and may not necessarily
(24:14):
want to trade or work with or may want to,
but have to find an alternative.
Speaker 2 (24:18):
And we've seen that in the Middle East and other places.
Speaker 3 (24:21):
And frankly, how do we find other ways in the
context of what's happening with deglobalization to take advantage of
reshoring and ally sharing and Elaine, there's been nobody better
than you.
Speaker 2 (24:33):
Doing work on this.
Speaker 3 (24:34):
So for the listeners interested in this idea of ally
shoring or friends sharing, I would look to Elaine Dozinski's
scholarship on this first and foremost, but the idea here
is essential because we have to think differently about alliances,
and alliance is not just in a military context like NATO,
but in the context of economic, financial and technology networks
(25:00):
and investment and alliances that we need to reinforce not
just the US economy, not just to counter bad behavior,
but also to drive, as you said, the norms and
the rules of the road, so that the rules aren't
being defined by the Chinese and the Russians, They're being
defined by those actors that want a transparent, traceable, accountable system.
Speaker 1 (25:23):
This is such a multi layered, complex domain, and you've
done an amazing job over the last few minutes making
the connection points across the threats, the tool set, the
challenges of working within this integrated global economy. Maybe we
can pick up a little bit on this question of
(25:45):
how we define an economic alliance because this also raises
some interesting questions, you know, when we talk about an
ally and this was actually something that came up when
I started writing about ally shoring four or five years
ago together with John as In at the University of Michigan.
Now at the Eisenhower Institute. We were really thinking about this, uh,
(26:05):
you know, application of the concept of ally, and you know,
we thought about, well, maybe we should call ally showing
something else. Maybe using the term ally is just too
loaded in this context. You know, we know what that means.
In the military defense space, we know what a natal
ally is. For example, we know what a five eye ally.
(26:26):
We have five of them, you know, there are five
in the group, and there is such an alignment around
the not only the way that threats are perceived, but
also the way that systems become integrated and information sharing
becomes core to a group of of of military allies.
(26:46):
In the economic space, some interesting questions arise. For example,
do we consider Mexico to be an economic ally? I
would make a strong pitch that we do. Now does
that mean that all the rules and norms align. Some do,
most do, and we have a free trade agreement that
(27:06):
that reinforces, but not always. We have to make a
distinction between what an alliance looks like in an economic
realm versus what a partnership or even a friend. I'm
not a huge fan of that term friend shoring because
I think friend means something different. Friends maybe come and go,
I don't know. Alies don't. But you know, this is
(27:27):
this is a question, and you know, maybe we need
to come up with that very succinct definition of what
economic ally really means. But then again maybe it just depends.
So what are your what are your thoughts on that?
Speaker 3 (27:41):
Well? The use of the term friend reminds me of
the old saying if you want a friend.
Speaker 2 (27:45):
In Washington, get a dog.
Speaker 3 (27:47):
I think. I think if you want a friend in
international relationships, find an ally. I don't know, but in
any event, I think you're right, and there's there are
there are several layers to because there's a fundamental question about,
in the first instance, what do we mean by an
American company? Right, because there are so many multinational dimensions
(28:12):
to a global enterprise. One base in the US, but
may have lots of subsidiaries and entanglements internationally, vice versa
with international companies that have a huge US presence from
a manufacturing perspective, not to mention, then you're talking about.
Speaker 2 (28:30):
Investments and capital from all sorts of places.
Speaker 3 (28:33):
So the first question is often very hard, which is, okay,
what do we mean by an American company? Some of
that's easy to divine, sometimes not. Then there's a question
of you know, how should we be thinking about engaging
in the world on these issues. I'll give you an
example of this where the US ran into trouble in
(28:54):
part because it didn't have an American company or technology
you're champion, and that was in the five G context,
where during the Trump administration they rightly I think and
I think we were late as a US government on
this started to raise concerns around Huawei and Huawei embedding
into the telecommunications infrastructure all around the world, including in
(29:19):
key allies, including in the UK, potentially including in Mexico,
and the question.
Speaker 2 (29:27):
Then was what do you do about it?
Speaker 3 (29:28):
In part because Huawei is offering a service, is offering
a technology, a capability often cheaper than anything else in
the marketplace. And the question then was, Okay, if you
try to rip and replace Huawei, what do you replace
it with?
Speaker 2 (29:47):
And Elaine the answer was not an American company.
Speaker 3 (29:50):
It was Ericson and other options, Nokia.
Speaker 2 (29:54):
Or other things.
Speaker 3 (29:56):
That I think was an important lesson for US policy makers,
which is, if we're going to engage in the international economic, financial,
and technological sort of domain, we're going to have to
think differently about what an ally means and frankly, what
our interests mean in this context, and that therefore, in
(30:21):
my mind, means we've got to think differently about our allies,
because we're not going to do everything you need to
do in a global economy in the United States. Right
We're going to have to have mining of rare earth
minerals in Chile, in the Democratic Republic of Congo, in
parts of Central Asia. We're going to need refinement of
(30:42):
whether it's oil or lithium or copper. In different parts
of the world. We're going to need shipping lanes and
transport that is assured and goes through allied territory and
can't be choked off by enemies in different parts of
the world. And so we're not going to be able
to do that all through American companies, US government investment,
(31:07):
or American control in a classic sense. But you can
begin to do that with allies who have capabilities, interests,
and are maybe even more geographically.
Speaker 2 (31:21):
Well situated to do these.
Speaker 3 (31:23):
Kinds of things, especially when you're talking about logistics and
supply chains. So I think you're spot on that we
need to think very differently about what allies mean and
in the North American context, Canada and Mexico. I think
that's not only an incredibly powerful set of economies and
trade relationship, but we need to think of that as
(31:44):
a whole.
Speaker 2 (31:45):
And this is why you've seen tension around.
Speaker 3 (31:47):
Well, let's make sure the Chinese aren't trying to do
an end around to some of our laws and restrictions
by you know, basically rebranding China these manufactured goods through
Mexico or through Canada, or playing other games with marketing
(32:08):
and labeling of their products. So I think it's very important,
and frankly, this debate is happening, and you see it
in the marketplace with manufacturing moving to other places other
than China. Certainly new investment and including old investment moving
places like Vietnam, India, even Mexico, and a lot of countries,
(32:30):
not just the United States, but Europe now coming to
grips with the fact that it's overly dependent on China
and it doesn't want to be.
Speaker 4 (32:39):
Winston and Strawn is an international law firm that, for
more than one hundred and seventy years, has served as
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Speaker 1 (34:54):
In this segment, we delve deeper into the Chinese economic
model protecting US strategic supply chain in the alignment of
private capital. Getting back to this core question about allies
and partners, maybe starting small or starting with a couple
of cases where we can build on the framework we
already have in place through free trade agreements, through alignment,
(35:14):
and then build that out over time, but recognizing that
it's also a long term play.
Speaker 2 (35:20):
Yeah, I think you're right a lane.
Speaker 3 (35:22):
And the challenge here is in the global free trade
system that paradigm. US companies for the most part have
not cared much about elements of the supply chain where
they got you know, the component parts or the minerals
(35:43):
or or you know, as long as it was efficient
and it met their needs, it didn't really matter. What
the Chinese have done with their model and their economic model,
and you see this in the EV context, is really
to create the efficiencies around not just production of the
(36:04):
cars or even batteries, but the aligning the entire supply
chain so that what they have done successfully is to
from sort of tooth to tail, from point of origin
of the material all the way to production and sale.
The Chinese are in control of it, or at least
(36:24):
have strings and levers that they can pull in some ways.
Speaker 2 (36:29):
That's a very different model. At the initial stage.
Speaker 3 (36:34):
It may be inefficient, but at the end of the day,
it may allow them to control costs and access to
supplies in ways that Western companies aren't aligned to do.
Western companies are dependent on suppliers and others that they
may not own or control. And so that's that's one
fundamental difference. That's that's fascinating, which then underscores your point,
(36:58):
which is, if if Europe or if the United States
wants a competitive EV market or solar panel market, or
you know, pick your technology, how is it thinking about
its supply chain and the origins of the goods that
it needs. The military is certainly doing this now, and
(37:22):
you've seen this in legislation and in DD reviews, where
they're having to look very carefully at their supply chain,
whereas again in the past thirty years they didn't really
have to worry so much about it. They would get
their titanium from Russia. Is it so clear that we
can get a titanium.
Speaker 2 (37:40):
From Russia in the future.
Speaker 3 (37:41):
I'm not sure If we need rare earth minerals ninety
six percent of which come from China, are we going
to get access to those that we need for our
batteries or our military equipment or high tech implements.
Speaker 2 (37:56):
Maybe not right, And so.
Speaker 3 (38:00):
To inspect for the high end national security reasons, but
also for our economy, what are the supply chains that matter?
And how should we think about those networks that then
are fundamental to the ability to produce and the ability
to compete, And to your point of lane, it then
becomes really important to think about how we leverage allies,
(38:23):
how we leverage comparative advantage in the marketplace with our friends,
with our allies in a way that allows us to
not have to do everything, to not have to have
US capital investing in everything, but to have at least
the ability to have access to the things that we
need and the supply chains.
Speaker 2 (38:42):
And again it's not everything everywhere in.
Speaker 3 (38:44):
The world, but those things that we think are strategic
and that are necessary to kind of the future of
the economy and the future of sectors that we think
are important. We then need to start unpacking where are
the material is coming from, where they refined, how are
they transported.
Speaker 2 (39:02):
Who owns and controls.
