How to Win a Trade War | Chad Bown

In Episode 491 https://hiddenforces.io/podcasts/how-to-win-a-trade-war-chad-bown of Hidden Forces, Demetri Kofinas speaks with trade economist Chad Bown—a former chief economist at the U. S. State Department, host of the popular Trade Talks podcast, and co-author of the recently published How to Win a Trade War—about what international policymakers, companies, and individuals need to understand about America's ongoing trade war, what victory would look like for the various parties involved in the conflict, and most importantly, how to win. The first hour lays the intellectual groundwork for understanding the modern trading system, examining the unique role played by the dollar and capital recycling in concentrating the gains from trade among the owners of capital, and stress-testing the theory of weaponized interdependence through the ongoing case studies of Russia's war against Ukraine and America's latest war with Iran. The second hour turns from the motivations behind the current trade war and what's at stake to the players themselves, their incentives, and what it means to wage a trade war in the first place—the weapons at each nation's disposal, the defensive measures to be taken, the strategies to be deployed, and the various time horizons and end games to be considered when fighting one. They close with an assessment of American industrial policy, including the CHIPS Act and the semiconductor export-control regime, Beijing's willingness to weaponize its dominance in rare earths and permanent magnets, and three scenarios for how this new and likely durable era of economic conflict could ultimately unfold. Subscribe to our premium content—including our premium feed, episode transcripts, and Intelligence Reports—by visiting HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you'd like to join the conversation and become a member of the Hidden Forces Genius community—with benefits like Q&A calls with guests, exclusive research and analysis, in-person events, and dinners—you can also sign up on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed today's episode of Hidden Forces, please support the show by: Subscribing on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334, YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg, Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP, Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces, SoundCloud https://soundcloud.com/hiddenforces, CastBox https://castbox.fm/channel/2629539, or via our RSS Feed http://hiddenforces.libsyn.com/rss Writing us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Join our mailing list at https://hiddenforces.io/newsletter/ Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Subscribe and support the podcast at https://hiddenforces.io https://hiddenforces.io/. Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 07/23/2026

• 0:00Speaker 00

  What's up, everybody? My name is Dimitri Karafinis, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Chad Bound, a trade economist at the Peterson Institute for International Economics, a former chief economist at the US State Department, the host of the popular Trade Talks podcast, and the co-author of the recently published book, How to Win a Trade War. Chad and I spent the first hour of our conversation today laying the intellectual groundwork for understanding the modern trading system, or what remains of it, roughly 10 years into

• 0:44Speaker 00

  America's trade war with China and much of the rest of the world. An important question that arises from this episode is whether some trade wars are more about trade, while others are more about war, and how knowing which kind of trade war you are in should influence the nature of your country's policies and the support of its citizens. We examine the unique role played by the dollar and capital recycling in concentrating the gains from trade among the owners of capital, and stress-test the theory of weaponized interdependence as seen through the ongoing case studies of Russia's war against Ukraine and America's latest war with Iran. The second hour turns from assessing the motivations behind the current trade war and what's at stake to a discussion about the players themselves, their incentives,

• 1:27Speaker 00

  and what it means to wage a trade war in the first place, the weapons at each nation's disposal, the defensive measures to be taken, the strategies to be deployed, and the various time horizons and end games to be considered when fighting war. We close the episode with an assessment of American industrial policy, including the CHIPS Act and the semiconductor export control regime, Beijing's willingness to weaponize its dominance in rare earths and permanent magnets, and three scenarios for how this new and likely durable era of economic conflict could ultimately unfold. If you want access to all of this conversation, go to hiddenforces.io/subscribe and join our premium feed, which you can listen to on your mobile device using your favorite

• 2:09Speaker 00

  podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, discounted access to third-party research and analysis, and in-person events like our intimate dinners and weekend retreats, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to [email protected], and I or someone from our team will get right back to you. And with that, please enjoy this highly useful and imaginative conversation with my guest, Chad Bound. Chad Bound, welcome to Hidden Forces.

• 2:54Speaker 01

  Thanks for having me.

• 2:55Speaker 00

  It's great having you on, Chad. You and your co-author Sumaya have been on a bit of a tear lately in terms of doing media for your book, How to Win a Trade War, including a recent appearance on The Daily Show with Jon Stewart. Before we get into the book or your background, what was the origin of your collaboration? And how long have you two known one another?

• 3:16Speaker 01

  Yeah, Sumaya and I have known each other about 10 years. She was, at the time, this was 2016, she was the main trade correspondent at The Economist newspaper, working out of London. I was here at the Peterson Institute doing work on trade policy at the time. President Trump comes along, wins the 2016 election, and all of a sudden, trade becomes part of the headlines every day in ways that had never been seen before in media history. So she was covering it every day from London, I was covering it every day from Washington, DC, and we decided to start a podcast together. And we did a podcast together called Trade Talks, really nerdy, niche podcast, only about international trade. But for our little world, it kind of blew up and became quite popular in the first

• 4:01Speaker 01

  Trump administration, and we did that together for about five years. And then she went off, and trade became a lot more boring when President Biden came along, not in the news every day. She went off to cover other things, I started working on other things as well. But when President Trump came along again in 2025, we decided to rekindle our partnership and work on a book together that we had talked about doing back in the first Trump administration, but never got around to doing.

