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PUBLISHED IN HBR
JANUARY–FEBRUARY 2020
ARTICLE
ECONOMICS & SOCIETY
Choke Points
Countries are turning economic infrastructure into political
weapons, and that poses a major risk to business.
by Henry Farrell and Abraham L. Newman
For the exclusive use of M. Hu, 2020.
This document is authorized for use only by Meiyi Hu in International Business Strategy Winter Semester 2020 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona
from Jan 2020 to May 2020.
http://hbr.org/search/R2001K
Henry Farrell
Professor, George
Washington
University
Abraham
L. Newman
Professor,
Georgetown
University
AUTHORS
PHOTOGRAPHER LUCA ZANIER
CHOKE POINTS
Countries are
turning economic
infrastructure
into political
weapons, and
that poses a major
risk to business.
ECONOMICS
+
SOCIET Y
2 Harvard Business ReviewJanuary–February 2020
For the exclusive use of M. Hu, 2020.
This document is authorized for use only by Meiyi Hu in International Business Strategy Winter Semester 2020 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona
from Jan 2020 to May 2020.
FOR ARTICLE REPRINTS CALL 800-988-0886 OR 617-783-7500, OR VISIT HBR.ORG
Harvard Business Review
January–February 2020 3
For the exclusive use of M. Hu, 2020.
This document is authorized for use only by Meiyi Hu in International Business Strategy Winter Semester 2020 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona
from Jan 2020 to May 2020.
http://hbr.org
IDEA IN BRIEF
THE VULNERABILITY
To keep the global
economy working
smoothly, crucial
resources such as
money, information,
and components pass
through an intricate
system of conduits.
But while this critical
invisible infrastructure
may seem to be
decentralized and have
multiple redundancies,
it has significant choke
points.
THE NEW RISK
A new political risk
comes from powerful,
wealthy states—
especially the United
States—that use legal
authority or coercion to
turn economic networks
into tools of domination,
ensnaring businesses
in the process.
THE RESPONSE
Multinational
businesses should
analyze their exposure
to network choke
points. Lobbying
government officials
and teaming up with
industry peers to resist
coercion can mitigate
the risks.
businesses have built an awe-inspiring global
infrastructure. Digital pipelines move vast
amounts of capital and data around the world,
and supply chains crisscross international
boundaries in a spider web of commerce. An
intricate system of networks keeps the global
economy running smoothly, but it’s easy to
take for granted, because it remains largely
hidden from view.
Though these networks appear to have multiple redun-
dancies and to be decentralized, many have significant choke
points. Global finance relies on a single organization in Belgium
to relay the majority of transactions between banks. Cloud
computing’s information storage facilities are often located in
the United States. Complex supply chains can be dependent
Luca Zanier/A
nzenb
erger
4 Harvard Business ReviewJanuary–February 2020
Since the
end of the
Cold War,
For the exclusive use of M. Hu, 2020.
This document is authorized for use only by Meiyi Hu in International Business Strategy Winter Semester 2020 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona
from Jan 2020 to May 2020.
on a handful of components, like the chips Qualcomm makes
for devices with the Android operating system.
These choke points allow seemingly neutral infrastruc-
ture to be manipulated by governments to further their
national strategic goals. China’s push into 5G equipment has
raised concerns in the West precisely because it might give
the Chinese access to key parts of emerging communications
networks. Japan recently restricted the export to South Korea
of three chemicals crucial to the production of semiconduc-
tors, because of a political spat with Seoul. And the United
States has aggressively exploited its control of a variety
of seemingly technical structures that make global trade
possible; it now appears increasingly willing to turn those
structures into a machinery of domination.
This new reality was summed up by former NSA director
Michael Hayden in describing why the U.S. government
coerced tech companies to help its surveillance efforts by
sharing confidential information routed through private
servers on U.S. soil: “This is a home game for us….Why would
we not turn the most powerful telecommunications and
computing management structure on the planet to our use?”
