Underground Empire by Henry Farrell and Abraham Newman

Right up front I should say that Henry Farrell, one of the authors of Underground Empire: How America Weaponized the World Economy, is a friend from graduate school. Part of me read this book the way one would read a draft of a friend’s project — not that Henry has ever wanted or needed my editing — pulling at the arguments, applauding good lines, suggesting tweaks here and there throughout the manuscript. And while doing that here would be fun (for blogger/editor values of “fun”), it would be entirely beside the point for Underground Empire. The book builds on the two authors’ academic work and aims to bring their ideas to a larger audience of policy practitioners, people who influence international relations, and interested citizens.

If everything exceeds expectations, Henry and co-author Abraham Newman will break out of the half-academic corner, and their book will join the line of discourse-shaping works such as The Rise and Fall of Great Powers, The End of History and the Last Man, The Clash of Civilizations and The World Is Flat. In contrast to most of those works, which are almost all expansions of journal articles,* Underground Empire is better for the non-specialist to read than its underlying article for at least three reasons. First, the authors have had four more years to refine their ideas and presentation, to gather more examples, and to have seen how officials have reacted to — and sometimes made use of — their ideas in real-world international relations. Second, they have taken out most of the academic and theoretical apparatus behind their ideas. They have left in the insights, and made them approachable for a larger audience without simplifying them to the point of caricature. Third, they are willing to look forward as well as backward and sideways. Henry and Newman close with a chapter that takes the interdependences the rest of the book has described and sketches how they could be used to help create a sustainable future in which humanity overcomes many of the perils of the twenty-first century.

What are their ideas? Henry and Newman take readers on a journey to some key places of the early twenty-first century. In short, after the end of the Cold War new global institutions were built around the idea of networks. I use the passive voice advisedly, because in contrast to the institutions that states made after the end of World War II, the ones that emerged from the aftermath of the Cold War were not grand designs. The World Trade Organization evolved from the General Agreement on Trade and Tariffs. The builders of the internet gave the network of networks characteristics, not a detailed plan. International banks found solutions to pressing business problems; what they came up with was not what anyone would have done if they were building a global financial system from the ground up, it was what held together well enough until the next crisis came along.

One of the assumptions of building the post–Cold War era was that in the absence of ideological competition between two opposing systems, the problems to be solved were practical one. Accompanying this was the idea that interaction, particularly through trade, would bring societies away from autocratic rule and toward political approaches that valued individual persons. In German it’s called Wandel durch Handel, “change through trade,” and it underpinned much of the rich world’s relations with China over the last 30 or so years. Many factors contributed to long-term growth in international trade, and supply chains became more like supply networks. Raw materials, designs, stages of production, customization — different stages of producing goods and services took place in different places around the world. And the world in turn became interdependent.

What it didn’t turn out to be, however, was decentralized. Though the internet is famously thought of as decentralized — as the adage goes, “the internet interprets censorship as damage and routes around it” — that also turns out to be much less true than cyberideologues would like to believe. At a physical level, much of global digital traffic passes through a relatively small number of undersea cables. (Far more than in the past, of course. Henry and Newman tell of Citibank employees holding open a phone line from New York to Brazil by talking continuously because if they let go of the line it might be days before the bank could get another one.) The states that control the locations where the cables return to land have unique opportunities to listen in on all the traffic on those cables. Henry and Newman also discuss cloud computing, the apparently decentralized computer resources that can be expanded almost infinitely to meet an organization’s needs without their having to own or maintain actual devices. The authors’ exposition shows what any technical professional knows: there is no cloud, there are only other people’s computers. Not only that, physical location plays a role, too. If major companies want to work as efficiently as possible, they will want to locate their data centers close to others, or maybe even have servers near each other in a third-party provider’s facility. That way, their data traffic may not need to travel through outside cables at all. The upshot is that clusters of data centers that were established early tended to attract more and more of the same; network effects locked in first-mover advantages for places such as the north Virginia suburbs of Washington, DC or the Bay Area near Silicon Valley.

So that is the interdependent world that many readers will recognize from Henry and Newman’s description. The “weaponized” part of their phrase comes from the realization by states, particularly the US federal government, that control of these concentrated locations can mean that the interdependencies and the networks that embody them can be made to do things that the state wants them to do. Sometimes networks or apparently decentralized devices that were created specifically to avoid state — especially American — oversight and control have wound up, years down the line, giving the US much greater leverage. Underground Empire details examples such as eurodollars and the SWIFT messaging system.