• 4:26Speaker 00

  Yeah, I'm glad that you concede that it's a boring topic, because I think that's how most people feel about it. And yet, it is one of the most important aspects of the modern economy that investors and businesses need to understand, and you guys have done a great job making it feel both accessible and interesting by taking a rather unorthodox approach to how you cover it in the book, which is written as a kind of battlefield manual for fighting a trade war. I should mention that we're recording this on the same week that Trump announced 50% tariffs on certain Canadian goods, including electrical equipment and machinery, which are apparently some of the steepest tariffs his administration has ever levied against

• 5:06Speaker 00

  any country, in addition to his plans that he supposedly has to impose new tariffs on up to 60 other countries. So while I conceded that I think many people find the topic boring, I also think that it is endlessly confusing for almost anyone to try and follow. It's hard to know, really, what to make of all these announcements. There have been so many of them. Where do we file them in our heads? What is the duration between the announcement of a tariff and its implementation, assuming it even gets implemented in the first place? Again, it's all very confusing for someone like me, and I think this is probably a feeling that many in the audience will also have.

• 5:48Speaker 00

  What is your assumption about people's pre-existing knowledge of trade economics before they even begin reading your work? And we're at the point, who is the audience for this book?

• 5:58Speaker 01

  The audience is you and your listeners. So you hit the nail exactly on the head, right? So this stuff usually is so boring that the general public doesn't need to pay attention to the details, right? The challenge is President Trump has made it really, really, really, really exciting. But at the same time, he's made it incredibly confusing, and it's really difficult to track all the details. So what we tried to do in this book, and I think it's worth talking about what the conceit of the book is. So imagine, Dimitri, you're an aspiring trade warrior. That's kind of our audience. You don't really know anything about it, but it sounds like it's awesome. President Trump, he's got some tweet or Truth Social post or a soundbite every day talking about tariffs, makes it sound like something you want to do.

• 6:42Speaker 01

  So you come to us, Sumaya and I, and we're your reluctant guides in terms of how to fight a trade war. We're going to explain it to you. We're nerdy, right? And so what that means is we have gone out and we've done all of the research so that you don't have to. We've read every economic paper that talks about what works and what doesn't work. We've tracked all of President Trump's details of his announcements, so you don't have to. We've gone out and spoken to all of the companies that operate and work in international trade to learn from them. We've gone out and interviewed all the policymakers that work not only in the United States, but in countries around the world and have to deal with all of this stuff. And what we're going to do in this book is to bring you on this journey, right? We're reluctant guides.

• 7:26Speaker 01

  We don't think that trade wars are the most awesome thing in the world, but we're going to be truthful. We're going to tell you about the evidence and really present you with what you need to know to help you understand what's actually happening out there in the news every day.

• 7:40Speaker 00

  So are trade wars more about trade, or are they more about war?

• 7:46Speaker 01

  They're a little about both. We haven't had war between the major powers in a very long time, since the Second World War of the 1940s. And there is this longstanding question, argument, that trade can help perhaps facilitate peace, that you get more trade between countries, and perhaps they're less likely to go to war with one another. One of the architects of the post-war trading system, the rules-based trading system that we've been living under since the end of World War II in the 1940s, was FDR's Secretary of State, Cordell Hull.

• 8:29Speaker 01

  And he was very much of this view, that if you can get countries to reduce their tariffs, trade more with each other, that the big terrible wars of the early 20th century, the First World War, Second World War, would be unlikely to repeat themselves, right? So in a sense, and we walk through the evidence of that in the book, there's a great theories. How much do we know? What's the historical evidence of, you take any two countries out there in the world, if they trade more together, are they less likely to go to war? And the answer is nuanced, and it's complicated. So that is a big part of it, right? Does trade lead to war or not? But really, in the absence of that war, and so again, we do have wars going on at the moment, especially Iran, and we could talk about the trade aspects of that as well.

• 9:13Speaker 01

  But in the absence of major conflict, it really is about trade, and it's a trade war in the ways that governments are interfering with international trade, the way that they're weaponizing international trade in ways that they haven't done in the recent past. And that's really sort of what the crux of the trade war issues that we're worried about today.

• 9:30Speaker 00

  I did a bad job setting that question up, because while you do make a distinction in the book between economic and geostrategic arguments for fighting a trade war, the distinction I was trying to make, or the question I was trying to ask, is whether a trade war is just an intense economic dispute, or whether it is war by other means, and how we can tell the difference. Because trade wars today feel less like disputes over the terms of trade and more like open hostilities. And this seems to be especially true when it comes to their use against smaller nations or dependent allies of the US. Before we delve into the current paradigm, which is one characterized by the breakdown

• 10:13Speaker 00

  of global trade, it would be helpful, at least for me, to hear you make the case for an open international trading system, conceding, of course, all the shortcomings of the neoliberal consensus. What were the advantages of that system? And what's at stake if we devolve further into protectionism, where major economies become increasingly walled off from each other? And where, in many instances, success is determined not by the expansion in the size of the overall pie, but by how much you can shrink the size of other people's pieces?

