The New Rules of War

Donald Trump may indeed regard “tariff “as the “most beautiful word in the dictionary,” but his exuberance for it reflects a broader reality. Just as we are now living in a bipolar—not multipolar – world, this is also an age where the rules by which war is waged have changed. The definition of war is not limited to the conventional interpretation of ships, tanks, missiles and planes backed up by soldiers but economic weaponry such as sanctions, tariffs and export controls -- equally effective weapons which great powers (or those aspiring to be great) wield against one another. While the United States arguably still possesses the world’s most fearsome economic arsenal, China, the European Union and others are starting to catch up.

In this contest, akin to military strategy, the key to geopolitical power is control over key chokepoints — critical nodes in the global economy where one nation holds a dominant position, and alternatives are scarce or non-existent. Countries that control these chokepoints command extraordinary leverage, as they can deny others’ access to them and devastate their economies.

Today, the most important chokepoint is the U.S. financial system — encompassing the dollar itself and the network of banks and payment systems that facilitate global commerce. Other highly consequential chokepoints include the technologies underpinning advanced semiconductors, the beating heart of the digital and electronic world. Thanks to its control of these chokepoints, which solidified in the period of hyper globalization following the Cold War, the United States no longer needs to commit to costly naval blockades or secure U.N. consensus to impose punishing sanctions on other countries — both of which it had to rely on to pressure Saddam Hussein’s Iraq as recently as the 1990s. Now, at the stroke of a pen, the U.S. president can impose economic penalties far more severe than the blockades and embargoes of old.

But as America has weaponized these chokepoints, the rest of the world has taken notice, threatening to undermine its position. From Beijing to Brasília, governments are racing to construct alternative financial channels, determined to avoid the fate of heavily sanctioned U.S. adversaries like Iran and Russia. Meanwhile, emerging technologies — such as A.I., digital currencies and clean-energy systems — are creating new chokepoints, triggering an intense competition for control among global powers.

Trump is attuned to this contest, as evidenced by his repeated threats of punitive tariffs against the BRICS — the international group of 10 countries including Brazil, Russia, India and China — if they create an alternative to the dollar. But history teaches us that economic dominance flows more from attraction than coercion. To reinforce U.S. economic power, Trump should consider leaning into his dealmaking instincts, using carrots rather than sticks to entice other nations to build their economies around American finance and technology.

The paradox of economic warfare is that sanctions and tariffs are only effective if you can first pull others in — and keep them there. If Trump fails to grasp this, his heavy-handed tactics may accelerate the very erosion of U.S.-controlled chokepoints that he seeks to prevent. A better approach would be to take a page from another Republican dealmaker who secured a cornerstone of American economic power half a century ago.

At a moment when the U.S. economy seemed at risk of a slow but inexorable decline, then President Richard Nixon sent his pugnacious treasury secretary, William Simon, to Saudi Arabia to stanch the bleeding from a devastating oil embargo against the United States. The mission could have been disastrous. But by cleverly packaging economic and military incentives, Simon managed to forge a deal that revolutionized the global financial system in ways we live with to this day — cementing American control over a critical chokepoint for decades to come.

1973 was a tough year for the U.S. The economy was in the dumps. Nixon’s decision to end dollar-gold convertibility two years prior had ushered in a system of floating exchange rates and caused the dollar to plunge. Years of heavy spending on the Vietnam War had degraded America’s financial health. Inflation soared to heights last seen in the 1940s. Instead of focusing on confronting these headwinds, Nixon floundered to contain the Watergate scandal.

America was rapidly declining as an energy superpower and losing its traditional status as the swing producer in the global oil market. U.S. oil production peaked in 1970 and would not reach the same level again for 50 years. For the first time, the country became dependent on oil imports, largely from the Middle East.

Compounding this situation, on October 6, 1973 — the Jewish holy day of Yom Kippur — a an Arab coalition of neighboring states attacked Israel. Two weeks later, in response to a request by Nixon to Congress for emergency aid for Israel, Saudi Arabia and the other members of the Organization of Petroleum Exporting Countries (OPEC), the oil-producers’ cartel, cut production and imposed an oil embargo on the United States. All told, the Saudis and their allies slashed some 5 million barrels per day from global oil markets, amounting to almost 10 percent of worldwide production.

The result was a calamitous energy crisis which could have risked the world entering a smei permanent state of national rivalry, competition, perhaps even depression which could have compromised the stability of the global order. The man charged with avoiding that outcome was Nixon’s energy czar, William Simon.