The first are US dollars held by banks outside the United States. They first became present in significant amounts as Marshall Plan aid for the reconstruction of Europe led to dollars flowing into western European economies. Three quarters of a century later, the US dollar is the most widely used currency of international trade. These offshore dollars keep goods and commodities moving; without them trade in things as fundamental as wheat and crude oil would be much slower and more difficult. Fundamentally, though, dollars are issued by the US Federal Reserve and are backed by the full faith and credit of the federal government. In one reading, anyone trading in an item priced in dollars is doing business with the United States. When the US was looking for ways to respond to the attacks on New York and Washington on September 11, 2001, finding ways to stop the flow of funds that supported Osama bin Laden’s operations was high on the list.

Over time, the Treasury Department developed tools to dry up funding that touched dollars. Terrorists and criminals didn’t much care about sanctions from the Treasury, but at some stage they interact with legitimate banks that do care. If the Treasury can’t directly find the criminals, they can take action against banks that they think do business with the criminals. These “secondary sanctions” can effectively shut down an international bank, if applied stringently. In fact, even the hint that they might be applied can be sufficient leverage to get a bank to do the things that the US government asks it to.

SWIFT — the Society for Worldwide Interbank Financial Telecommunication — is a means for banks to send messages to other banks confirming the validity of transactions at a distance. It is an old problem — the authors of Underground Empire mention Francis Spufford’s Golden Hill, which turns on exactly the question of whether a large credit is genuine — and had progressed to hand-read messages via Telex machine by the early 1970s. European bankers worried that a New York bank was on the verge of monopolizing the business of interbank messaging, and thus giving itself a massive competitive advantage, so they set up SWIFT to avoid American control. As SWIFT grew into a global standard, it became a key part of international interdependence. The lion’s share of international transactions involve SWIFT, with exceptions of separate attempted competitors developed by China, Russia and India. A bank disconnected from SWIFT is a bank that cannot do international business. That centrality also means that SWIFT is a node that can be put to a state’s use, it can weaponize the interdependence of global finance.

Over the short and engaging chapters of Underground Empire, the authors trace how interdependencies came to exist, how American authorities discovered their leverage, and how over the successive administrations from George W. Bush to Joe Biden they have put that leverage to use. Put briefly, the Bush people were scrambling to take action after 9/11. The Obama people tried to be judicious, thinking that using leverage might lead to others setting up competing systems that would freeze the Americans out. They were most aggressive in regard to Iran, leading up to the Joint Comprehensive Plan of Action (JCPOA) that would stop Iran’s development of nuclear weapons technology in exchange for step-by-step lifting of sanctions against Iran’s economy. The Obama administration used the techniques described in Underground Empire, especially secondary sanctions, to give the JCPOA real teeth to make sure lived up to its end of the grand bargain. People who chose to work for Donald Trump were unsurprisingly much more willing to weaponize interdependence because they felt like it and believed that they could. They tore up the JCPOA and kept sanctions going anyway, for example. The biggest surprise of that era is that they got less pushback than they expected. (I think the reason for that is a mix of self-interest and the time and effort necessary for substitutes to be built. I suspect that resistance to American aggressiveness is likely to be the way that Hemingway described bankruptcy: gradually and then suddenly.) Underground Empire went to press in early 2023, and the authors’ assessment of the Biden administration is that they have been nearly as aggressive as their immediate predecessors but with a lot less bluster.

The topics may sound arcane, and the details are definitely arcane but the upshot is power in the twenty-first century: who has it and what they do with it. Underground Empire shows how these parts of the world got to be the way that they are, and what some of the consequences might be. In their final chapter, Henry and Newman show not only how the Biden administration put together an unprecedented array of sanctions against Russia following it’s full-scale invasion of Ukraine, but also how the methods described in the book might be used against carbon-intensive industries that are subsidized by other states. The first is an example of defending the liberal international order against an attack by an autocratic state; the second could be part of slowing and eventually reversing climate change, the stick to complement a range of carrots. In both instances, the methods described in Underground Empire are being put to conscious use.

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* The exception is Thomas Friedman, whose work on the Middle East is sometimes good because long ago he was a good reporter and that’s occasionally relevant, in contrast to his work on globalization, where his writing was perhaps glibly appealing when it was new but has not stood the test of time.