• 10:51Speaker 01

  Yeah, so I'm a trade economist, and I believe in the benefits of international trade, right? And so, one of the things that we do in the book is we we walk through that evidence. In what ways does trade make us better off, right? What are the key channels? It's things like it allows your companies to achieve scale, right? If they get access not only to your domestic consumers, but if you get access to foreign consumers as well, they can produce more and more. And so, if you have big fixed cost industries, you know, if you're talking about semiconductors or automobiles, right? You can spread those costs over more and more consumers, get lower prices, that's great, right? One of the reasons for trade. And comparative advantage. Countries are relatively better at doing different things.

• 11:32Speaker 01

  In the United States, you know, we're really good at high-end stuff, right? Things that involve a lot of R and D, a lot of really smart people. Because historically, we've had a great educational system. We have been the innovators. But our workers are then relatively expensive. And if you're talking about doing things that really anybody can do, right? So if it's sewing garments or putting together footwear, having Americans do that would be really, really costly compared to having that done by people elsewhere in the world, where, you know, their standard of living is relatively lower just because of differences in, you know, the supplies and education levels and things like that of people, right?

• 12:14Speaker 01

  So my bias, quote unquote, going into all of this is trade is generally good. And there's large benefits from engaging in more international trade if countries are getting along in the world. That being said, of course, there and economists have known this for, you know, 100 years. There's also distributional consequences of opening up to trade. There are going to be some people that are going to be hurt from increased trade. And we saw that especially play out in the 2000s when China entered the world trading system. It was so large and its impact was so big that, you know, there were a number of sets of workers in the United States, for example, that were making goods that competed directly with what China was suddenly shipping to the world

• 12:58Speaker 01

  and could do much more cheaply than what we could do here. That they were hurt by it, they couldn't find new jobs. Their communities might have been devastated by it as well because, you know, you get a bunch of people and the only thing that gets done in that one plant in a relatively small city is now gone. Well, that affects housing values in that city and that affects tax receipts in that city. And that affects the distribution of public services in that city. So at the same time that trade is absolutely unequivocally good overall for the economy and for the world, it can also have harmful effects at the individual and community level that, at least in the United States, we've been very, very bad at dealing with, right?

• 13:40Speaker 01

  We should have better adjustment policies to help workers find new jobs, to help them transition into new industries, to have new industries pop up when old industries disappear, to help workers get through tough times, things like wage insurance. In any case, there's lots of domestic public policy issues that you could implement to complement trade openness. And that, unfortunately, when you look back to what's been known as now like the rise of anti-globalization or, you know, those sort of forces of the last 10, 15 years or so, I pin it less on trade than on the failure of the American domestic political system to realize that there were going to be some costs associated with trade and distributional issues

• 14:24Speaker 01

  and not enacting the complementary policies that you need to have to actually facilitate that and to make it happen. So anyway, those are sort of my biases heading into that. And in the book, what we do is we walk through the evidence. This is what we know. This is what we know about how big the gains from trade are. This is what we know about how costly these distributional effects are. And then also how those things have implemented, you know, the political process, the rise of Donald Trump and all of that kind of stuff as well.

• 14:50Speaker 00

  Yeah, so I should, I'm reading off the contents of the book here. There's a couple of chapters on what are called the stakes, which is what we're talking about now. Another three on the players, then some on the rules, the defense and the attack. And the defense and the attack relate to the trade war component of this. So my recollection of this was, in fact, that we were aware, generally speaking, the political class was aware that there were going to be distributional, negative distributional consequences to free trade. And I remember Clinton in the 90s talking about reskilling programs for workers who were displaced by NAFTA, et cetera. What's the reason that we didn't follow through? Is it, was it just because that was the unique circumstance of that time? Or is it just that political incentives just would never lead

• 15:33Speaker 00

  to the kind of policy steps required to actually remedy the distributional consequences of free trade in the first place? And therefore, the distributional shortcomings of more international trade ultimately undercut the benefits, at least in a democracy like the United States, where voters have a say?