Today the political risk businesses face doesn’t come
just from developing countries that might abruptly change
market rules or nationalize assets. It comes from powerful,
wealthy states that are turning economic networks into
political weapons. The stakes are high. Companies that
are isolated from critical networks can go out of business.
A global bank blocked by the United States from accessing
a secure interbank communication system because it pro-
vides financial services to an American adversary is not going
to be a global bank for long. A technology manufacturer that
can’t buy sophisticated chips is in big trouble. Businesses
that control digital hubs and are pressed into service by states
can suffer reputational damage. U.S. tech giants like Google
and Facebook, for example, took a hit in foreign markets after
Edward Snowden revealed that they had cooperated with
U.S. surveillance activities.
What can global firms do to protect themselves? The key
is to understand the specifics of the networks your organi-
zation depends on and then create a strategy to address the
possibility that they will become weaponized. But to start
with, executives need to accept that the world—and specifi-
cally, America’s role in it—has changed.
AMERICA’S NEW ROLE
As political scientists, we’ve been studying the United States’
use of economic networks to achieve its national objectives
for close to two decades, and we feel that the corporate world
consistently underestimates the risks from this form of politi-
cal muscle flexing. In large part that’s because the country has
long been a proponent and guarantor of global business, so
it’s hard to conceive of it as a potential threat. It’s equally hard
to imagine that the networks that have been the driving force
of globalization could be used to chain and entangle compa-
nies. But we believe that the “America first” approach, which
treats international business infrastructure as a political tool,
is profoundly reshaping the world economy.
Note that this isn’t a new strategy for the United States;
Hayden’s remarks were made in 2013. Indeed, the George W.
Bush and Obama administrations both used U.S. Treasury
controls and the dollar-clearing system—which converts for-
eign currencies into dollars, the lingua franca of international
trade—to try to prevent financial institutions from providing
services to Iran and North Korea. America’s intelligence ser-
vices pressed U.S.-based internet-communications firms not
only to provide data on suspected terrorists but also to help
spy on U.S. adversaries, rivals, and even partners.
However, what started as an aggressive and coordinated
response after 9/11 has been supercharged by the Trump
administration, which at times has replaced diplomacy
with the raw exercise of power. The president has increas-
ingly been weaponizing economic networks and has rarely
coordinated with businesses or allies when doing so. And his
administration has targeted developed nations and economic
powers like China rather than rogue regimes and terrorists,
which has emboldened China and other countries to retaliate
or even mimic America’s tactics to further their own interests.
To understand how things have changed, consider
America’s sanctions against Iran. The Society for Worldwide
Interbank Financial Telecommunication (SWIFT), based in
Belgium, runs a secure financial-messaging service that is
used for most global financial transactions. In 2012 the Obama
administration and the European Union used this choke point
to press Tehran for concessions on its nuclear program. They
cut Iranian financial institutions out of SWIFT in 2012 but
then restored access after a nuclear deal was struck in 2015.
ABOUT THE ART
Photographer Luca Zanier’s project Corridors of Power investigates international sites of political and
economic power and the often unseen rooms where important decisions are made. Previous spread:
UN Room XXIV, Geneva 2013. Left: Council of Europe Strasbourg I, Committee of Ministers, 2015.
ECONOMICS
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Harvard Business Review
January–February 2020 5
For the exclusive use of M. Hu, 2020.
This document is authorized for use only by Meiyi Hu in International Business Strategy Winter Semester 2020 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona
from Jan 2020 to May 2020.
http://hbr.org
During the presidential campaign, Trump railed against
the agreement with Iran. Despite desperate attempts by
European politicians to save it, the United States withdrew
from it in 2018 and then unilaterally reinstated sanctions
that made it illegal to buy Iranian oil. Any banks—including
foreign banks—that facilitate such transactions could face
U.S. fines. BNP Paribas and others had already paid billions of
dollars in penalties for violating the previous round of sanc-
tions. Citing the risk that new fines associated with Iranian
trades could destabilize the financial system, SWIFT felt it
had no choice but to cut off Iranian banks’ access in 2018.