Speaker 3 (39:05):
That that chain of events, the supply chain, and how
do we get in the middle of it. And frankly,
private capital is starting to move in this direction with
a bit of help from the US government. But you
see this, for example in the investment private investment in
Subic Bay in the Philippines where.
Speaker 2 (39:26):
The US and as it's been kicked out, sort of
welcome back but there was a.
Speaker 3 (39:31):
There was a question of how the investment in Subic
Bay would follow, whether not Chinese investment would come in
or something else. You had American private investors come in
and invest in Subic Bay in order to take that
strategic port in many ways and put it onto our
side of the ledger. So those are the kinds of
(39:51):
things that I think are starting to happen, but it's
not happening at scale, And certainly it's your scholarship and
those of others that are st already to eliminate where
we need to do this more fundamentally.
Speaker 1 (40:03):
So the question of capital alignment is such an important
topic and I want to dig into that a little
bit more. Subig Bays is an excellent example, and certainly
there are more opportunities where we can think about asymmetric
investments to break a choke hold within a supply chain. So,
(40:24):
going back to some of the ev research that we're
going to soon publish, one of the key issues is
the price the question of price volatility around critical minerals
and how when you have a dominant position in terms
of extracting critical minerals or even more importantly, processing those
minerals like China does. It gives that government incredible market
(40:50):
power to set prices in a way that keep competitors out.
We fundamentally can't compete against state subsidized model, and then
that pricing dominance becomes even more problematic over the long
term as prices start to rise because there are no competitors,
no alternative sources, particularly for processing. So yeah, we definitely
(41:13):
have to get a handle on this and think about
where we can provide incentives, where we can push back,
whether that's through tariffs, other types of controls to allow
for a new ecosystem to come into play. Otherwise it's
going to be very difficult for us. But on the
other hand, dismantling this full vertical integration of these industries
(41:38):
that China has built up may not be necessary if
we can go at it in a more strategic way
and kind of break off those points of the supply
chain where that that risk becomes really problematic for the
US or for the US and its allies. So every
supply chain looks different. I think that's part of the
challenge and it becomes a mental task. But the upside
(42:02):
to all of this is if we can identify more
clearly where The risk is it also provides a bit
of a roadmap to private capital right to be able
to invest in those areas where there's a huge opportunity
not only to create a new ecosystem, but ultimately over
time to drive some real investment and profit. And so
(42:25):
this kind of raises the question, right, how do we
use these tools in a way that supports the kind
of open market, rules based system we want, but without
becoming so heavy on industrial policy that we end up
with something like the Chinese system where there's a tremendous
amount of subsidy, but also a private sector that really
doesn't exist as we think of the private sector, or
(42:48):
you know, certainly not as it used to.
Speaker 3 (42:51):
Yeah, I think this is a fundamental challenge of the
twenty first century for the United States and in our system.
That is to say, how do we align private sector interests,
private capital, private technology innovators in a way that does
not have the US government co opting, owning, or controlling
(43:16):
those interests. And you do not want the US system
to become a state authoritarian system. You don't want an
aggressive industrial policy where the government is picking all of
the winners.
Speaker 2 (43:30):
And its champions.
Speaker 3 (43:32):
But it's hard because I think all of US applauded
and you know, heralded the Chips Act, which is the
US government's sort of investment in the semiconductor industry in
particular to reinforce manufacturing in the United States. Much, if
(43:54):
not all, of all that investment it seems to be
going to Intel, and you know, in many ways, Intel
has become the US semi conductor champion, right, And this
starts to then look like the French system, the Japanese system,
where you have industrial policy that really is driven through
one or two state champions per industry or sector. We
(44:16):
want to I think we don't want to kill the
golden you know, the goose that laid the golden egg. Here,
the golden the golden goose in terms of the US system,
the innovation that comes from it by then imposing the
US government in different ways.
Speaker 2 (44:34):
On the other hand, the US government can be incredibly
helpful in.
Speaker 3 (44:40):
Spotlighting where there are needs for particular capabilities.
Speaker 2 (44:45):
If not capital.
Speaker 3 (44:47):
This is why what was then called OPIC is now
the Development Finance Corp. Was expanded to try to in essence,
expand the US government insurance around particular investments around the world.
It's why XIMBANC was reauthorized in a fairly aggressive way
(45:08):
with a focus on China work that you have done,
Ambassador Dobriyanski has done and others really effectively. It's why
DoD IS established capabilities and funding on the tech side.
So I think I think the US government is trying
to figure out how to align private sector interests without
(45:30):
crossing the line.
Speaker 2 (45:32):
And that's a great area.
Speaker 3 (45:33):
That's not an easy answer, and it's one that's subject
to a lot of debate, especially when you start getting
to industrial policy or you get to these kinds of
sectors or capabilities like mining of rare earth minerals that
is really expensive, hard to do, rife with other regulatory
(45:55):
issues like environmental issues for example in Nevada or the West,
And so how do you align all of that to
get the access to the capabilities that you need. That's
not easy, and this takes a lot of I think,
grappling in a different way with.
Speaker 2 (46:13):
Our national economic security, you know. And I think, again,
we don't have to think of this alone.
Speaker 3 (46:20):
And I think this is a bit of a challenge
with some of the legislation that very much wants US
based manufacturing US origin goods at a certain point, we
have to think about how we let our allies into
that system, and there are allowances for that, but also
how we think about that internationally, because it may be
(46:42):
that the most efficient access to rarest minerals isn't in Nevada.
Maybe it might be in Australia or maybe in some
part of Europe where we can get access efficiently, but
we may not have to do it necessarily in the US.
Speaker 1 (47:00):
Bring in a couple of cases that I thought would
be interesting to highlight some of the challenges that we've
been talking about and how we're thinking about applying tools
like sanctions, for example, and when the rollback of those
tools might actually serve a greater purpose. So picking up
on the critical minerals thematic and some of the conversations
(47:21):
underway around Dan Gertler, who's a heavily sanctioned individual in
Israeli involved in critical minerals for many, many years, sanctioned
in twenty seventeen along with many others for a lot
of corrupt practices in the DRC, and now there's some
(47:42):
discussion about potentially lifting those sanctions in exchange for Girdler
agreeing to sell off his royalty streams from some of
these mining operations. What do you think about that? And
this idea that not only do we need to think
about implementing these tools like sanctions, but where there's strategic
(48:02):
opportunity to roll them back because we've achieved something even
more valuable in the process of levy these sanctions.
Speaker 3 (48:12):
Lane, I'm glad you raised this case because it's fascinating.
I think it raises three different elements that are relevant
to our discussion. Really important one is it raises this
question of how do you unwind sanctions in a way
that is strategically advantageous to the United States. And this
(48:34):
is something I've been writing about, We've been talking about
for a long time, which is we often think about
sanctions in a fairly static way.
Speaker 2 (48:41):
You know, it's an on off switch.
Speaker 3 (48:42):
You're either imposing a sanction or not, and when you
do it, you kind of move on to the next sanction.
Speaker 2 (48:48):
As opposed to sanctions as a continuum of influence.
Speaker 3 (48:51):
And the way I've described kind of the financial and
economic landscape, especially with sanctions, is it's about shaping the
the environment. It's about shaping the risk environment in which
market actors are playing, and that isn't just about one action.
It's about a series of actions, including unwinding at the
(49:11):
right moment with the right conditions in a way that
advantages the US interests.
Speaker 2 (49:16):
And so that's that's an.
Speaker 3 (49:18):
Important question, how do you unwind in a way that
meets our interests and doesn't do.
Speaker 2 (49:24):
Damage to what we were trying to do initially.
Speaker 3 (49:27):
Two, it emphasizes the fact that the anti corruption sort
of agenda, which you've been a part of for as
long as I've known you ling, is really a fundamental
part of this national economic security environment.
Speaker 1 (49:42):
Right.
Speaker 2 (49:42):
This isn't just about how do you.
Speaker 3 (49:44):
Apply the Foreign corupt Practices Act or the Anti Briber
Act from the UK.
Speaker 2 (49:48):
This is about strategically how our sanctions anti kryptocracy measures,
you know, law enforcement tool of how are those being
applied in a way that strategically matter.
Speaker 3 (50:03):
That's why the Global Magnitsky Act was passed to look
at human rights and corruption.
Speaker 2 (50:10):
Actors around the world have been applied globally.
Speaker 3 (50:13):
It's why Dan Gertler's sanction and so this case raises
the question of how do you deal with sanctioned actors
that are sanctioned because they're corrupt and they're not being
prosecuted for it, right, Sanctions aren't prosecutions, and so what
do you do in.
Speaker 2 (50:32):
Part because they have ongoing operations.
Speaker 3 (50:35):
So there is a fundamental question about, especially in these
corruption sanctions, what comes next. There has to be reformed,
there has to be clean up, there has to be remediation.
And so we've been doing a lot of this work
at KATE two Integrity, saying Okay.
Speaker 2 (50:51):
Let's think about monitorships.
Speaker 3 (50:53):
Let's think about cleaning things up in a way that
gives the US government comfort, doesn't necessarily kill enterprises.
Speaker 2 (51:02):
It may actually be important.
Speaker 3 (51:04):
And the third layer of this, which is really what
you're getting at, which is this now puts these kinds
of sanctions and the question of access to rare minerals
right in the same conversation, right right along that spectrum
that we were talking about earlier. And that's really important
because we can't think about sanctions in isolation. You can't
(51:27):
think about access to rare minerals in isolation. You can't
think about trade controls, export controls. These are all related.