• 15:55Speaker 01

  Yeah, it's a great question, right? And it goes to the heart of what makes America different, right? Because there are lots of countries in the world. You know, you look at Europe and the Nordic countries especially in Europe that are much more open to international trade than the United States. And the reason for them is it's simple. They're so small that they have to import to get goods and services. And if they want to produce anything competitively in the world, they've got to get to scale, they've got to get it through exports. Their domestic economies, their domestic markets are just too small. But in recognizing that, they have set up much bigger, you know, you can call it a welfare state if you want, but it's basically a redistributive mechanism to make sure that when trade shocks happen

• 16:39Speaker 01

  and new technologies come along and new sources of imports come along that displace your workers, that they spend money on doing exactly what you said, retraining them, putting it to work in new industries. And that's not been traditionally the American approach, right? We like small government writ large, right? We have political cycles where what Clinton did in the 1990s was one thing, but then the Bush administration comes along and, you know, and has a different view. President Obama comes along and, you know, anyway. So it's, we have much less consistent policy in the United States. And we have just been historically much less willing to deal with these, to deal with these distributional issues. And I should say, it's not just trade, right? We're facing a lot of distributional consequences that are going to come about through shocks for other reasons as well, right? During the same period that we're talking about

• 17:24Speaker 01

  of trade liberalization and opening up to the world, you also had incredible advances in technology, right? You had the internet come along that made it a lot easier to communicate. You had a lot of forces of automation. And so, how much of this dislocation and job loss is actually due to trade versus robots and automation and firms just finding alternative ways of making stuff that require less people, that has nothing to do with trade, is also hard to disentangle. But the latter is stuff that has the same exact impact on workers and jobs, right? And it's just something in the United States historically, and even currently, I think we're doing a very, very bad job at in addressing what people and workers need. But in any case, right, we're kind of different from many of the other countries in the world

• 18:09Speaker 01

  that have managed to address some of these concerns better than we have.

• 18:12Speaker 00

  Yeah, I'm glad you brought up those confounding variables because they also have important implications for what the solution is, you know? In terms of like, oh, is it simply just, we just have to raise trade barriers? Is that going to fix the problem? Well, not necessarily, because a lot of this stuff has also been increasingly automated. So even if it comes back to the United States, the gains would accrue, all things being equal, to the capital owners. And so, there's another question that comes up for me. And that has to do with really what percentage of the benefits of free trade for a large country like the United States with the world's reserve currency are actually the result of a labor arbitrage, at least in the early phases, certainly more true in the early phases, and also the recycling of capital from surplus countries into the United States and into US capital markets,

• 18:57Speaker 00

  which have led to asset price appreciation, which further advantage the owners of capital at the expense of labor? Because the economic benefits I've seen, having spent much of the last 30 years of my life living in and around New York City or Washington DC, seem disproportionate to the overall benefit that has supposedly accrued to the nation as a whole and certainly far in excess of anything experienced by broad swaths of citizens living in the great middle of the country.

• 19:27Speaker 01

  Yeah, and so there is research that it kind of speaks to that issue as well, right? That it's also, you know, the cities and the communities that you're living in and how they're able to take advantage of globalization that may be quite separate from, you know, your position as an individual that matters. I guess, so I don't have an exact number to be able to give you, to be able to break it out in terms of shares. But the way I think about it is trade and openness can definitely affect.

• 19:57Speaker 01

  Those shares and those numbers. But the main way to deal with them, if that's something that you're concerned about, and I think it is something that we should be concerned about, these distributional issues, is not by cutting off trade, right? It's by figuring out, how do we get a domestic policy that maybe takes away some of the benefits from the folks living on the coast, people like you and me, that have seen incredible rises in our standard of living, that go well and above and beyond what we could say, oh, it's our brilliance of how hard we work, or our education, or how, you know, we're just lucky in some sense, and redistribute that to the other areas that haven't been as fortunate for reasons that are outside of all of our control. Those are domestic policies, right? That's basically what kind of a tax system that do you want to live under?

• 20:41Speaker 01

  And what kind of, you know, government benefits do you want to provide to your populations? So I would say if you're interested in those issues and tackling those kinds of issues, those are the policies that you should be using and not trade policy. Because to your earlier point, could we reverse what happened if we suddenly imposed tariffs today? No, right? Yeah, we might get back more manufacturing, but it's going to come in the form of robots doing the work instead of people. It's going to show up in new places. It's not going to necessarily go back to where the jobs were lost 20 years ago. So you have to be forward looking when you're talking about ways to tackle some of these underlying concerns and not have too much of an emphasis, I think, on what you lost and the nostalgia of the past, even though admittedly you do want to learn those lessons

• 21:26Speaker 01

  so you don't repeat them.

• 21:28Speaker 00

  So I'd like to go back to the conversation about national security and theories for what we might think of as weaponized interdependence, or arguments that would have been proposed by someone like Norman Engel back in the pre-World War I period for why it's less likely for countries to go to war if they trade more with each other. So what is that argument? And I'm curious to know really, to what degree the data supports it? To what degree, in other words, data supports the weaponized interdependence argument? And then also, there's another argument to be made, and COVID, I think, is the most recent example for why it's important, and the data shows us it's important, which is that countries are vulnerable when they depend too much on international trade, or

• 22:10Speaker 00

  rather, actually, a better way to put it is, when they depend too much on international trade for specific things that are of critical national security importance, whether those be masks, or missiles, or whatever. So how do we disentangle this? One, what does the data tell us about actually how real this theory is of weaponized interdependence? And then, two, how do we balance, to the extent that it is, how do we balance those sort of larger macro objectives of peace, international security, with a more immediate, concrete vulnerabilities that arise from international trade and dependency?