A chain-smoking New Jersey native so conservative he was once described as “far to the right of Genghis Khan,” Simon had joined the administration after a career as a bond trader on Wall Street, and his gruff style and short temper suited the confrontational nature of his new job. Not everyone could have made the fraught decision to ration gasoline, that American lifeblood, and allocate scarce oil supplies to factories over motorists. But that’s what Simon did.

By the end of the year, Americans were waiting hours to fill their tanks. (“I’m the guy that caused the lines at the gas stations,” Simon admitted.) Prices at the pump surged by 40 percent. Even after OPEC lifted the embargo in March 1974, oil prices did not fall back to earth. In 1970, the price of a barrel of oil was about $1.80. By 1980, the price was $39 — an increase of more than 2,000 percent. America’s import bills skyrocketed, and deficits spiked. On top of the energy crisis, America teetered on the brink of a full-fledged financial meltdown.

In May 1974, with the president fighting for his political life over the Watergate scandal, Simon took up a new role as treasury secretary. His solution to the strain that higher oil prices were putting on America’s finances was to convince Saudi Arabia to invest its windfall oil profits in U.S. government debt. This way, the Saudis would essentially recycle the dollars America paid them for oil, plugging the U.S. deficit.

In July 1974, Simon boarded a plane at Andrews Air Force Base and headed for the Saudi coastal city of Jeddah. En route, he passed the time by indulging in copious amounts of alcohol. By the time he got off the plane, he was hardly in a condition to walk a straight line.

Yet, liquor seemed to have no apparent effect on his negotiating ability. While Simon was no Kissinger (not many people were, and are) -- he was hardly anyone's definition of a diplomat, he was nevertheless a damn good bonds salesman, and he left with a deal in hand: In exchange for American military assistance and continued oil purchases, the Saudis would funnel their oil money into U.S. Treasury bonds, which they would be permitted to buy in secret outside the normal auctions. Simon had secured a commitment by a foreign country to finance American deficits — lol and behold the birth of what we have come to call the pertodollar.

In the years that followed, there were moments when Simon’s deal risked coming apart at the seams. As the dollar continued to plunge throughout the 1970s, the real value of Saudi oil profits fell in lockstep. The weakening dollar was effectively reducing the global price of oil. As a result, in 1975, OPEC resolved to stop pricing oil in dollars, opting instead for a basket of currencies. But before the plan could be implemented, Simon’s successor at Treasury, Michael Blumenthal, cut a fresh quid prop quo deal with Riyadh. The United States promised to help Saudi Arabia obtain more voting rights at the IMF, and in exchange, the Saudis and their OPEC partners would continue to price oil in dollars.

Over time, Simon’s arrangement crystallized into a structural feature of the world economy. Oil is still priced in dollars, and foreigners still finance American deficits. Petrodollars became a key ingredient in an increasingly global financial system — a system dominated by the United States.

Today, more than at any other point in the past fifty years, this deal — and the wider dollar-based financial system it helped kick off — risks unravelling. Most directly, China is pushing to replace the petrodollar with the petroyuan. China has set up all the necessary infrastructure to trade oil in yuan, including launching a yuan-denominated oil futures contract on the Shanghai International Energy Exchange, extending currency swap lines to major oil-exporting nations and forging homegrown systems for payment settlement. After its 2022 full-scale invasion of Ukraine and subsequent Western sanctions, Russia became the first big oil producer to price a sizable share of its energy exports in yuan. Beijing is now at work trying to coax a bevy of Gulf states -- Saudi Arabia, the United Arab Emirates and other petrostates -- to follow suit. The Middle Kingdom will struggle to popularize the petroyuan unless it loosens capital controls, but the headway it’s making is undeniable.

The nascent petroyuan, moreover, is just the tip of the iceberg. Countries from Brazil to India to Saudi Arabia are actively building alternative financial channels, seeing them as insurance against America’s economic arsenal with the BRICS coalition acting as the primary vehicle for these efforts. In 2023, the group expanded for the first time, bringing in a diverse array of new members including Iran and the UAE. Their stated goal is modest — creating new payment systems to facilitate trade between members, but the implications are substantial. In 2024, a Chinese-led initiative called mBridge demonstrated it could settle cross-border transactions using digital currencies in seconds, bypassing the dollar-based system entirely. Adding fuel to the fire, Saudi Arabia, the linchpin of the petrodollar system, recently joined the project, making it easier to imagine a future in which America’s ability to wield financial power is severely curtailed.