And this particular case, based on what we know publicly,
shows that the State Department and the Treasure Department are
grappling with a very important question, which is how do
we ensure access to these very important minds and minerals
(51:52):
when those minds are owned by somebody who's been sanctioned,
and where we still want to drive the idea of
anti corruption and transparency.
Speaker 2 (52:03):
So what does that look like?
Speaker 3 (52:05):
How do you unwind the sanctions, how do you ensure
proper access to the minds, how do you ensure that
corruption doesn't follow in whatever happens. So I think that's
all at play, and it demonstrates again that we're in
a different geoeconomic, geostrategic environment when we're talking about these issues.
Twenty years ago, you'd have just talked about whether or
(52:27):
not somebody was going to be delisted. You wouldn't be
talking about the strategic impact of what that delisting means.
Speaker 1 (52:33):
Right, And there's something very powerful about the idea that
we have strategies to roll back sanctions, for example, where
it makes sense when there is something much more valuable
that we can drive for market dynamics for countries like
the DRC where they desperately want to increase local value
(52:58):
around these critical d streets and how they develop over time,
and ultimately using this concept of transparency or like you know,
we often refer to it radical transparency, and all of
these tools, sanctions, export controls contribute in some way to
that notion of radical transparency. That then begins to flip
(53:20):
the idea that we're not just protecting ourselves by using
these tools and by driving an anti corruption framework, we're
actually using it as a sword. Not just the shield,
but the sword. It becomes a strategic way to change
the dynamics of the market, to drive that concept of
the level playing field in a way that we've talked about,
(53:41):
but we haven't really gotten there. And so you know,
again taking a step back and looking at how capital
alignment plays into this, looking at how we use these
tools for purposes that are actually much broader than just
sanctioning bad behavior of Dan Gurler as important and as
that is, so, you know, so it's really interesting to
(54:04):
see how all of this develops.
Speaker 2 (54:06):
I just want to comment on.
Speaker 3 (54:07):
This because it's a really important point you just made,
and for listeners who who follow this space and who
follow the Illicit Edge, they know that, you know, one
of the things that's happened over the last twenty years
with with sanctions and with the anti money laundering rules
sort of broadening and deepening greater sensitivity to corruption. You've
had a broad de risking around the world, sometimes blunt,
(54:33):
sometimes for a variety of reasons. But the reality is
you've often seen US institutions, Western institutions, and even capital
retreating from environments like the DRC, like parts of Africa,
parts of South Asia, Central Asia, et cetera, Latin America
because of concerns around financial crime, sanctions, risks.
Speaker 2 (54:56):
And I think a major challenge.
Speaker 3 (54:58):
In this space is how do you create those avenues
of greater transparency, how do you create mechanisms of greater
assurance so that capital is not cowered in this regard.
Capital is encouraged to race into those environments. And part
of that is, you know, the US government in some
(55:18):
ways helping or shining a light on those opportunities. Some
of it is courageous capital playing a part, but some
of this has to do with actually shaping environments that
are transparent and accountable and that provide that level of assurance.
Speaker 2 (55:33):
There's a lot of the work that we're doing at
Key to Integrity.
Speaker 3 (55:37):
It's part of the mission of my great partner known
to many of the listeners, Chi Ponzi who's been attacking
this problem to say, let's build systems and capabilities that
make the system more transparent so that you have more
opportunities for capital to flow into what are considered to
be higher risk environments or deep dark environments where frankly,
(55:59):
we need we need that capital, We need the presence
in order to compete with China, in order to compete
with Russia, in order to get access to goods and
services that are important to the global economy.
Speaker 1 (56:12):
Yeah, and I'm glad you came back to that question
about reform within global financial systems and the work that
you and SHIP and others have done through Financial Integrity
Network and now K two I has been nothing short
of phenomenal. I run into it all the time talking
to people in the field who are using your training
(56:33):
and working with you and the team on building better systems,
and this is so so critical. And maybe just to
go into that point a little bit more, because we
have a huge illicit edge subscriber based from the banking
and finance community, this role of financial institutions and really
being at the frontline, deputized really since nine to eleven
(56:56):
to be the gatekeepers of a system that continues to
have some gaps and loopholes, but is also much strengthened
is going to continue to be really important. And how
we drive technology and compliance and better solutions for managing
lots of data, all of that is going to be
absolutely critical. But fundamentally having alignment between the public sector
(57:21):
and the private sector around these goals of financial reform
that is the backbone. Because without that, I think this
whole process that we're talking about of trying to bring
the level playing field and trying to build that integrity
within the system and trying to bring radical transparency, it
kind of falls apart. So we really have to get
back to those basics at the same time that we're
(57:42):
thinking about, Okay, what are these emerging threats and what's
the toolkit and how do we balance that out, and
where can we bring in strategic investment and align that
with sanctions and export controls in a way that helps
build what we're talking about the systemic approach. So, yeah,
this is going to keep us busy for all long time.
Speaker 3 (58:00):
Yeah, and you've said a lot there, and I really
appreciate what you said about our work. I'm privileged to
work with a lot of former Treasury colleagues and others
in our company.
Speaker 2 (58:13):
So I really appreciate you saying that it.
Speaker 3 (58:15):
Goes back to what we were talking about with respect
to what happened post nine eleven, Because post nine eleven,
it wasn't just that the Treasury became important to national
security and that we were thinking about more aggressive use
of US financial power. That's essentially what was happening, But
we also reconsidered, along with industry, how we thought about
(58:36):
financial integrity, right, And the point here is that the
measures we took with EFFECTA sanctions, the Patriot Act in
Title III, the expansion of the anti money laundering system,
everything we were doing in the fact to expand requirements
ultimately around effective systems to deal with anti money laundering
(58:59):
and actual crime, all of that had to do with
the strength, the integrity, the soundness of the financial system itself,
which meant that the key elements of that system, mainly
the large global banks as well as other financial institutions,
had to now start fundamentally worrying about these issues of
(59:22):
financial integrity as a fundamental part of.
Speaker 2 (59:25):
Their business and as a part of banking.
Speaker 3 (59:27):
This wasn't just some regulatory requirement or some diplomatic sanction.
This is now a part of banking that is just
as fundamental as managing for credit risk, right, managing for
financial crime risk. And especially now given our discussion, what
you see in the industry and you see it with
(59:49):
authorities is the convergence of not just risk, but these regimes.
That is to say, sanctions, anti money laundry, anti corruption,
anti fraud, cyber controls, insider threat these are all now
in many ways interrelated. And you're now having more pressure
on investment advisors given the new fence end rule, So
(01:00:13):
now you have investment security, all of which a major
financial institution has to worry about. And ultimately what they
have to worry about is the risk to their institution,
to their customer base, to their data that they are
potentially being misused by rogue actors, criminals, state and non
state actors in this system. And that was the major
(01:00:37):
shift post nine eleven, which is to say, there's a
responsibility here for you in terms of not just complying
with the law, but thinking about this as a fundamental
part of your.
Speaker 2 (01:00:47):
Culture of compliance and the way you do business. And
banks complain all the time.
Speaker 3 (01:00:55):
Believe believe me, you know we've got lots of bank
clients and there's a ton of pressure put on them,
and regulators have to I think modulate that in terms
of asking for what's effective and not just sort of
checking the box, so to speak.
Speaker 2 (01:01:09):
But the demands are real because the.
Speaker 3 (01:01:13):
Risk is real and it's it's a risk not just
to national security but to the fundamentals of the financial system.
And if we want to transparent financial system, you need
financial institutions, namely the large dollar clearing banks in particular,
to have systems in place, controls in place, a culture
(01:01:33):
of compliance in place that actually allows them to know
who they're doing business with, how money is following through,
and ensuring that they're not facilitating malign actors from accessing
capital through their institutions.
Speaker 1 (01:01:48):
Maybe, as a final thought, I know we're coming to
the end of our time here. I'd love to maybe
get one idea from you as we move into a
new administration next year twenty five. Lots of challenges but
also lots of opportunities in the space of economic state craft.
What do you think might be the most important aspect
(01:02:09):
for a new administration to be thinking about going forward.
Speaker 2 (01:02:13):
I'll give you two ideas. If it's Okay, Lane, I
think the first and we've learned stward this I think in.
Speaker 3 (01:02:21):
The two prior administrations, but the idea of thinking about
a national economic security strategy writ large, and having the
White House lead and effort to not only align all
of the agencies and authorities around this theme, but beginning
to grapple, in particular with Congress and the private sector
(01:02:45):
on what the bounds of that looks like. Right, these
questions of how far do we go with our industrial
policy when we're talking about exquisite technologies, are we going
to have champions or not in different in different technologies,
whether it's AI, robotics, quantum, et cetera. How do we
(01:03:08):
think about the use of the authorities, and how do
we make sure that we're using these sorties in concert
for US interests and we're not sort of sclerotically applying
these things in silos which has typically been the case.
So having a very clear strategic outlook and then driving
the US government to force this debate and discussion which
(01:03:31):
is upon us, right, we can't avoid it. The second
is it would be a part of it, I think,
is to think about this question that you've been so
articulated so articulate on which.
Speaker 2 (01:03:43):
Is, how do we think about alliances differently in this context,
because we're going to have layers of alliances at the
end of the day.
Speaker 3 (01:03:51):
We're going to have those that are really within the
inner circle and the tent. We're going to have those
that were willing to sort of be very as partners
with on supply chain and other things. Then there are
those that we're going to want to trade with but
you know, may not want to let in the tent.