• 22:42Speaker 01

  To the first question, you know, what the evidence tells us is that more trade overall, so more interdependence, tends to promote peace and the less likelihood of war between two countries. So if I trade more with you, and you trade more with me, we're less likely to have a military conflict because it's going to be economically costly for us to do so. But unfortunately, there's also evidence that if you and I trading more together comes at the expense of me trading less with Sally, then it's actually more likely that I might go to war with Sally, or Sally might go to war with me, because now, because you and

• 23:25Speaker 01

  I are trading so much, I don't need Sally, right? So more trade overall isn't necessarily the panacea if it's really concentrated and there isn't sort of enough trade between everybody. The countries that are left out, or the bilateral relationships that are left out, can actually have, you know, more probability of conflict. That being said, right, this evidence is based on the history that we have lived through, right? You know, we don't get to do randomized control trials with a lot of public policy, right? We have to learn about the history that we live through. We don't get to live in some sort of counterfact, we don't get to observe the counterfactual universe of, you know, what actually didn't happen. So we don't want to push, this is what the evidence is, but we kind of don't want to push it too far.

• 24:10Speaker 01

  To the second question about, you know, the way I think about it is, what has changed recently that's made us kind of question this? And I agree, the pandemic was part of it, right? So we saw product shortages in the pandemic. You mentioned personal protective equipment. You know, then we can think about shortages of vaccines, semiconductors even, you know, low-end semiconductors. We couldn't get access to a toaster, or washing machine, refrigerator, or car for a while because we were so short on semiconductors. Governments were saying, wait, where are we getting these things from? You know, is this worrisome? This is making us vulnerable in one way or another.

• 24:53Speaker 01

  So at that point, what governments did is they did what are called mapping exercises. They went out and asked all of their economists to go do studies and figure out, where are we sourcing these things from? And are we vulnerable in ways that we hadn't previously anticipated? Now, this is not to say that international trade is the problem. What the problem is, is the concentration of production, because you also don't want to be too reliant on yourself for some of these essential goods also, right? So you can remember in the United States, where we live, and I think this was post-pandemic, but we ran short on infant formula, right? There was a shortage, and the story there turned out to have nothing to do with international trade. It was basically, American parents, American consumers were sourcing entirely, you know,

• 25:38Speaker 01

  a particular type of infant formula from one plant in Michigan. And when it had a, you know, issue with its production process, there was just no other sources of supply. And so the concern there was, you weren't buying from enough, there wasn't enough diversity from which you were getting, and which international trade could have actually made you better off, could have given you alternative sources. And eventually, what helped solve that problem was, at least until that plant got itself up and running again, we had to import this stuff from Switzerland to be able to make sure that infants could get access to formula. So I think that, but the pandemic really did kind of wake up government officials, not only here in the United States, but around the world, and this is something that we worked through in the book, to open up this question.

• 26:23Speaker 01

  But I think where it really came up in terms of making policymakers worried was something else entirely. And it's even, this is relevant for my own kind of transformation in semais as well, which is, and we haven't talked about it yet, which is the role of China, right? And because it turns out that for a lot of essential goods, the concentrated source of production of these things is increasingly finding itself located in China. And some of that was normal economics. So for personal protective equipment, you know, N95 masks and hospital gowns, it is really efficient to have China produce the world's, you know, vast majority of production,

• 27:08Speaker 01

  to have that all located in one place in China. And when everybody's getting along, that's great. It does become a problem when that one place becomes the source of an outbreak of a pandemic, and they need it themselves first, then there isn't really as much left over for the rest of the world. But it does become worrisome when geopolitics kind of change. And all of a sudden, we become worried about China for non-economic reasons, perhaps, right? Military reasons. And this brings us to the single moment, at least for me, and I'll wrap it up here. President Xi Jinping, Chinese President Xi Jinping in 2020, gives what became known as a famous speech on what's called, referred to as the dual circulation speech.

• 27:48Speaker 01

  And in that speech, he essentially lays out his vision of the world as one in which China is not going to be dependent on the rest of the world for their supply chains. But he wants the rest of the world, so the United States, and Europe, and Japan, and all the Western democracies, market-oriented economies, to be very reliant on China for our supply chains, right? So he lays out that vision, and then you start to look at the data, and you say, wait, not only is that vision, that a vision, they've got policies in place to support it, they've got economic outcomes, you look at the data, that are heading them in that direction. And then, as we saw last year, in 2025, at some point, they're actually going to weaponize it against us.

