Treasury's War Read online

  An encompassing definition must acknowledge that in the twenty-first century, our potential enemies are not easily categorized, but they could easily array against US interests by using the economic, digital, and global systems for their purposes. The nature of economic warfare now involves an environment where a single strategic act—enabled with low barriers to entry, digital connectivity, and the promise of relative anonymity—can have enormous global ripple effects. This danger may require the US government and US companies to operate differently. We must recognize that US economic interests—both public and private—are missing long-term opportunities, while international competitors are playing a different economic game entirely.

  To date, such threats and risks have not been wholly ignored, but neither have they been viewed systemically or holistically as part of a new national economic security ecosystem that may require the US government and US companies to change the way they do business. The rhetoric of paying attention to our core economic strengths must be matched with a strategy that sees economic and financial power as central to national security and a concerted effort to apply that strategy. We must redefine financial intelligence and public-private collaboration and must refocus our international systems, alliances, and doctrines.

  Reaffirming Core US Principles

  This new national economic security framework requires a recommitment to the core economic principles that the framework is designed to protect.

  The United States should eschew protectionism and retrenchment, remaining the vanguard of the global capitalist system and global trade rules and practices that reinforce trade liberalization.79 The United States is neither China nor Russia, and it should not seek to emulate their practices. This forces the United States to continue to respect the divide between the public and private sectors while finding creative ways of aligning those interests for the promotion of American economic influence and power.

  The United States should also continue to promote and enforce its standards abroad in the economic sphere. Mercantilist threats cannot be countered via mercantilism. But they do demand a muscular, activist strategy that protects the US financial industry and the liberal economic order. This includes enforcement of free trade rules, reciprocal investment opportunities, and anti-money-laundering and sanctions policies. Nowhere is this more significant than in the anticorruption field, where Chinese and Russian investments with no strings attached can promote corruption in fragile and developing states. This point is particularly important when dealing with economies that rely on extractive industries and the energy sector—where flows of capital can convert societies into kleptocracies.

  Setting this new approach into motion then requires a set of policies that recognizes the vulnerabilities and opportunities in this new environment, that takes into account the range of actors and tools that could be leveled against the United States, and that leverages the strategic opportunities therein. Confronting these new realities requires innovative policy, new institutions and doctrines, new modes of public-private collaboration and international cooperation, and new tools to account for the changes in the geo-economic ecosystem.

  Viewing and Treating the Geo-Economic Landscape Holistically

  The US intelligence community should reframe how it treats economic security matters by creating a new national economic security discipline. This would require institutionalizing private outreach and eliminating current stovepipes between economic, financial, and commercial expertise and the national security community.

  This broadened intelligence view should be matched by a corresponding policy focus on national economic security within the White House. Though there has always been a connection between the national security community and international economic issues like trade and macrolevel policies within the National Security and Economic Council structures, there is no corresponding policy focus on national economic security as defined above. Former Deputy Treasury Secretary Robert Kimmitt and others have argued for making the treasury secretary a statutory member of the National Security Council to reflect the growing salience of the economic and financial aspects of national security policy.80 This policy step would formalize what has already occurred in practice and is not a sufficient step to integrate geo-economics into core national security strategies and deliberations. Other government agencies and the private sector need a seat at the policymaking table, especially when the United States is competing abroad for resources and market access.

  The growing focus on interrelated systemic risks—to critical infrastructure and national security systems—should become the primary focus of the Department of Homeland Security. With its unique authorities, information, and personnel, already charged with protecting critical infrastructure and the borders and ports of entry, the department could forge a post-9/11 view of itself that is not defined by Al Qaeda or terrorism but instead is focused on protecting the systems that are critical to the functioning of the nation. This includes the cyber-domain along with the energy, maritime, financial, transport, and other systems that allow the American economy to run. DHS could then begin to shape the way in which the US government addresses these issues, serving as a lead federal agency in concert with the private sector in defending against threats and ensuring systemic redundancy domestically and internationally.

  This broader focus on national economic security may require new legislation to create transparency and accountability in the economic and investment space. The broad intent would be to reduce the danger of the United States being blindsided by unseen economic vulnerabilities or nefarious actors using legitimate financial and commercial systems to undermine US interests. An equally important purpose would be to ensure that the United States and the private sector could take full advantage of emergent opportunities. For example, Senator Carl Levin, a Michigan Democrat, has proposed legislation that would require revelation of beneficial ownership of corporate entities formed or operating in the United States. Such legislation would build on existing anti-money-laundering “know your customer” principles and requirements, giving US regulators and law-enforcement agencies better tools for identifying suspicious actors who were controlling companies, supplies, and financial networks operating in or through the United States.

