Key Takeaways:
A nation's control over a single, critical supply line can wield more economic power than tariffs on billions of dollars in goods.
Recent standoffs with China over rare earths and Iran over the Strait of Hormuz reveal a key flaw in modern economic warfare: targeted chokepoints are proving far more effective than broad tariff campaigns. The strategy of leveraging control over single points of failure in global supply chains is rewriting the rules of economic statecraft.
"A chokepoint has three attributes: a dominant market position, a lack of short-term substitutes, and the ability to inflict more pain on your adversary than on yourself," Edward Fishman, who worked on sanctions policy in the Obama administration, wrote in his book “Chokepoints: American Power in the Age of Economic Warfare.”
China, for example, produces 94% of the world's rare earth magnets, essential for electric vehicles and aerospace. Meanwhile, the Strait of Hormuz, which Iran has threatened, controls the passage of 20% of the world's oil. This contrasts with the U.S. dollar system, a formidable chokepoint itself, accounting for 88% of global currency transactions and 50% of international payments.
The weaponization of these chokepoints signals a new era of geopolitical risk, potentially forcing nations and corporations to build costly, resilient alternative supply routes. This shift could trigger severe volatility in key sectors, as the scramble to neutralize these vulnerabilities disrupts established trade partnerships and commodity prices.
The reliance on tariffs assumes that access to the U.S. market is an overwhelming advantage. However, with the U.S. accounting for just 13% of world imports, most countries can find substitute markets. This was demonstrated when China's exports to the rest of the world expanded to offset losses from U.S. tariffs last year. Tariffs fail the chokepoint test because their impact is not asymmetric enough to force compliance from a major economic power.
Cultivating allies is critical to turning a moderate edge into a dominant one. According to Ben Vagle and Stephen Brooks in their book “Command of Commerce,” U.S. firms and their allies generated a combined 73% of world profits in 2022, compared to just 16% for China. In the high-tech sector, the gap is even wider, at 84% versus 6%. This combined economic might, if leveraged, could inflict far more pain on an adversary by withholding critical technology or market access than China could inflict on the U.S. coalition.
While chokepoints are powerful, their use also prompts long-term countermeasures. Once a vulnerability is exposed, affected nations will invest heavily to neutralize it. Western Europe has moved to find substitutes for Russian natural gas, and global efforts are underway to create payment systems that are alternatives to the dollar-based SWIFT network. Similarly, if Iran were to maintain control of the Strait of Hormuz, Gulf economies would accelerate plans for alternative export pipelines while consuming nations would diversify their energy sources.
This article is for informational purposes only and does not constitute investment advice.