• 28:31Speaker 01

  And this was the examples of rare earths and permanent magnets. So China produces 90% of the world's supply of this stuff. These things are essential, yes, for some military purposes, but they're also essential inputs that go into vehicles, cars, and without them, you can't make a car. You know, you can't make a car that people would want to buy because it's what makes the windows go up and down, the windshield wipers go back and forth, your seats go backward and forward. China cuts off supplies to the world of that stuff. We almost have to shut down our automobile industry. Wow, now all of a sudden, we're really, really worried. In any case, that's sort of how the world has changed, and it's very much this question of too much one-way dependence of us on China, and China's increasing willingness to weaponize

• 29:16Speaker 01

  it against us.

• 29:18Speaker 00

  So that was excellent. I want to dig into that a bit later in the interview. Just a couple of things I wanted to tie off when it comes back to the theory for, again, weaponized interdependence.

• 29:29Speaker 00

  And those have to do with Russia, the recent invasion of Ukraine in 2022 by Russia, and also the recent war with Iran. Because I feel like while those tilt towards negating the argument for weaponized interdependence, in other words, I don't feel like they, I feel like they actually work against it. In some ways, you could also make the argument that there are evidence of it. So like, for example, Russia had gone to lengths to insulate itself from the US financial system to some degree, obviously imperfectly, to become more resilient post 2014. So you could say, okay, this is an example of weaponized interdependence. This is why they invaded Ukraine in 2022. But at the same time, their invasion of Ukraine also, one, it happened as they were still building Nord Stream.

• 30:14Speaker 00

  Two, they had deep integration with the European economy, and also there were no clear economic rationales for the invasion itself. And then similarly with Iran and the Strait of Hormuz, you could say, yeah, the US post-shale has become more energy independent. So maybe this is what sort of freed Trump's hands to go as big as he did in bombing Iran and pushing us into this potential quagmire. But at the same time, the US is highly dependent on the rest of the world's economy. This is really bad. This could move the US into recession. So what do these two wars tell us in your view? How do they validate or invalidate what some of these theories we've discussed today have to say about trade and its tendency to promote peace?

• 30:55Speaker 01

  Yeah. So I think you laid it out perfectly. I think I would say one thing is wars are not, military wars, right, are not always or only about the underlying economics. And we have a great quote to that effect from the great

• 31:12Speaker 00

  Daniel Dresner.

• 31:13Speaker 01

  Dan Dresner, making that point is, you know, we economists shouldn't get too wrapped up in thinking that the world is all just about economic incentive. There's a lot of other crazy stuff going on in the world, especially for autocrats and those who desire to become autocrats. But I think you're right. Those are definitely some of the aspects of it. Heading into Russia-Ukraine, right, it is worth, you know, recalling that this was a deliberate strategy of Europe to have more integration with, first, the Soviet Union, to build those pipelines, you know, beginning in the late 1970s, 1980s, to try to get more interdependence, thinking that that interdependence would soften the Soviet Union's, you know,

• 31:53Speaker 01

  foreign policy and it might, you know, make for a more harmonious relationship with its neighbor. But then you could, you know, make the argument that perhaps that got pushed too far. And then it looks like, you know, Germany's decisions to get rid of nuclear, right, and become increasingly dependent on cheap Russian natural gas to fuel its industrial economy, made, or at least contributed to Putin thinking that he could invade Ukraine and face relatively pushback, little pushback from the West due to that one-way dependency, right? So I agree. I think that's definitely an argument, a set of arguments that make it complicated

• 32:38Speaker 01

  for that war. For Iran, I think, I like the way you framed, you know, the United States' perspective. I think what's interesting for us to see and observe what's played out in the period since then is the ability of the global economy to weather the storm so far. Part of that, in terms of, you know, having a massive reduction of energy supplies coming out of the Gulf, why didn't the global economy go into a sudden recession, you know, like what happened in the 1970s when OPEC, you know, suddenly cut us off with the oil embargo in 1973? And part of the arguments of this, you know, we walk through in the book, in the period since then, we have learned how to stockpile, right?

• 33:23Speaker 01

  So now we do have the Strategic Petroleum Reserve in the United States, you know, the Western industrialized economies all have some reserves of oil to help them get through at least the initial periods of these shocks. China, we think, right, has a massive supply of oil. Again, China's not transparent, so we don't know how large its reserves would be upfront. We don't know how much it might be releasing, but we can look at the trade data and say, ah, its imports have been cut dramatically. And so that must mean that it's meeting its domestic demand by releasing some of these reserves. So we have learned something. We've figured out how to adjust along other dimensions on the demand side, you know,

• 34:07Speaker 01

  not us necessarily here in the United States, but in the most exposed countries of Asia, they have, you know, cut down travel during their working week. And so doing more work from home, like they were doing, like we were all doing during the pandemic, to try to reduce fuel consumption. In any case, and we've got, obviously, the rise of renewables and things of that nature too. So there's lots, I think, of lessons about how to address and how to adjust to these shocks. And that's ultimately what the question comes back to in any of these cases, right? When you're talking about economic warfare and what can be weaponizable, what can't be, is how can an economy adjust? How quickly can it adjust? And what are the ways through which it can adjust to deal with the threat of having something weaponized against you?