And then we're going to be those that we want
to exclude. And those alliances are really important in the
(01:04:13):
context of a shifting global restructuring of alliances, the expansion
of bricks, the establishment of the quad, you know, the
attempt by China to re order systems.
Speaker 2 (01:04:29):
All of that's happening in the backdrop.
Speaker 3 (01:04:31):
We then need to think aggressively about how we drive
alliances in the economic and financial domains.
Speaker 1 (01:04:38):
Drawing from three decades of leadership in the national security arena,
Wanza Rate, chief strategy Officer and co managing partner at
K two Integrity shared some fantastic insights on today's economic
and national security challenges. My thanks to wan for helping
to set the stage for a wide range of conversations
to follow. I'm Elie Dezinski. This is coercive capital on
(01:05:00):
the elicit edge network.
Coercive Capital is proudly supported by Hummingbird. Hummingbird is a
modern compliance platform designed to make financial crime investigations smarter, faster,
and more effective. Because today's financial criminals are sophisticated, savvy,
and agile, meaning the tools used to fight them should
be too. Learn Moore at hummingbird dot Co. Welcome to
(00:25):
Coercive Capital. I'm Elaine Dezenski. I'm excited to be launching
this podcast on the Illicit Edge Network. For over two decades,
I've led major initiatives and national security, anti corruption and
risk management at the Department of Homeland Security, the World
Economic Forum, and now at the Foundation for Defensive Democracies.
And with every episode, my goal is to provide you
(00:48):
with fresh ideas on the most pressing economic and national
security challenges of our time. We face a complicated set
of security threats, but we have many opportunities to address them.
Radical transparency in finance, trade and investment, and strengthening key
economic alliances and partnerships must be cornerstones of our national
security agenda. I'll speak with leading experts in the field,
(01:12):
those that have helped guide and shape this country's thinking
on national and economic security and those who fight the
good fight to keep America safe from foreign adversaries. One
such expert as Wanzerate, the former Deputy National Security Advisor
and author of Treasury's War, a book that documents the
evolution of the US Department of Treasury's role in economic
(01:33):
warfare in the wake of nine to eleven. In our
wide ranging conversation, one and I discussed today's economic security landscape,
our complex relationship with China, ally shoring, and the growing
weaponization of trade. Without further ado, let's get into it
with Wanzerate. I know a lot of folks are familiar
(01:54):
with your background and all the amazing work that you've
done as Deputy National Security Advisor for Combating Terrorism at
the White House under the George W. Bush administration. Prior
to that, serving as the Assistant Secretary for terrorst Financing.
I think you were the first person to have that job.
After nine to eleven, and since leaving government, you've been
(02:15):
an entrepreneur. You formed the Financial Integrity Network. Hard to
believe it was more than ten years ago. Of course,
that's now part of the K two Integrity family. You've
also served as an academic teaching for eight years at
Harvard law School and have many affiliations, including the one
that's closest to my heart, which is serving as co
(02:37):
founder and chair of the Center on Economic and Financial
Power at FDD, where I'm running the center as senior Director.
So wonderful to have you here.
Speaker 2 (02:47):
And by the way, that makes me feel very old.
Speaker 3 (02:50):
All that stuff feels long ago service.
Speaker 2 (02:54):
I got a lot of gray and less hair.
Speaker 1 (02:56):
But anyway, but you know, it's all good, and it
is I think helpful for this conversation that we can
go back twenty years. Hard to believe it's been twenty years,
but since that time when we were both serving in
the government after nine to eleven, you were at Treasury,
I was at Homeland, and you were charting some new
(03:19):
pathways with respect to how the government was thinking about
and continues to think about, dealing with nonstate actors, asymmetric threats,
the rise of authoritarianism. Now we're in a slightly different
moment here, this post COVID moment I might call it,
but I thought maybe it would be help for our
readers to root this conversation in the post nine to
(03:44):
eleven environment. So what we were facing really a generation
ago in terms of rethinking how to use economic and
financial tools to push back against a new class of
foreign adversaries. And starting there makes some sense because what
we're facing now in the toolkit that we have now
is largely based on a lot of that investment. But
(04:08):
we're also in a moment where we need to move
into a new phase of how we think about protecting
our systems. So maybe we can just kick it off
with kind of the basics around how you think about
this convergence of economic security and national security. What are
we facing today in terms of exposure, particularly exposure of
(04:31):
our economic and financial system to arising authoritarian threats. How
should we think about that convergence.
Speaker 3 (04:39):
Yeah, Elann, I'm so happy you have this podcast for
precisely these issues and themes, because I think the question
of our national economic security is now in many ways
taking pride of place as we talk about where geopolitically
and geoeconomically the United States sits and the challenges we
face with China and Russia shifting a lot is the
(05:01):
expansion of.
Speaker 2 (05:01):
Bricks, et cetera.
Speaker 3 (05:03):
But I appreciate you recognizing that you know a lot
of the fundamentals of what we're facing and how the
US government is dealing with. Those sets of challenges in
the economic and financial domain were set in that post
nine to eleven period, and I think it bears mentioning
some of the fundamental shifts that happened right after nine
(05:24):
to eleven.
Speaker 2 (05:26):
That really does set the stage then for where we
are now.
Speaker 3 (05:31):
And I think most people tend to think of nine
to eleven through the lens of that tragic day, the
horrors of terrorism, the challenges of al Qaeda, and that's right.
But one of the things we did at the Treasury Department,
largely due to the urging of the President, was to
think more aggressively about how we used US economic and
(05:55):
financial might, and I would even say suasion, the ability
to influence, to not just punish Kaita, but to isolate
them from the financial system and to find ways of
dismantling terrast networks, dismantling their financial infrastructure, and ultimately to
(06:17):
not allow terrorist groups like al Qaeda and others that
have global ambitions to use the financial system and capital
and the elements of the commercial system to our disadvantage to.
Speaker 2 (06:30):
Attack the United States. And so the question was how
do you do that?
Speaker 3 (06:34):
And in many ways, the US has asymmetric power. We
are the largest economy of the world, the most attractive
capital markets. The dollar is the chief reserve currency, the
chief trade currency around the world. What the US says
and does in the economic domain usually matters in the
(06:55):
international system.
Speaker 2 (06:56):
The rules of the road.
Speaker 3 (06:58):
And so we then set out a strategy to use
that system that power to isolate not just aw Kainda,
but other rogue actors, and ultimately became of the mantra
and the strategy and the Treasure Department that we want
to make it harder, costlier, and riskier for America's enemies
to raise and move money around the world. That was
(07:20):
what we were doing, and we wanted to do that
in a way that was systemic, that was global, and
that leveraged US power in this domain. What we recognized
Elane was this was going to be a domain of conflict, right,
a domain of influence and power that was fundamental to
national security.
Speaker 2 (07:41):
And you could.
Speaker 3 (07:42):
Already begin to see that the financial rogues, those that
were being excluded from the system were beginning to align,
whether it was terrorist groups, criminal actors, rogue states like
North Korea, they were going to try to evade sanctions,
evade controls use the system to their advantage, and we've
(08:03):
continued to see that over time, such that what we're
facing now, in particular with the rise of China and
the state authoritarian capitalist model, is in essence a challenge
of systems, and where not only the US is potentially vulnerable.
It's financial system, commercial system, cybertex, the kinetics of threats,
(08:26):
a lot of which you worked on, but also the
systemic threats, which is to say, do you have a
group of economies, do you have a system Chinese commerce
payment rails, new crypto payment ecosystems that begin to rise
in a way that not only evade US sanctions and
(08:48):
Western scrutiny, but start to alter the standards by which
international finance and commerce operate so that things like transparency, traceability,
accountability may not matter as much, things like corruption may
be more douragor in the international system, and where in fact,
(09:09):
these other actors are able to gain access to capital, goods,
technology in a way that harms US national security. So
we're at a place now where everyone is recognizing that
economic security is now fundamental to national security, and that
creates all sorts of challenges which we can talk about,
(09:29):
but that's where we are now. The post Nylem period
in many ways set the stage for it. We are
now right in the heart of an economic and commercial
struggle with some of America's adversaries and rivals.
Speaker 1 (09:44):
I think it's a perfect framing for getting into some
of the questions we're facing today. And you've alluded to China,
and I want to go down that pathway a little
bit more because one thing that seems very clear is
that the integration of our economy or US economy with China,
(10:05):
which for probably two decades was seen as such a strength,
has now taken on a different lens. And some of
this is certainly a response to the situation during COVID,
where it was clear that our supply chain resilience wasn't
(10:25):
what it needed to be. We couldn't get Ppe into
the country. We were worried about critical materials and supplies,
and we continue to be worried about that. But it's
a fundamentally different conversation than, for example, how we were
thinking about the Russia thread in twenty fourteen, or the
threat of al Qaeda in the early two thousands, because
(10:46):
we're in a different position. We have influence as massive
consumers of Chinese product, and that's something we should pull
on a little bit more, maybe a little bit later,
but means that the way we apply sanctions, export controls,
the tools of economic warfare are probably a little bit different,
(11:08):
and we may need new tools. So maybe we could
dig into that a little bit more, because really, China
is now driving so much of this conversation around economic
security and how we build that level of resilience but
also use the power that we have in the marketplace
in different ways. But it's from a consumer perspective. It's
(11:29):
not as the primary trading partner for most countries in
the world. So these dynamics have shifted and this brings
up some interesting challenges for us.
Speaker 2 (11:39):
Yeah, no, there's a lot in that question, Alane.