This time the Europeans were apoplectic. French finance
minister Bruno Le Maire said that European countries should
not accept the United States as the “economic policeman of
the planet” and allow themselves to become its “vassals.”
The Trump administration has also exploited its de facto
control of the flow of crucial tech components to target both
China and rogue states like Iran and North Korea. From 2010
to 2016 the Chinese telecommunications manufacturer ZTE
sold restricted technologies to Iran and North Korea, violat-
ing U.S. export controls. It was forced to agree to an expen-
sive settlement with U.S. authorities. When ZTE flouted that
settlement, the U.S. government banned American firms
from supplying ZTE with parts, including the Qualcomm
chips it needs. This might have driven ZTE out of business
if President Trump had not swapped a lighter penalty for
concessions in his trade fight with China.
More recently, the U.S. government blacklisted the
Chinese telecommunications giant Huawei. Corporate
America had expected the United States to ban Huawei from
selling to domestic markets. Many in the business commu-
nity, however, didn’t anticipate the decision to restrict the
export of U.S. technology to Huawei, putting the firm’s very
existence in danger and injecting uncertainty into global
supply chains. Huawei estimated that more than 1,200 U.S.
firms would lose contracts with it. Google has warned that
it will not provide Android to new Huawei phones, and
Microsoft temporarily stopped selling Huawei laptops in its
online store. This has led China to threaten to constrain its
sales of essential rare-earth metals to U.S. technology com-
panies and to start building its own blacklist of foreign firms.
FedEx is at risk of being put on that list, because the Chinese
government claims that the company knowingly rerouted
CLOCKWISE FROM TOP LEFT: EU Parliament
Strasbourg II, Plenary Chamber 2015;
UN Security Council, New York 2008; PCF French
Communist Party, Paris 2010; Council of Europe
Strasbourg, Parliamentary Assembly 2015.
ECONOMICS
+
SOCIET Y
6 Harvard Business ReviewJanuary–February 2020
For the exclusive use of M. Hu, 2020.
This document is authorized for use only by Meiyi Hu in International Business Strategy Winter Semester 2020 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona
from Jan 2020 to May 2020.
FOR ARTICLE REPRINTS CALL 800-988-0886 OR 617-783-7500, OR VISIT HBR.ORG
Harvard Business Review
January–February 2020 7
For the exclusive use of M. Hu, 2020.
This document is authorized for use only by Meiyi Hu in International Business Strategy Winter Semester 2020 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona
from Jan 2020 to May 2020.
http://hbr.org
Huawei packages destined for China from other countries in
Asia to the United States. U.S. manufacturers are frantically
checking their supply chains to identify Chinese partners
that might be subject to the new economic tensions, while
financial firms are asking whether they want to orient
themselves toward the United States or China. Everyone
fears the worst is yet to come, because Trump has “ordered”
U.S. companies to immediately find alternatives to Chinese
suppliers, and other U.S. policy makers are asking whether
America needs to “decouple” its economy from China’s. In
October 2019 the U.S. government blacklisted an additional
28 Chinese firms for their role in human rights violations
against Muslim minorities in China. As of this writing, the
U.S. Justice Department was trying to block the completion
of a $300 million submarine cable that would connect Hong
Kong and Los Angeles—and had already mostly been laid
by Google, Facebook, and Dr. Peng Telecom & Media Group,
a Chinese company—on the grounds of national security.
A NEW GAME
As other powerful states respond to and even model the U.S.
strategy, a war is quietly being waged through manufacturing
ties and business relationships. U.S. officials are concerned
that Chinese-produced components could be compromised
and then deployed in surveillance activities or even sabotage.