  New Means of Public-Private Collaboration

  A new economic security approach requires a new paradigm of US public-private engagement and collaboration. This involves an evolution from classic, state-based national security actions toward deeper involvement of the private sector in arenas previously confined to the halls of government, with a commensurate and widening appreciation within governments of the power of markets and the private sector to influence international security. In arenas such as financial sanctions and anti-money-laundering and counter-terrorist-financing programs, the United States has already moved in this direction, relying on the private sector and the ability of financial institutions to act as protective gatekeepers to the financial system by identifying, reporting, and preventing the use of financial facilities by transnational actors and criminals of concern.

  The utility of this approach is that it is not based on private-sector altruism or civic duty, but on the self-interest of legitimate financial institutions that want to minimize the risk of facilitating illicit transactions that could bring high regulatory and reputational costs if uncovered. In other economic arenas, this symbiosis takes hold only with great effort, particularly given the private-sector aversion to increased regulatory burdens and associated costs. This means that governments need to check their regulatory practices and work closely to build consistent requirements and regimes across borders to help international financial institutions to operate effectively and efficiently. This challenge will be exacerbated as governments create new regulatory structures and requirements in the wake of the recent financial crisis.

  The innovation in public-private coordination is already occurring by necessity in the cyber-domain, with approximately 80 percent of the c
yber-infrastructure in private-sector hands. After the attacks on Google servers by Chinese hackers, Google and the National Security Agency began to work together in 2010 to help Google defend against future attacks. In the wake of the massive attacks on US banks in 2012 and continuing into 2013, the National Security Agency has begun a pilot project with the banks to try to track and prevent cyber-attacks. This kind of collaboration opens the door for more creative and widespread public-private cooperation to tackle cyber-threats and serves as a testing ground for such collaboration on broader issues of national economic security.

  New Doctrines, International Systems, and Alliances

  The United States needs to consider new doctrines that will drive its engagement on these issues and frame new systems and alliances in this intertwined geo-economic landscape. This includes accounting for those who would openly use economic warfare to destroy a country’s infrastructure or economy, the growing problem of anonymity and use of proxies via the Internet, and the common dependencies of multinational companies around the world on supply chains and digital and electronic infrastructure.

  For instance, if intertwined economies and global systems create vulnerabilities, they may also create barriers for the use of economic weaponry and leverage against US interests. China’s deep investment in US Treasuries gives it enormous potential leverage in a confrontation with the United States, yet it has restrained itself from doing anything to undermine the value of the dollar or confidence in the US economic system. Interdependence blunts China’s so-called dollar weapon. This suggests that by pursuing a strategy of quasi-bandwagoning with China—embracing interdependence and investing heavily in Chinese industry—the United States can also develop a new doctrine of deterrence by entanglement. With such a doctrine, the United States might set out to convince, cajole, and perhaps even force potential competitor and rival states to adopt a free trade model and practices more consistent with our own.81

  Importantly, the United States would need to view its relationships—with government and private-sector partners alike—as a vehicle to address some of the more complicated elements of national economic security. Creating alliances and arrangements based not just on trade opportunities or pure security arrangements, but also on shared economic vulnerabilities and strategies, might mitigate some of the risks in the international supply chain and concentrated resource and manufacturing systems.

  Such alliances could help shape new international modes of interaction in the global commons. In the context of cyber-security, the Obama administration has set forth a framework for international cooperation that could serve as the start for such new arrangements—leading to tactical cooperation such as joint international cyber-forensic teams and to agreements of nonaggression in cyberspace.82 This could lead to principles of engagement in cyberspace, rules for addressing anonymous attacks, and new preventive cooperative models, such as the concept of Mutually Assured Support.83 It could also enhance current efforts to isolate rogue actors in the international geo-economic system, such as money launderers and terrorist financiers—with countries further unified around labeling and isolating those who pose threats to the integrity and safety of the international financial and commercial systems.

  Conclusion

  In many ways, the United States has taught the world how to use financial power in the twenty-first century. The United States has deliberately leveraged US capital markets, the centrality of the dollar, and American ability to set global standards and mores to drive national security goals. The power of this paradigm is derived from the centrality and stability of New York as a global financial center, the importance of dollar-clearing transactions, and the demonstration effects of any regulatory or other steps taken by the United States or major US financial institutions in the broader international system. Our competitors have learned from our use of power, and our enemies have witnessed our vulnerabilities.