Speaker 3 (11:42):
You know, there's no question that the perception of China
and the economic relationship has shifted. Right the old paradigm
was we need to engage with China. We need to
get China into the international system, the World Trade Organization,
into FATA, into all all of the organs and systems,
in part to help them develop economically, but also to
(12:04):
open them up and also to create the entanglement that
would create elements of not just better relationships but also
dependencies which would create.
Speaker 2 (12:15):
Deterrent effects in the rest. And so that was.
Speaker 3 (12:18):
The paradigm for much of the last thirty years with
respect to China, and it frankly has led to massive
Chinese growth, massive investment in China, massive development of their.
Speaker 2 (12:31):
Manufacturing base, even their technologies.
Speaker 3 (12:35):
Huge advantage to China, but a recognition now that we've
moved to a different stage in part because of Chinese
behavior much more aggressive in the international domain, much clearer frankly,
as to what their ambitions are in terms of centralized
communist party control over the economy, over technology, over all
(12:56):
the elements of the national economy, to the point where
they've you know, they've cracked down on their tech giants
and their tech moguls. They've consolidated tech R and D,
for example in the quantum space. So we're seeing a
very different China internally and externally as they've grown more
aggressive in the South China see elsewhere. But a bears
(13:19):
mentioning in light of nine to eleven and where we've
been on sanctions, because in many ways the sanctions that
have been applied post nine to eleven were applied in
ways that were easier to apply if we were talking
about isolating actors from the international financial commercial system, because
you were talking about actors like O Kaida or maybe
(13:41):
even Hesblah or North Korea, or moving up to chain
Iran which was important to the oil sector but not
much else, and now Russia, which is a major G
twenty economy with lots of oil and lots of mineral wealth.
Speaker 2 (13:58):
And now the question of China.
Speaker 3 (14:00):
And so you've moved up the scale of targets, so
to speak, or of actors that have been the subjects
of sanctions and should be isolated, but incredibly difficult to
do with China. And so now the narrative with China
is how do we think about decoupling. That's now moved
to the narrative, how do we de risk, meaning how
(14:24):
do you unwind in ways that don't have us so
fundamentally dependent on Chinese supplies, supply chain, manufacturing. How do
we unwind so that we're not transferring our most exquisite.
Speaker 2 (14:39):
Technology, and how do we begin to.
Speaker 3 (14:42):
Restrict those things that China says that they need and
want for the advancement of not just their economy but
for their military. And they want that, and they say
explicitly in order to challenge the United States to push
us out of the region and in many ways to
re establish a new system along with its allies, including Russia.
(15:08):
And so we are now faced with a major global economy,
the number two economy in the world, one that's has
ambitions to be a technology giant, but also has military
and geoeconomic, geopolitical ambitions that in many ways are antithetical
to our interests. And so the question is, how then
(15:29):
do you constrain the Chinese economy without strangling it? And
how do you continue to have relations with a major
economy like China that we still rely on without giving
them unfair advantage in trade, in technology, and in capital. Yeah.
Speaker 1 (15:48):
Yeah, So the concept of ally shoring, or as the
Biden administration has turned it, friendshoring, is a really interesting
part of this, and picking up on your point about
decoupled or de risking, this idea of strategic decoupling across
as you say, the most exquisite technologies, the most valuable
(16:08):
of our advanced manufacturing opportunities, the areas where the jobs
will be produced in the future, bringing that back either
to our shores or working with democratic allies and partners.
Seems like it has to be part of this solution
because we're talking about a misalignment of rules and core values,
(16:33):
or at least that's my take on it, that is
driving this division in the marketplace. And you know, maybe
we need to be honest that it was always there,
but the fact that it's now weaponized at least I
think we would view it that way in terms of
how we've seen the Chinese Communist Party utilize its market
(16:56):
dominance right in ways that don't necessarily recognize the US
as a primary consumer of their goods and UH as
an integrated trading partner. You know, there are a lot
of threads here that are kind of working across purposes.
But at the end of the day, it seems like
creating a space where aligned partners and I'm talking about
(17:20):
democratically aligned UH governments have an opportunity to reinforce and
rebuild the trust around an open, rules based system that
that would be really important. And you know, maybe we're
at this point of a very serious rewiring of our
economic and UH financial trade trade systems. As a result,
(17:43):
it's also interesting that at this point the Chinese economy
is under some serious strain uh for the most part,
because they haven't been able to implement UH steady reforms
around their own systems. And you know, they're facing some
serious headwinds demographic headwinds, slow growth internally, this lack of
(18:09):
a consumer market to pick up a lot of the demand. Right,
So there's this focus on export driven growth, but it's
becoming harder and harder for them to manage that. So
this is also where as a major consumer of Chinese product,
the US and Europe as well. I think there's a
(18:30):
real opportunity to align the fundamentals around how we manage
this and bring a little bit of balance back into
the relationship. But easier said than done.
Speaker 3 (18:40):
Yeah, and I think we can get into the weakness
of the Chinese economy and system a bit more because
I think there are those who are are now saying, look,
you are you are seeing the decline of the Chinese
economy in a way that uh, you know, is happening
in a fast, sure way, in a more fundamental way
(19:02):
than most had anticipated.
Speaker 2 (19:04):
So I think I think this is China isn't a
ten foot giant.
Speaker 3 (19:08):
And I think all the indicators, whether it's foreign direct investment,
all the challenges on supply chain, consumer demand internally, the
real estate market, the the you know, the difficulties they're
having across the board, on debt at the local level.
You know, all of the fundamentals within China are creaky
(19:29):
or cracking.
Speaker 2 (19:30):
Uh. And I think that's that's really important to keep
in mind.
Speaker 3 (19:33):
This is not a this is not a ten foot giant,
and they're not poised to be the number one economy
in the world.
Speaker 2 (19:39):
The US still is.
Speaker 3 (19:40):
This still is the American century if the US handles
as properly and continues to grow and to handle its
fundamentals right. But I've given you a question. I want
to take a step back because for the listeners, I
think they may wonder, like, well, we're talking about a
lot of different things. We're talking about supply chains, we're
(20:01):
talking about sanctions, et cetera. I think one way of
thinking about, you know what we're talking about. And frankly,
I think a lot of the topics you're going to
cover in your podcast series over time is kind of
the spectrum of arenas, if you will, in the financial
and economic domain that are now subject to this conflict
(20:25):
and competition, largely with China.
Speaker 2 (20:28):
By China, but not just China.
Speaker 3 (20:29):
It's Russia, it's Iran, it's other actors, and it's the
full spectrum of things that you may not have ever
considered as part of national security. There are things like
sanctions that have always sort of been in the national
security orbit. The things like the anti money laundering system,
which requires you know, the banks and authorities to know
(20:52):
who and what is moving money in through the system,
so to speak. Right, there's the anti corruption system, which
you know, from a US perspective, tries to discipline the
markets so that it's not corroded by corruption and other
externalities that are not only deteriorating a society or a system,
(21:13):
but making things unfair.
Speaker 2 (21:15):
In the marketplace.
Speaker 3 (21:17):
Then there are things like export controls, which have taken
on even more importance in the Russia context because and
in China, because we are trying to restrict, for example,
high end semiconductors so that we can maintain an advantage
in that space and in the military context, and so
(21:39):
export controls now have an important role. You now have
investment security, both inbound and outbound. That is to say,
restrictions on who can own what in the US that's
through the Committee on Foreign Investment in the US that.
Speaker 2 (21:54):
Is that's been in existence since the seventies, but.
Speaker 3 (21:58):
Has taken on a more dominant role in protecting the
US system because we don't want the Russians, or the Chinese,
or the Venezuelan generals or the Iranians hiding their hand
to own sensitive technologies or properties, for example, next to
military facilities.
Speaker 2 (22:18):
And so there's more restriction.
Speaker 3 (22:19):
There, restriction on the outbound, both in Congress and from
the White House, restrictions on how US capital, this is
private investment can invest or what it can't invest in,
in particular in China, things like semiconductors, lasers, quantum computing AI,
(22:40):
and then trade and then supply chains, and so there's
an entire spectrum of activities and authorities that are now
implicated by everything you're mentioning Elaine. And with China, it's
the hardest problem, right because you have the entanglement of
the economies. You have a major economy that has its
(23:03):
own weight and.
Speaker 2 (23:05):
Gravity onto itself.
Speaker 3 (23:06):
And so the question is how do you use some
of these measures, if not all of them, to constrain
what we consider to be Chinese behavior that's dangerous or
threatening and that means everything from suppression of the wigers
in western China and use of slave labor in the
(23:28):
cotton fields, to suppression of human rights in Hong Kong,
to threatening our allies the Philippines and Japan in the
maritime context, or more broadly, their attempts to be the
dominant player in the most exquisite technologies in the world
for purposes of the military. So that then sets the
(23:51):
table for we shouldn't have deep dependencies on China. We
should find other ways of creating resilient in our supply chains.
To your point, we need to find more creative ways
of creating networks and alliances that benefit those that want
to trade and work with us and may not necessarily
(24:14):
want to trade or work with or may want to,
but have to find an alternative.
Speaker 2 (24:18):
And we've seen that in the Middle East and other places.
Speaker 3 (24:21):
And frankly, how do we find other ways in the
context of what's happening with deglobalization to take advantage of
reshoring and ally sharing and Elaine, there's been nobody better
than you.
Speaker 2 (24:33):
Doing work on this.