Chinese leaders fear that the United States will use the ZTE
playbook against more Chinese firms. They worry that Amer-
ica sees Chinese economic strength as a security threat and
will do everything it can to hamper and even cripple the Chi-
nese economy. This is one reason they’re trying to accelerate
their ability to develop and manufacture advanced chips: so
that they won’t be at the mercy of the U.S. government.
Although the European Union has officially identified
China as a rival and begun to pay much closer attention
to Chinese acquisitions, it is still far less belligerent toward
China than the United States is. Indeed, it’s beginning to
create ways to work around U.S. economic power and perhaps
even oppose it. For instance, Europeans have started to exper-
iment with alternative financial channels that are less exposed
to U.S. pressure. In 2019 the governments of France, Germany,
and the United Kingdom jointly created an international
barter system, known as Instex, which offers an alternative
payment method that circumvents U.S. sanctions on Iran.
Instex has had teething problems, and trade between Iran
and Europe is negligible, but Europe’s experiment may give
it the tools to counteract future U.S. sanctions against much
more economically important countries, like Russia.
Disputes can quickly escalate. When Japan pushed back
against South Korean claims for World War II reparations by
blocking the export to Korea of key chemicals needed by the
semiconductor and manufacturing industries, it sent chills
through the boardrooms at Samsung and LG. South Korea,
in turn, has threatened to retaliate by cutting off supplies of
heating oil to Japan. Businesses are being forced into invol-
untary service in purely political disputes.
UNDERSTANDING YOUR EXPOSURE
The firms located at choke points are the most directly at risk.
Google’s Android operating system, Visa’s payment channel,
FedEx’s courier and logistics services, and Qualcomm’s chips
are all hugely profitable because they sit at the center of vast
global networks everyone wants access to. Their market
control has always been a gold mine. It’s now also a political
vulnerability, creating dependencies that powerful govern-
ments may want to exploit for national security purposes.
Companies that lie at emerging choke points are likely
to also come under pressure. Behind the U.S. case against
Huawei is a straightforward fear: that America will lose con-
trol over 5G networks and the internet of things. U.S. security
would be threatened in a world where everyone depends on
Chinese communications technology. Building a choke point,
knowingly or not, puts you in the crosshairs.
When governments target choke-point companies, other
businesses can get caught in the crossfire. The U.S. ban on
Huawei reverberated throughout the firm’s supply chain.
The U.S. chipmaker Skyworks, which got 12% of its sales from
Huawei, was blindsided; its stock fell sharply and took weeks
to recover. Upstream, political uncertainty is leading all
telecommunications firms to delay 5G investments. The CEO
of Sweden’s Tele2, Anders Nilsson, put it bluntly: “Decisions
are postponed. This is not only Huawei; this is all vendors.”
As China retaliates, the economic fallout is likely to
spread. Cisco’s CEO, Chuck Robbins, says the anti-American
backlash in China is hurting his company: “We’re being
uninvited to bid. We are not even being allowed to partici-
pate anymore.” Tertiary companies that are neither choke-
point providers nor directly up- or downstream will also
be affected. A slowdown in 5G’s rollout will reshape entire
markets for mobile equipment, audiovisual offerings, and
smart, connected products.
Can’t diversification help companies avoid this new form
of risk? Firms don’t like relying on a single supplier anyway,
ECONOMICS
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SOCIET Y
8 Harvard Business ReviewJanuary–February 2020
For the exclusive use of M. Hu, 2020.
This document is authorized for use only by Meiyi Hu in International Business Strategy Winter Semester 2020 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona
from Jan 2020 to May 2020.
since that supplier might raise prices, defect to competitors,
or go bust. But diversification won’t mitigate political risk if
all the suppliers of, say, a critical component are in the same
country or dependent on the same choke point. Instead,
executives should think about developing alternative net-
work hubs or in-house or in-country capabilities that allow
them to minimize vulnerabilities. After the ZTE incident,
Huawei saw that it was at risk and stockpiled its U.S.-made
components. Increased redundancy may also reduce
vulnerability.