Donald Trump is rightly concerned by these shifts, but he seems to be fixated on the wrong problem. He has repeatedly threatened 100 percent tariffs on the BRICS nations if they attempt to create a common currency — even though a formal BRICS currency union is far-fetched, given the geopolitical rifts between members like China and India. Meanwhile, his administration has yet to confront the rise of mBridge or the Cross-Border Interbank Payment System (CIPS), China’s alternative to the financial messaging giant SWIFT. CIPS has expanded rapidly, bringing thousands of banks into its network — including even some large Western institutions like HSBC — and its transaction volume is growing by more than 50% year-over-year. Trump has also been unable thus far to put forward a counterstrategy to China’s digital renminbi, or e-CNY, which was launched in 2020 and is by far the world’s most advanced central bank digital currency.

The United States cannot outcompete these new financial systems by standing still. The infrastructure supporting cross-border dollar transactions was built in the 1970s, and it still takes days — sometimes even longer — to settle an international wire transfer. By contrast, digital currency networks promise near-instant settlement. If America does not modernize its financial architecture, systems like mBridge will reshape global finance within the next decade while the US finds itself relegated to the sidelines.

Trump has openly embraced cryptocurrencies, but his approach is more geared towards retail speculation than serious financial innovation. Championing meme coins will do little to help the United States counter China’s push for digital payment dominance. If anything, his tariff-happy policies risk undermining the credibility of the U.S. financial system, making alternatives more appealing.

The challenge to American financial leadership does not come solely from China and the rest of the BRICS. Europe is also poised to take advantage of the shifting global dynamics. Almost four months into his second term, Trump’s sweeping use of tariffs and sanctions has created an opportunity for the euro to gain ground against the dollar. European stock markets have outperformed their U.S. counterparts since the start of the year, prompting big asset managers to shift capital across the Atlantic. If the EU follows through on plans for large-scale rearmament and joint debt issuance (albeit big ‘ifs’ given their history of rhetoric versus follow-through), the euro could inch closer to parity with the dollar — offering a viable alternative to the dominant currency. And while U.S. tariffs typically strengthen the dollar — as they reduce demand for foreign currency — the reverse has happened in the wake of Trump’s tariff barrage: The dollar has slid by more than 5 % against the euro and other major currencies since he entered the White House. This unexpected dip could be the shape of things to come.

When Trump imposed and then hastily withdrew sanctions on Russian aluminum company Rusal in April 2018, the Russian government responded by shifting its reserves into euros and settling most of its trade in the currency. If Trump’s policies continue raising the geopolitical risk of holding dollars, other countries may turn to the Russian playbook, opting not just for the yuan but also for the euro.

To be sure, Trump is a self-described “Tariff Man” — he loves economic warfare. But he also sees himself as a dealmaker, and it’s this side of his personality that will be crucial to retaining American financial leadership. The lesson of Simon’s deal is that economic dominance is not imposed by force; it must be cultivated. The petrodollar system endured for decades because Saudi Arabia saw long-term benefits in anchoring its financial future to the United States.

To preserve America’s financial primacy, Trump must offer the world a compelling rationale to remain within the dollar-based system. That means reinforcing the message that U.S. capital markets as the safest and most attractive destination for investment. It means strengthening trade and financial ties with allies while selectively diversifying away from adversaries like China. It also means ensuring that the United States is at the forefront of financial technology so that, as global payments systems evolve, the key networks still run through America.

Most importantly, it requires maintaining America’s reputation as a responsible steward of the international financial system. Currencies ideally function as a kind of everyday infrastructure that one uses without having to do much thinking, like a road is for a driver. The less the average company needs to worry about the currency it uses, the better. Two of the dollar’s main advantages over the yuan, for instance, are confidence in the Federal Reserve’s independence and trust in America’s commitment to the rule of law. For all the appeal of the Chinese market, when deals go sideways, most executives would rather find themselves in an American courtroom than a Chinese one.

Ultimately, therefore, the greatest threat to the dollar’s supremacy emanates not from China or Europe but from America’s own political system. If Trump eventually politicizes the Fed like he implied during his first term and ends its monetary policy independence — or worse, if the justice system is debased and the rule of law called into question — the advantages of the dollar over other currencies will fade as it ceases to be perceived as a safe, predictable haven.

Economic power is not static — it must be actively maintained. William Simon, Richard Nixon and successive presidents have understood that. It’s probable that Trump, who is more sagacious than condescending elites realize, does too.

Now that he has the world's attention through his aggressive tariff stance, what will he do long term? Or is he really, as his detractors claim, only capable of transactional thinking?