Speaker 3 (24:34):
So for the listeners interested in this idea of ally
shoring or friends sharing, I would look to Elaine Dozinski's
scholarship on this first and foremost, but the idea here
is essential because we have to think differently about alliances,
and alliance is not just in a military context like NATO,
but in the context of economic, financial and technology networks
(25:00):
and investment and alliances that we need to reinforce not
just the US economy, not just to counter bad behavior,
but also to drive, as you said, the norms and
the rules of the road, so that the rules aren't
being defined by the Chinese and the Russians, They're being
defined by those actors that want a transparent, traceable, accountable system.
Speaker 1 (25:23):
This is such a multi layered, complex domain, and you've
done an amazing job over the last few minutes making
the connection points across the threats, the tool set, the
challenges of working within this integrated global economy. Maybe we
can pick up a little bit on this question of
(25:45):
how we define an economic alliance because this also raises
some interesting questions, you know, when we talk about an
ally and this was actually something that came up when
I started writing about ally shoring four or five years
ago together with John as In at the University of Michigan.
Now at the Eisenhower Institute. We were really thinking about this, uh,
(26:05):
you know, application of the concept of ally, and you know,
we thought about, well, maybe we should call ally showing
something else. Maybe using the term ally is just too
loaded in this context. You know, we know what that means.
In the military defense space, we know what a natal
ally is. For example, we know what a five eye ally.
(26:26):
We have five of them, you know, there are five
in the group, and there is such an alignment around
the not only the way that threats are perceived, but
also the way that systems become integrated and information sharing
becomes core to a group of of of military allies.
(26:46):
In the economic space, some interesting questions arise. For example,
do we consider Mexico to be an economic ally? I
would make a strong pitch that we do. Now does
that mean that all the rules and norms align. Some do,
most do, and we have a free trade agreement that
(27:06):
that reinforces, but not always. We have to make a
distinction between what an alliance looks like in an economic
realm versus what a partnership or even a friend. I'm
not a huge fan of that term friend shoring because
I think friend means something different. Friends maybe come and go,
I don't know. Alies don't. But you know, this is
(27:27):
this is a question, and you know, maybe we need
to come up with that very succinct definition of what
economic ally really means. But then again maybe it just depends.
So what are your what are your thoughts on that?
Speaker 3 (27:41):
Well? The use of the term friend reminds me of
the old saying if you want a friend.
Speaker 2 (27:45):
In Washington, get a dog.
Speaker 3 (27:47):
I think. I think if you want a friend in
international relationships, find an ally. I don't know, but in
any event, I think you're right, and there's there are
there are several layers to because there's a fundamental question about,
in the first instance, what do we mean by an
American company? Right, because there are so many multinational dimensions
(28:12):
to a global enterprise. One base in the US, but
may have lots of subsidiaries and entanglements internationally, vice versa
with international companies that have a huge US presence from
a manufacturing perspective, not to mention, then you're talking about.
Speaker 2 (28:30):
Investments and capital from all sorts of places.
Speaker 3 (28:33):
So the first question is often very hard, which is, okay,
what do we mean by an American company? Some of
that's easy to divine, sometimes not. Then there's a question
of you know, how should we be thinking about engaging
in the world on these issues. I'll give you an
example of this where the US ran into trouble in
(28:54):
part because it didn't have an American company or technology
you're champion, and that was in the five G context,
where during the Trump administration they rightly I think and
I think we were late as a US government on
this started to raise concerns around Huawei and Huawei embedding
into the telecommunications infrastructure all around the world, including in
(29:19):
key allies, including in the UK, potentially including in Mexico,
and the question.
Speaker 2 (29:27):
Then was what do you do about it?
Speaker 3 (29:28):
In part because Huawei is offering a service, is offering
a technology, a capability often cheaper than anything else in
the marketplace. And the question then was, Okay, if you
try to rip and replace Huawei, what do you replace
it with?
Speaker 2 (29:47):
And Elaine the answer was not an American company.
Speaker 3 (29:50):
It was Ericson and other options, Nokia.
Speaker 2 (29:54):
Or other things.
Speaker 3 (29:56):
That I think was an important lesson for US policy makers,
which is, if we're going to engage in the international economic, financial,
and technological sort of domain, we're going to have to
think differently about what an ally means and frankly, what
our interests mean in this context, and that therefore, in
(30:21):
my mind, means we've got to think differently about our allies,
because we're not going to do everything you need to
do in a global economy in the United States. Right
We're going to have to have mining of rare earth
minerals in Chile, in the Democratic Republic of Congo, in
parts of Central Asia. We're going to need refinement of
(30:42):
whether it's oil or lithium or copper. In different parts
of the world. We're going to need shipping lanes and
transport that is assured and goes through allied territory and
can't be choked off by enemies in different parts of
the world. And so we're not going to be able
to do that all through American companies, US government investment,
(31:07):
or American control in a classic sense. But you can
begin to do that with allies who have capabilities, interests,
and are maybe even more geographically.
Speaker 2 (31:21):
Well situated to do these.
Speaker 3 (31:23):
Kinds of things, especially when you're talking about logistics and
supply chains. So I think you're spot on that we
need to think very differently about what allies mean and
in the North American context, Canada and Mexico. I think
that's not only an incredibly powerful set of economies and
trade relationship, but we need to think of that as
(31:44):
a whole.
Speaker 2 (31:45):
And this is why you've seen tension around.
Speaker 3 (31:47):
Well, let's make sure the Chinese aren't trying to do
an end around to some of our laws and restrictions
by you know, basically rebranding China these manufactured goods through
Mexico or through Canada, or playing other games with marketing
(32:08):
and labeling of their products. So I think it's very important,
and frankly, this debate is happening, and you see it
in the marketplace with manufacturing moving to other places other
than China. Certainly new investment and including old investment moving
places like Vietnam, India, even Mexico, and a lot of countries,
(32:30):
not just the United States, but Europe now coming to
grips with the fact that it's overly dependent on China
and it doesn't want to be.
Speaker 4 (32:39):
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Speaker 1 (34:54):
In this segment, we delve deeper into the Chinese economic
model protecting US strategic supply chain in the alignment of
private capital. Getting back to this core question about allies
and partners, maybe starting small or starting with a couple
of cases where we can build on the framework we
already have in place through free trade agreements, through alignment,
(35:14):
and then build that out over time, but recognizing that
it's also a long term play.
Speaker 2 (35:20):
Yeah, I think you're right a lane.
Speaker 3 (35:22):
And the challenge here is in the global free trade
system that paradigm. US companies for the most part have
not cared much about elements of the supply chain where
they got you know, the component parts or the minerals
(35:43):
or or you know, as long as it was efficient
and it met their needs, it didn't really matter. What
the Chinese have done with their model and their economic model,
and you see this in the EV context, is really
to create the efficiencies around not just production of the
(36:04):
cars or even batteries, but the aligning the entire supply
chain so that what they have done successfully is to
from sort of tooth to tail, from point of origin
of the material all the way to production and sale.
The Chinese are in control of it, or at least
(36:24):
have strings and levers that they can pull in some ways.
Speaker 2 (36:29):
That's a very different model. At the initial stage.
Speaker 3 (36:34):
It may be inefficient, but at the end of the day,
it may allow them to control costs and access to
supplies in ways that Western companies aren't aligned to do.
Western companies are dependent on suppliers and others that they
may not own or control. And so that's that's one
fundamental difference. That's that's fascinating, which then underscores your point,
(36:58):
which is, if if Europe or if the United States
wants a competitive EV market or solar panel market, or
you know, pick your technology, how is it thinking about
its supply chain and the origins of the goods that
it needs. The military is certainly doing this now, and
(37:22):
you've seen this in legislation and in DD reviews, where
they're having to look very carefully at their supply chain,
whereas again in the past thirty years they didn't really
have to worry so much about it. They would get
their titanium from Russia. Is it so clear that we
can get a titanium.
Speaker 2 (37:40):
From Russia in the future.
Speaker 3 (37:41):
I'm not sure If we need rare earth minerals ninety
six percent of which come from China, are we going
to get access to those that we need for our
batteries or our military equipment or high tech implements.
Speaker 2 (37:56):
Maybe not right, And so.
Speaker 3 (38:00):
To inspect for the high end national security reasons, but
also for our economy, what are the supply chains that matter?
And how should we think about those networks that then
are fundamental to the ability to produce and the ability
to compete, And to your point of lane, it then
becomes really important to think about how we leverage allies,
(38:23):
how we leverage comparative advantage in the marketplace with our friends,
with our allies in a way that allows us to
not have to do everything, to not have to have
US capital investing in everything, but to have at least
the ability to have access to the things that we
need and the supply chains.
Speaker 2 (38:42):
And again it's not everything everywhere in.
Speaker 3 (38:44):
The world, but those things that we think are strategic
and that are necessary to kind of the future of
the economy and the future of sectors that we think
are important. We then need to start unpacking where are
the material is coming from, where they refined, how are
they transported.
Speaker 2 (39:02):
Who owns and controls.
Speaker 3 (39:05):
That that chain of events, the supply chain, and how
do we get in the middle of it. And frankly,
private capital is starting to move in this direction with
a bit of help from the US government. But you
see this, for example in the investment private investment in
Subic Bay in the Philippines where.
Speaker 2 (39:26):
The US and as it's been kicked out, sort of
welcome back but there was a.
Speaker 3 (39:31):
There was a question of how the investment in Subic
Bay would follow, whether not Chinese investment would come in
or something else. You had American private investors come in
and invest in Subic Bay in order to take that
strategic port in many ways and put it onto our
side of the ledger. So those are the kinds of
(39:51):
things that I think are starting to happen, but it's
not happening at scale, And certainly it's your scholarship and
those of others that are st already to eliminate where
we need to do this more fundamentally.