• 34:48Speaker 01

  And I guess then finally, on Iran, right, I think it was amazing, this example to see that this choke point, the Strait of Hormuz, it's not just Iran cutting, restricting its own oil and energy exports to the rest of the world. It basically shut down an entire region's exports, right? Saudi, UAE, right? It's an incredible choke point story that I don't think people had fully come to grips with, you know, or at least the top-level policymakers had come to grips with before this whole thing got kicked off, but we have subsequently learned of since.

• 35:19Speaker 00

  Yeah, I mean, I think we talked about this a little bit. We certainly talked about the war with Iran and the Strait of Hormuz with Daniel Yergin recently, but I think we specifically spoke about what the thinking was in Washington in, you know, prior years. I mean, I remember Alan Greenspan, unless this is like a hallucination, but I remember him being, speaking to Congress about, at least on one occasion, specifically describing this as the kind of nightmare scenario, the thing that keeps him up at night, it's the shutting down of the Strait of Hormuz. So yes, I think it surprised a lot of analysts. At the same time, we're having another go at it. So we'll see if that resiliency, how long that continues to hold. I have one more question to ask you before we talk about some additional foundational questions, like who the major players are.

• 36:03Speaker 00

  We talked about the stakes, the major players, before we go back to the discussion about China. And that has to do with goals. So I feel like you've done a pretty good job here articulating what the general thinking is in Beijing, at least as it's been presented in the Western media, what the strategy is around trade, which explains their behavior. It's not clear entirely what the respective goal is on the American side. I mean, I feel like for the Europeans, they're kind of stuck in the middle. You actually do a great job in the book of analogizing all these different national nation-states as ships, which I guess led to you learning quite a bit about maritime commerce. But you describe the Europeans very correctly as a merchant fleet or a merchant marine.

• 36:48Speaker 00

  What is the goal in the US? And can we even think about it as a singular goal? Or is it rather, like so many things in a democracy like ours, a confluence of interests and sort of lobbyists pushing that ends up leading to this agenda? And what is the agenda? Like, what are we looking to achieve here nationally?

• 37:04Speaker 01

  And what is President Trump seeking to achieve? Right? Because I think, you know, when you look at

• 37:13Speaker 00

  Assuming that he's seeking to achieve anything that we would consider falling within the national interest. It could just be an extension of political graft and corruption.

• 37:21Speaker 01

  Yeah. No, and so that's where I don't think we have a really good answer to that. And I think that's because this is a thing, something that's really uncertain for the United States writ large at the moment, right? I think President Trump has a very, very different view of the world, but I don't think any of us are really sure of what his view of the world is. And again, you know, in any administration, you know, there are competing views, you know, of senior officials. I think what's perhaps unique in this administration is it really does then come down to President Trump in ways that is probably different from most others. And with this particular president, you just don't know, right? And so there is a bigger question as well, what does the United States writ large want in the absence of President Trump? And we talk about that.

• 38:06Speaker 01

  But in this particular moment in time, when it's really down to the decisions of one man, and that man, you know, perhaps by design, likes to keep everyone guessing, that's sort of where we are.

• 38:17Speaker 00

  Yeah. You know, I don't want to open this door, but I remember seeing an interview of Trump, maybe by Charlie Rose, around the year 2000 or whatnot, where he kind of laid out a framework for thinking about actually why he governs in the way that he does. But anyway, that's for a different conversation, or maybe for the second hour. So tell me if I've got this right, because I might be missing some interest groups here, but it feels like part of what, there is a coalition that is motivated to fight this trade war out of grievance, just grievance, just wanting to hurt other people who have hurt them, or hurt somebody else, or just hurt. Another constituency is folks who, you know, support certain trade policies because it

• 38:58Speaker 00

  will insulate their industry, or it will help revive their industry or protect their job, or they perceive it to potentially protect their job. And another constituency are sort of national security-minded individuals who are concerned about whether it's dependency on TSMC or other critical supply chains, and they want to make America more resilient. I don't know if I'm sure I'm missing other important groups, but I'd love for you to, one, you know, whether you want to validate or push back against that framing, add any additional important interest groups, and then give me a sense of like, do you have a sense of which ones are most important in driving this policy? Like, do we know where the animating energy is coming from here?

• 39:41Speaker 01

  I think you've characterized it exactly right. And we have evidence, I think, from recent studies by economists of the first point that you identified, that have looked at the voters in the most recent election and found that President Trump's tariffs, if they looked like they were designed to address the previous grievances, right, the fact that they were the ones that have suffered because of import competition, even though his tariffs didn't make them any better off. They may have been worse off in terms of jobs, production in their communities, et cetera, because of his tariffs, they didn't care. They still voted for him anyway in the most recent election, and that may be because of this. They like the idea of somebody fighting for them, even though it may not actually help them, right?