  Countries such as Russia and China will continue to challenge the predominance of the US-led international system and the dollar itself. If such attacks succeed fundamentally, they could potentially weaken the ability of the United States to affect or move private-sector decision making in line with national security interests, regardless of what other governments do. The advent of nuclear weapons forced scholars and policymakers to rethink their models and methods for advancing US national security. In a similar way, the coming financial wars will force the United States to adapt amid a new geo-economic order defined by globalization and the speed and ease of communication and transnational commerce. In the age of nuclear competition, the United States drew strength from its scientific and technological advantage. But it is becoming increasingly clear that America is losing its competitive edge in the era of economic security. This is particularly troubling in light of the unique advantages it possesses as the vanguard of the international trading and financial system and a hub of innovation and collaboration.

  The domain of financial warfare will no longer remain the sole province of American power. A wide array of state and nonstate actors may step up to wield economic power and influence in the twenty-first century. Confronting challenges, seizing opportunities, and minimizing systemic vulnerabilities must therefore proceed as part of a coordinated effort. The United States must begin to play a new and distinctly financial game of geopolitical competition to ensure its security and to seize emerging opportunities. Just as the mistakes leading to 9/11 were deemed a failure of imagination, the inability of the US government to recognize the changed landscape could be considered a collective failure of comprehension.

  The financial wars are coming. It is time to redesign a national economic security model to prepare for them. If we fail to do so, the United States risks being left vulnerable and left behind as other competitors race toward the future.

  EPILOGUE: LESSONS FROM THE USE OF FINANCIAL POWER

  The use of financial power and influence has become an accepted and central tool for protecting and projecting the national security interests of the United States. Just about every day, the US government employs some form of financial pressure—sanctions, financial and diplomatic suasion, regulatory pressure, or prosecution—to address issues in every corner of the globe—from terrorism in the Middle East to the drug wars in Mexico or human smuggling in Asia. The use of financial isolation as a core national security tool has now become deeply embedded in the practices of Western governments. These tools and strategies will not remain the sole province of the West for much longer. As the world changes, we must heed a number of key lessons from the use of these powers.

  Tending the Financial Ecosystem

  The financial techniques that the US Treasury Department has cultivated over the past decade must be tended carefully if they are to retain their power. Their effectiveness ultimately relies on a global financial, regulatory, and diplomatic ecosystem that rejects rogue financial behavior. That environment must clearly define legitimate financial activity and rules of the road—with rewards for participation and compliance in the legitimate order and guaranteed punishment and isolation for collusion with international rogues.

  What’s more, illegal or suspect conduct must remain the primary driver for attention and isolation. Though financial suasion may appear to be a tantalizing and powerful tool to achieve political or diplomatic motives, its efficacy will be drastically diminished if diplomatic goals take precedence over conduct-based drivers. Nor should the financial tools be overused. This particular form of financial power is not a silver bullet for each and every national security problem the United States faces, and it should not become the reflexive policy of choice in its maximalist form absent other solutions. It should be viewed as an essential element of creating leverage and shaping the environment, but used in concert with other forms of pressure and influence.

  This power relies on continued US leadership, the centrality of the United States as a financial center, and maintenance of the dollar as the world’s preferred reserve currency.
At the same time, it is a power wielded best when used in conjunction with other tools. It relies principally on the risk aversion and business calculus of the legitimate private sector and the credibility of the financial suasion wielded by the US Treasury and other relevant authorities.

  The ecosystem that allows for this form of financial warfare and isolation is resilient but fragile. The forced isolation of more and more actors—and the tendency of the private sector to decline doing business in at-risk sectors and jurisdictions and with suspect actors—raises the possibility of reaching a tipping point where the effectiveness of these tools begins to diminish. This is especially the case when the use of financial sanctions and regulations is used to address a diverse range of diplomatic and political ills and concerns—such as human smuggling, child labor, and human rights abuses. With the threat of financial sanctions, public opprobrium, and an erosion of reputation for doing business with suspect actors, legitimate financial actors—like major international banks—are exiting from problematic markets, “derisking” their operations. This raises concerns that less credible or scrupulous financial actors will step in to fill the vacuum. For authorities, this would entail a potential loss of visibility as certain types of financial activity become murkier and more difficult to detect; for the banks, it would mean even greater pressure to abandon certain segments of the population or regions of the world. We have seen this happening already. Banks that have been stung by enforcement actions and painful, public settlements are beginning to exit markets and business lines wholesale; some of the money-service businesses in North America are struggling to find banking relationships with major banks; and there are embassies that continue to struggle to maintain bank accounts in places like the United States and Switzerland.