Speaker 1 (40:03):
So the question of capital alignment is such an important
topic and I want to dig into that a little
bit more. Subig Bays is an excellent example, and certainly
there are more opportunities where we can think about asymmetric
investments to break a choke hold within a supply chain. So,
(40:24):
going back to some of the ev research that we're
going to soon publish, one of the key issues is
the price the question of price volatility around critical minerals
and how when you have a dominant position in terms
of extracting critical minerals or even more importantly, processing those
minerals like China does. It gives that government incredible market
(40:50):
power to set prices in a way that keep competitors out.
We fundamentally can't compete against state subsidized model, and then
that pricing dominance becomes even more problematic over the long
term as prices start to rise because there are no competitors,
no alternative sources, particularly for processing. So yeah, we definitely
(41:13):
have to get a handle on this and think about
where we can provide incentives, where we can push back,
whether that's through tariffs, other types of controls to allow
for a new ecosystem to come into play. Otherwise it's
going to be very difficult for us. But on the
other hand, dismantling this full vertical integration of these industries
(41:38):
that China has built up may not be necessary if
we can go at it in a more strategic way
and kind of break off those points of the supply
chain where that that risk becomes really problematic for the
US or for the US and its allies. So every
supply chain looks different. I think that's part of the
challenge and it becomes a mental task. But the upside
(42:02):
to all of this is if we can identify more
clearly where The risk is it also provides a bit
of a roadmap to private capital right to be able
to invest in those areas where there's a huge opportunity
not only to create a new ecosystem, but ultimately over
time to drive some real investment and profit. And so
(42:25):
this kind of raises the question, right, how do we
use these tools in a way that supports the kind
of open market, rules based system we want, but without
becoming so heavy on industrial policy that we end up
with something like the Chinese system where there's a tremendous
amount of subsidy, but also a private sector that really
doesn't exist as we think of the private sector, or
(42:48):
you know, certainly not as it used to.
Speaker 3 (42:51):
Yeah, I think this is a fundamental challenge of the
twenty first century for the United States and in our system.
That is to say, how do we align private sector interests,
private capital, private technology innovators in a way that does
not have the US government co opting, owning, or controlling
(43:16):
those interests. And you do not want the US system
to become a state authoritarian system. You don't want an
aggressive industrial policy where the government is picking all of
the winners.
Speaker 2 (43:30):
And its champions.
Speaker 3 (43:32):
But it's hard because I think all of US applauded
and you know, heralded the Chips Act, which is the
US government's sort of investment in the semiconductor industry in
particular to reinforce manufacturing in the United States. Much, if
(43:54):
not all, of all that investment it seems to be
going to Intel, and you know, in many ways, Intel
has become the US semi conductor champion, right, And this
starts to then look like the French system, the Japanese system,
where you have industrial policy that really is driven through
one or two state champions per industry or sector. We
(44:16):
want to I think we don't want to kill the
golden you know, the goose that laid the golden egg. Here,
the golden the golden goose in terms of the US system,
the innovation that comes from it by then imposing the
US government in different ways.
Speaker 2 (44:34):
On the other hand, the US government can be incredibly
helpful in.
Speaker 3 (44:40):
Spotlighting where there are needs for particular capabilities.
Speaker 2 (44:45):
If not capital.
Speaker 3 (44:47):
This is why what was then called OPIC is now
the Development Finance Corp. Was expanded to try to in essence,
expand the US government insurance around particular investments around the world.
It's why XIMBANC was reauthorized in a fairly aggressive way
(45:08):
with a focus on China work that you have done,
Ambassador Dobriyanski has done and others really effectively. It's why
DoD IS established capabilities and funding on the tech side.
So I think I think the US government is trying
to figure out how to align private sector interests without
(45:30):
crossing the line.
Speaker 2 (45:32):
And that's a great area.
Speaker 3 (45:33):
That's not an easy answer, and it's one that's subject
to a lot of debate, especially when you start getting
to industrial policy or you get to these kinds of
sectors or capabilities like mining of rare earth minerals that
is really expensive, hard to do, rife with other regulatory
(45:55):
issues like environmental issues for example in Nevada or the West,
And so how do you align all of that to
get the access to the capabilities that you need. That's
not easy, and this takes a lot of I think,
grappling in a different way with.
Speaker 2 (46:13):
Our national economic security, you know. And I think, again,
we don't have to think of this alone.
Speaker 3 (46:20):
And I think this is a bit of a challenge
with some of the legislation that very much wants US
based manufacturing US origin goods at a certain point, we
have to think about how we let our allies into
that system, and there are allowances for that, but also
how we think about that internationally, because it may be
(46:42):
that the most efficient access to rarest minerals isn't in Nevada.
Maybe it might be in Australia or maybe in some
part of Europe where we can get access efficiently, but
we may not have to do it necessarily in the US.
Speaker 1 (47:00):
Bring in a couple of cases that I thought would
be interesting to highlight some of the challenges that we've
been talking about and how we're thinking about applying tools
like sanctions, for example, and when the rollback of those
tools might actually serve a greater purpose. So picking up
on the critical minerals thematic and some of the conversations
(47:21):
underway around Dan Gertler, who's a heavily sanctioned individual in
Israeli involved in critical minerals for many, many years, sanctioned
in twenty seventeen along with many others for a lot
of corrupt practices in the DRC, and now there's some
(47:42):
discussion about potentially lifting those sanctions in exchange for Girdler
agreeing to sell off his royalty streams from some of
these mining operations. What do you think about that? And
this idea that not only do we need to think
about implementing these tools like sanctions, but where there's strategic
(48:02):
opportunity to roll them back because we've achieved something even
more valuable in the process of levy these sanctions.
Speaker 3 (48:12):
Lane, I'm glad you raised this case because it's fascinating.
I think it raises three different elements that are relevant
to our discussion. Really important one is it raises this
question of how do you unwind sanctions in a way
that is strategically advantageous to the United States. And this
(48:34):
is something I've been writing about, We've been talking about
for a long time, which is we often think about
sanctions in a fairly static way.
Speaker 2 (48:41):
You know, it's an on off switch.
Speaker 3 (48:42):
You're either imposing a sanction or not, and when you
do it, you kind of move on to the next sanction.
Speaker 2 (48:48):
As opposed to sanctions as a continuum of influence.
Speaker 3 (48:51):
And the way I've described kind of the financial and
economic landscape, especially with sanctions, is it's about shaping the
the environment. It's about shaping the risk environment in which
market actors are playing, and that isn't just about one action.
It's about a series of actions, including unwinding at the
(49:11):
right moment with the right conditions in a way that
advantages the US interests.
Speaker 2 (49:16):
And so that's that's an.
Speaker 3 (49:18):
Important question, how do you unwind in a way that
meets our interests and doesn't do.
Speaker 2 (49:24):
Damage to what we were trying to do initially.
Speaker 3 (49:27):
Two, it emphasizes the fact that the anti corruption sort
of agenda, which you've been a part of for as
long as I've known you ling, is really a fundamental
part of this national economic security environment.
Speaker 1 (49:42):
Right.
Speaker 2 (49:42):
This isn't just about how do you.
Speaker 3 (49:44):
Apply the Foreign corupt Practices Act or the Anti Briber
Act from the UK.
Speaker 2 (49:48):
This is about strategically how our sanctions anti kryptocracy measures,
you know, law enforcement tool of how are those being
applied in a way that strategically matter.
Speaker 3 (50:03):
That's why the Global Magnitsky Act was passed to look
at human rights and corruption.
Speaker 2 (50:10):
Actors around the world have been applied globally.
Speaker 3 (50:13):
It's why Dan Gertler's sanction and so this case raises
the question of how do you deal with sanctioned actors
that are sanctioned because they're corrupt and they're not being
prosecuted for it, right, Sanctions aren't prosecutions, and so what
do you do in.
Speaker 2 (50:32):
Part because they have ongoing operations.
Speaker 3 (50:35):
So there is a fundamental question about, especially in these
corruption sanctions, what comes next. There has to be reformed,
there has to be clean up, there has to be remediation.
And so we've been doing a lot of this work
at KATE two Integrity, saying Okay.
Speaker 2 (50:51):
Let's think about monitorships.
Speaker 3 (50:53):
Let's think about cleaning things up in a way that
gives the US government comfort, doesn't necessarily kill enterprises.
Speaker 2 (51:02):
It may actually be important.
Speaker 3 (51:04):
And the third layer of this, which is really what
you're getting at, which is this now puts these kinds
of sanctions and the question of access to rare minerals
right in the same conversation, right right along that spectrum
that we were talking about earlier. And that's really important
because we can't think about sanctions in isolation. You can't
(51:27):
think about access to rare minerals in isolation. You can't
think about trade controls, export controls. These are all related.
And this particular case, based on what we know publicly,
shows that the State Department and the Treasure Department are
grappling with a very important question, which is how do
we ensure access to these very important minds and minerals
(51:52):
when those minds are owned by somebody who's been sanctioned,
and where we still want to drive the idea of
anti corruption and transparency.
Speaker 2 (52:03):
So what does that look like?
Speaker 3 (52:05):
How do you unwind the sanctions, how do you ensure
proper access to the minds, how do you ensure that
corruption doesn't follow in whatever happens. So I think that's
all at play, and it demonstrates again that we're in
a different geoeconomic, geostrategic environment when we're talking about these issues.
Twenty years ago, you'd have just talked about whether or
(52:27):
not somebody was going to be delisted. You wouldn't be
talking about the strategic impact of what that delisting means.