Doing an analysis of the risk your specific sector faces
is helpful too. The Trump administration (and, ultimately,
its successors) will probably weaponize a host of networks,
but some sectors are more exposed than others are. In
recent disputes with China, the United States has focused
on technologies like telecommunications, drones, and
surveillance systems, all of which are viewed as having both
commercial and military applications. But less-obvious
sectors are increasingly vulnerable. It is unlikely that Beijing
Kunlun Tech expected the United States to request that it
divest Grindr, a gay dating network, but if it had thought
about how personal information could be used for blackmail,
it might have foreseen the possibility. Companies that did not
think of their sectors as politically risky—perhaps because
they were producing relatively innocuous products such as
camera-enabled doorbells—should have paid attention when
U.S. defense legislation targeted Hikvision and its surveillance
technology in early 2018. The U.S. intelligence community has
also been issuing warnings about Huawei for several years.
Executives dismiss these “weak signals” at their own peril.
MITIGATING THE RISK
Identifying risks is only the first step. As the global economy
moves away from open trade, companies need new strate-
gies and relationships that balance economic efficiency with
security. Firms essentially have three choices: collaborate,
resist, or educate.
After the terrorist attacks on 9/11, the U.S. government
sought private sector help. A group of firms running network
choke points, most notably FedEx, volunteered to work with
it. FedEx CEO Fred Smith argued at the time, “All we are
trying to do is to protect our assets and not have our assets
be used for bad purposes.” This approach can have great ben-
efits, but it may pose problems in a world where cooperating
with one government may provoke another government to
target you. HSBC, for instance, complied with U.S. authori-
ties’ demand for financial information on Huawei, and now
it is at risk of being blacklisted by the Chinese government.
Some firms may be less enthusiastic about cooperation
and decide to push back. Apple, for example, is a tempting
target. The iPhone operating system is potentially a key hub
for surveillance, allowing governments to learn what people
are saying to one another. This is one reason Apple tried to
design the system to make it impossible for anyone—even
Apple itself—to access the phones without user passwords.
Microsoft, which faces similar pressures from governments
that want its data, has responded in a more directly political
way. It is spearheading a global initiative known as the Digital
Geneva Convention to develop core norms of cybersecurity.
The goal is to persuade private companies to collectively com-
mit to limiting offensive cyberattacks—including those by
the U.S. government. Already over 100 firms have signed the
initiative’s Cybersecurity Tech Accord. As tensions heat up
between the United States and China and Russia, businesses
with control of economic choke points will need to consider
how they can work together to depoliticize their roles.
Businesses can also reduce some of the potential fallout of
network attacks by educating government officials. Network
connections are so complex that policy makers often don’t
understand how interventions could produce unexpected
consequences. When the United States announced sanctions
against the Russian metals giant Rusal, it did not anticipate
that they might bring the European auto industry to a halt,
and it had to modify them swiftly. The more businesses’ gov-
ernment-relations offices can do to educate policy makers,
the better. Firms also can push back directly against the most
disruptive policies. In the wake of the initial Huawei ban, the
U.S. semiconductor industry quietly lobbied the Commerce
Department and the White House to ease it.
Once it was the places that globalization hadn’t yet
reached that were politically dangerous. Now new political
risks are found right at the heart of the global economy.
They’re coming from the very infrastructure that facilitates
global business, which powerful states are weaponizing.
Executives who fail to understand this new world are likely
to run into serious trouble. HBR Reprint R2001K
HENRY FARRELL is a professor of political science and
international affairs at George Washington University.
ABRAHAM L. NEWMAN is a professor at Georgetown University’s
Edmund A. Walsh School of Foreign Service and in its Department
of Government. He also serves as the director of Georgetown’s
Mortara Center for International Studies.
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Harvard Business Review
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For the exclusive use of M. Hu, 2020.
This document is authorized for use only by Meiyi Hu in International Business Strategy Winter Semester 2020 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona
from Jan 2020 to May 2020.
http://hbr.org/search/R2001K
http://hbr.org