• 40:26Speaker 01

  So the grievance story there. In terms of the interest groups, I think you've nailed it, right? You do have those, and we have evidence that it is largely those either on the export side, wanting access to foreign markets, and so they're the ones that tend to lobby for, push for globalization because it's good for them, it's good for their workers. Those that push against it are ones that are folks that are in industries that are worried about having to compete with imports, stuff made in other countries. The thing that's really new, and that's sort of always been there, and it's something that we understand, the thing that's newish, it's always been there at some level, but the reason again why is the China concern, and maybe some of these concerns about resilience and having production of really certain essential goods being located in really in narrow areas

• 41:08Speaker 01

  geographically, is this national security worry. It's not the first time in history, obviously, that we've had this come along, but it's really reared its head in the last five years or so. And again, for a couple of reasons, I would say, one is President Xi of China making clear his alternative view of the world, two, the fact that China is now so much bigger economically, and so when it makes decisions or does things in its own economy that has massive repercussions on us outside of China in ways that we didn't necessarily have to worry about 20 years ago when it was so much smaller.

• 41:46Speaker 01

  And then, three, because we were open to trade for so long, it allowed firms and multinationals to locate production where it was the most efficient, that oftentimes leads to this concentration of production in certain places, right? This is what the economist Paul Krugman won his Nobel Prize for, one of the things, right, was these kind of new theories of international trade that were brought about in the 1970s and 1980s about countries taking advantage of the fact that if you've got economies of scale in these big fixed cost industries, that it would be great for international trade to locate it all in one place. You get these spillovers, and you get workers learning from each other, and you get all kinds of specialized suppliers that actually couldn't be good for the world when the world

• 42:30Speaker 01

  is getting along, but it can also be really, really bad for the world and really risky when suddenly you expose the world to new kinds of shocks, whether the shocks of the pandemic that we talked about, public health, or maybe it's just we're now more exposed to climate-related shocks, droughts, and floods, and extreme weather events that make it risky to have all of your location of production, or earthquakes. Even if you weren't worried about China for geopolitical reasons, having all your production of the world's high-end chips located on one island, right, is probably not great for the global economy, because who knows what could happen? But then you layer on top of that, right, the rise of geopolitical concerns, and that obviously gives rise to new sets of worries as well.

• 43:13Speaker 01

  So it's not as if the national security and the resilience arguments haven't always been there, they've just risen more to the fore. And I think what we argue in the book is, if you're going to fight a trade war, and the argument in the book is, you are fighting some trade wars because they have been thrust upon us today, but the one that really does need to be fought, in a sense, that you need to address, is that one, right? You do need to worry about some of these resilience, some of these national security concerns, in ways that are just kind of fundamentally different from any of the other concerns that we have had in the past when it comes to international trade.

• 43:51Speaker 00

  Yes. So I think another interesting observation here, which is, I think, somewhat obvious for a lot of people, but I'll say it anyway, is that a big part of this isn't just about the downstream distributional consequences of free trade for national economies, that's part of it, the political backlash, it's certainly part of it. But a bigger, I would say, part of the story, or equally large, is the breakdown of the rules-based international system and American leadership, American hegemony, American unipolarity. And so that whole international trading system worked because of the political overlay, the international geopolitical overlay of the United States, and a particular form of American empire.

• 44:34Speaker 00

  American empire may not be going away, but at the very least, the nature of that empire is changing, and I think that's sort of the larger backdrop in which all of this really makes sense, that politics comes first and economics comes second. And I think that during the neoliberal era and the era of this rising technocracy, we failed to really grasp that. There seemed to be this desire to sell social science as more of a natural science, and there are economic laws, and you can obey them or not obey them, but in fact, these things are largely political, and the economy derives out of that. So I'm going to move us to the second hour, Chad. I want to talk about the players, because there's a whole section of the book about the players, the nations.

• 45:19Speaker 00

  Again, we've talked about some of this, but I really want to flesh it out, the nations. We haven't talked about corporations and multinational corporations, these are increasingly very important, not just international economic actors, but also geopolitical actors. And then also individuals, again, we've somewhat touched on this, but there are some interesting comparisons. I mean, I remember in the 90s where we did this asinine thing of like compartmentalizing people or breaking them apart into workers, and this is how I learned economics, or like, who does free trade benefit? Well, it benefits consumers, but it can hurt workers. And it's like, well, that also was kind of like an artificial framing that I think really missed the point. And then we'll have a chance to revisit the conversation about China and also the chapters around how to fight a trade war. So if we're going to go ahead and fight a trade war, what was the most effective way to do that?

• 46:04Speaker 00

  What are some of the most effective weapons, so to speak? Are they tariffs? Are they export controls? Where do we want to channel our energy? What are some complementary sort of policies that we want to implement, et cetera? For anyone new to the program, Hidden Forces is listener-supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Chad, head over to hiddenforces.io/subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device, using your favorite podcast app, just like you're listening to this episode right now.

• 46:47Speaker 00

  Chad, stick around, we're going to move the second hour of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at @Kofinas, and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.