Speaker 1 (52:33):
Right, And there's something very powerful about the idea that
we have strategies to roll back sanctions, for example, where
it makes sense when there is something much more valuable
that we can drive for market dynamics for countries like
the DRC where they desperately want to increase local value
(52:58):
around these critical d streets and how they develop over time,
and ultimately using this concept of transparency or like you know,
we often refer to it radical transparency, and all of
these tools, sanctions, export controls contribute in some way to
that notion of radical transparency. That then begins to flip
(53:20):
the idea that we're not just protecting ourselves by using
these tools and by driving an anti corruption framework, we're
actually using it as a sword. Not just the shield,
but the sword. It becomes a strategic way to change
the dynamics of the market, to drive that concept of
the level playing field in a way that we've talked about,
(53:41):
but we haven't really gotten there. And so you know,
again taking a step back and looking at how capital
alignment plays into this, looking at how we use these
tools for purposes that are actually much broader than just
sanctioning bad behavior of Dan Gurler as important and as
that is, so, you know, so it's really interesting to
(54:04):
see how all of this develops.
Speaker 2 (54:06):
I just want to comment on.
Speaker 3 (54:07):
This because it's a really important point you just made,
and for listeners who who follow this space and who
follow the Illicit Edge, they know that, you know, one
of the things that's happened over the last twenty years
with with sanctions and with the anti money laundering rules
sort of broadening and deepening greater sensitivity to corruption. You've
had a broad de risking around the world, sometimes blunt,
(54:33):
sometimes for a variety of reasons. But the reality is
you've often seen US institutions, Western institutions, and even capital
retreating from environments like the DRC, like parts of Africa,
parts of South Asia, Central Asia, et cetera, Latin America
because of concerns around financial crime, sanctions, risks.
Speaker 2 (54:56):
And I think a major challenge.
Speaker 3 (54:58):
In this space is how do you create those avenues
of greater transparency, how do you create mechanisms of greater
assurance so that capital is not cowered in this regard.
Capital is encouraged to race into those environments. And part
of that is, you know, the US government in some
(55:18):
ways helping or shining a light on those opportunities. Some
of it is courageous capital playing a part, but some
of this has to do with actually shaping environments that
are transparent and accountable and that provide that level of assurance.
Speaker 2 (55:33):
There's a lot of the work that we're doing at
Key to Integrity.
Speaker 3 (55:37):
It's part of the mission of my great partner known
to many of the listeners, Chi Ponzi who's been attacking
this problem to say, let's build systems and capabilities that
make the system more transparent so that you have more
opportunities for capital to flow into what are considered to
be higher risk environments or deep dark environments where frankly,
(55:59):
we need we need that capital, We need the presence
in order to compete with China, in order to compete
with Russia, in order to get access to goods and
services that are important to the global economy.
Speaker 1 (56:12):
Yeah, and I'm glad you came back to that question
about reform within global financial systems and the work that
you and SHIP and others have done through Financial Integrity
Network and now K two I has been nothing short
of phenomenal. I run into it all the time talking
to people in the field who are using your training
(56:33):
and working with you and the team on building better systems,
and this is so so critical. And maybe just to
go into that point a little bit more, because we
have a huge illicit edge subscriber based from the banking
and finance community, this role of financial institutions and really
being at the frontline, deputized really since nine to eleven
(56:56):
to be the gatekeepers of a system that continues to
have some gaps and loopholes, but is also much strengthened
is going to continue to be really important. And how
we drive technology and compliance and better solutions for managing
lots of data, all of that is going to be
absolutely critical. But fundamentally having alignment between the public sector
(57:21):
and the private sector around these goals of financial reform
that is the backbone. Because without that, I think this
whole process that we're talking about of trying to bring
the level playing field and trying to build that integrity
within the system and trying to bring radical transparency, it
kind of falls apart. So we really have to get
back to those basics at the same time that we're
(57:42):
thinking about, Okay, what are these emerging threats and what's
the toolkit and how do we balance that out, and
where can we bring in strategic investment and align that
with sanctions and export controls in a way that helps
build what we're talking about the systemic approach. So, yeah,
this is going to keep us busy for all long time.
Speaker 3 (58:00):
Yeah, and you've said a lot there, and I really
appreciate what you said about our work. I'm privileged to
work with a lot of former Treasury colleagues and others
in our company.
Speaker 2 (58:13):
So I really appreciate you saying that it.
Speaker 3 (58:15):
Goes back to what we were talking about with respect
to what happened post nine eleven, Because post nine eleven,
it wasn't just that the Treasury became important to national
security and that we were thinking about more aggressive use
of US financial power. That's essentially what was happening, But
we also reconsidered, along with industry, how we thought about
(58:36):
financial integrity, right, And the point here is that the
measures we took with EFFECTA sanctions, the Patriot Act in
Title III, the expansion of the anti money laundering system,
everything we were doing in the fact to expand requirements
ultimately around effective systems to deal with anti money laundering
(58:59):
and actual crime, all of that had to do with
the strength, the integrity, the soundness of the financial system itself,
which meant that the key elements of that system, mainly
the large global banks as well as other financial institutions,
had to now start fundamentally worrying about these issues of
(59:22):
financial integrity as a fundamental part of.
Speaker 2 (59:25):
Their business and as a part of banking.
Speaker 3 (59:27):
This wasn't just some regulatory requirement or some diplomatic sanction.
This is now a part of banking that is just
as fundamental as managing for credit risk, right, managing for
financial crime risk. And especially now given our discussion, what
you see in the industry and you see it with
(59:49):
authorities is the convergence of not just risk, but these regimes.
That is to say, sanctions, anti money laundry, anti corruption,
anti fraud, cyber controls, insider threat these are all now
in many ways interrelated. And you're now having more pressure
on investment advisors given the new fence end rule, So
(01:00:13):
now you have investment security, all of which a major
financial institution has to worry about. And ultimately what they
have to worry about is the risk to their institution,
to their customer base, to their data that they are
potentially being misused by rogue actors, criminals, state and non
state actors in this system. And that was the major
(01:00:37):
shift post nine eleven, which is to say, there's a
responsibility here for you in terms of not just complying
with the law, but thinking about this as a fundamental
part of your.
Speaker 2 (01:00:47):
Culture of compliance and the way you do business. And
banks complain all the time.
Speaker 3 (01:00:55):
Believe believe me, you know we've got lots of bank
clients and there's a ton of pressure put on them,
and regulators have to I think modulate that in terms
of asking for what's effective and not just sort of
checking the box, so to speak.
Speaker 2 (01:01:09):
But the demands are real because the.
Speaker 3 (01:01:13):
Risk is real and it's it's a risk not just
to national security but to the fundamentals of the financial system.
And if we want to transparent financial system, you need
financial institutions, namely the large dollar clearing banks in particular,
to have systems in place, controls in place, a culture
(01:01:33):
of compliance in place that actually allows them to know
who they're doing business with, how money is following through,
and ensuring that they're not facilitating malign actors from accessing
capital through their institutions.
Speaker 1 (01:01:48):
Maybe, as a final thought, I know we're coming to
the end of our time here. I'd love to maybe
get one idea from you as we move into a
new administration next year twenty five. Lots of challenges but
also lots of opportunities in the space of economic state craft.
What do you think might be the most important aspect
(01:02:09):
for a new administration to be thinking about going forward.
Speaker 2 (01:02:13):
I'll give you two ideas. If it's Okay, Lane, I
think the first and we've learned stward this I think in.
Speaker 3 (01:02:21):
The two prior administrations, but the idea of thinking about
a national economic security strategy writ large, and having the
White House lead and effort to not only align all
of the agencies and authorities around this theme, but beginning
to grapple, in particular with Congress and the private sector
(01:02:45):
on what the bounds of that looks like. Right, these
questions of how far do we go with our industrial
policy when we're talking about exquisite technologies, are we going
to have champions or not in different in different technologies,
whether it's AI, robotics, quantum, et cetera. How do we
(01:03:08):
think about the use of the authorities, and how do
we make sure that we're using these sorties in concert
for US interests and we're not sort of sclerotically applying
these things in silos which has typically been the case.
So having a very clear strategic outlook and then driving
the US government to force this debate and discussion which
(01:03:31):
is upon us, right, we can't avoid it. The second
is it would be a part of it, I think,
is to think about this question that you've been so
articulated so articulate on which.
Speaker 2 (01:03:43):
Is, how do we think about alliances differently in this context,
because we're going to have layers of alliances at the
end of the day.
Speaker 3 (01:03:51):
We're going to have those that are really within the
inner circle and the tent. We're going to have those
that were willing to sort of be very as partners
with on supply chain and other things. Then there are
those that we're going to want to trade with but
you know, may not want to let in the tent.
And then we're going to be those that we want
to exclude. And those alliances are really important in the
(01:04:13):
context of a shifting global restructuring of alliances, the expansion
of bricks, the establishment of the quad, you know, the
attempt by China to re order systems.
Speaker 2 (01:04:29):
All of that's happening in the backdrop.
Speaker 3 (01:04:31):
We then need to think aggressively about how we drive
alliances in the economic and financial domains.
Speaker 1 (01:04:38):
Drawing from three decades of leadership in the national security arena,
Wanza Rate, chief strategy Officer and co managing partner at
K two Integrity shared some fantastic insights on today's economic
and national security challenges. My thanks to wan for helping
to set the stage for a wide range of conversations
to follow. I'm Elie Dezinski. This is coercive capital on
(01:05:00):
the elicit edge network.
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