Critical shipping routes around the world, from the Panama Canal to the Bosphorus Strait, hold strategic importance for global trade. As a result, these chokepoints are often caught in the crosshairs of geopolitical competition. But in a new age of economic warfare, invisible chokepoints are also emerging. The dominance of the US dollar, economic sanctions, and tariffs on imported goods can all be leveraged to achieve political goals. Meanwhile, nations are laying out plans to increase defense spending—potentially altering the outlook for productivity, industrial activity, and economic growth.

With economic warfare becoming a more prominent feature of the investment environment, new winners and losers based on country, region, sector and asset class could emerge. This episode of The Outthinking Investor explores how economic warfare, national security concerns, and friend-shoring in global trade are creating new implications for investors to consider.

Our guests are:

• Edward Fishman, senior research scholar at Columbia University’s Center on Global Energy Policy and author of the new book, “Chokepoints: American Power in the Age of Economic Warfare”
• Katharine Neiss, PGIM Fixed Income’s Deputy Head of Global Economics and Chief European Economist
• Jeff Rathke, President of the American-German Institute at Johns Hopkins University and former American diplomat

Do you have any comments, suggestions, or topics you would like us to cover? Email us at thought.leadership@pgim.com, or fill out our survey at PGIM.com/podcast/outthinking-investor.

>> The Bosphorus Strait is one of the most important shipping routes in the world. This natural seaway cuts across Turkey, connecting Europe and Asia. It's also the only passage linking Ukraine and other Eastern European countries to the Mediterranean. That makes it critical for shipping Russian oil, grains from Ukraine, and other goods. That also makes the Bosphorus critical for military strategy. The Bosphorus has been the site of major conflicts, from the Ottoman Empire's capturing of Constantinople in 1453 to the infamous Battle of Gallipoli, 500 years later, during World War I. Today, the Bosphorus continues to be a regional flashpoint due to its strategic energy and trade importance. Similarly, the Panama Canal, vital for US-Asia commerce, is increasingly strained by rising geopolitical tensions, as is the Strait of Hormuz. Could critical trade routes become a flashpoint for future conflicts? How are issues of trade and national security becoming more interconnected? And how might increased spending on national defense impact the global economy? To understand today's investment landscape, it's important to know how we got here. This is The Outthinking Investor, a podcast from PGIM that examines the past, the present-day opportunities, and the future possibilities across global capital markets. Three experts will shed light on how national security impacts trade and the global economy. Edward Fishman is a senior research scholar at Columbia University's Center on Global Energy Policy and author of the new book "Chokepoints: American Power in the Age of Economic Warfare." Katharine Neiss is PGIM Fixed Income's Deputy Head of Global Macro and Chief European Economist. Jeff Rathke is President of the American-German Institute at Johns Hopkins University. He's held several roles as an American diplomat, including as a staff member of the Secretary General of NATO. The Bosphorus Strait is one example of a potential trigger for geopolitical tensions. Edward Fishman refers to these sites as choke points.

>> So, historically speaking, choke points are geographic features like the Bosphorus or the Strait of Hormuz that are critical to global economic relationships. Ancient Athens relied on access to the Bosphorus for its food supply. And today, something like three million barrels of oil a day go through the Bosphorus. What has happened in the wake of hyper-globalization in the 1990s -- when not just the West, but even countries like China and Russia, became integrated into global financial markets and supply chains -- is that there emerged these invisible choke points like the US dollar-based financial system, like global semiconductor supply chains and energy supply chains, where one country has a dominant position and there are few, if any, substitutes. And as a result, instead of needing to blockade a physical choke point like the Bosphorus with Navy ships to impose economic harm on a foreign country, the president of the United States can just sign an executive order in the Oval Office and just with that stroke of a pen, deploy substantial economic pressure on any foreign company or even foreign country. And that is the power of economic warfare today. And it's because of these invisible choke points in the global economy.

>> The lines between trade policy and national security are blurring as geopolitics heats up. For decades, the global economy enjoyed a kind of peace dividend. Nations spent less on defense and more on other budget items or tax cuts. Now the peace dividend seems to be breaking down. With two ongoing wars and rising geopolitical tensions around the world, Katharine Neiss considers the impact on economic growth.

>> Most economists have shown that the kind of bang for your buck that you get for every additional government spend on defense doesn't really lift GDP by as much as you would expect if that spending was on something like infrastructure or other types of government spending. And in Europe, this is probably further amplified by the fact that they have to buy some of their military resources from abroad. That said, if this government spending is channeled towards building up the defense industry capacity in Europe, if this government spending in defense goes towards things like defense R&D that have dual-use civilian purposes, you could get not only growth in terms of building out of industry and jobs and that sort of thing, but you could also see further down the line spillovers that actually end up enhancing productivity in Europe and so have a more long-lasting impact on growth.

>> This isn't a near-term fix. Major shifts take time to plan, to budget, to build out, and to feed through to the broader economy. That's measured in years, not months. But it also depends on the situation.

>> In the case of Germany, they're starting from a position where they have an industrial base. And moreover, there is a lot of spare capacity. So that, too, one would think, would help make any kind of shift in their industrial policy and need for ramping up that bit marginally easier for them to do. Clearly, if they were starting at a point of having no industrial base or no spare capacity, making that transition quickly would probably be a lot more difficult.

>> Mario Draghi recently called Germany's pivot on military spending a game-changer. Could Germany's investments in the military and infrastructure turn the country into a growth engine for Europe? Jeff Rathke explains.

>> We are really at a turning point with respect to the German economy. Not only in security terms, but there's also a pent-up need for investment in Germany, which has been stifled over the years in part because of the debt brake. It is a constitutional measure that limits the amount of borrowing that the German government can engage in. And so over the years, this has kept German budgets roughly in balance, but it has also meant a neglect of a lot of public sector infrastructure, whether that is roads, rail, and so forth, or things like cybersecurity, digitalization, and those kinds of things. So where do we stand right now? A new German government is taking shape soon, and in preparation for this new government taking office, they have loosened the debt brake with two main objectives in mind. The first objective is to unleash German security spending. German defense spending was among the lowest in NATO 10 years ago, and since Russia's invasions of Ukraine, it has been increasing, and now it is really set to accelerate even more. The other is to create a 500 billion euro special fund for infrastructure. So these two measures together will allow the incoming government to come out of the gate quickly with new programs, with an infusion of cash into Germany's ailing infrastructure, into the productive capacity of Germany's defense industry, and this could be extremely welcome at a time when many of Germany's traditional industries -- think about the car industry, for example -- have been encountering tough times.

>> Germany is by far the largest economy in the EU, so these changes are likely to have a big impact on Europe overall, but it's not the only lever Europe can pull to stimulate growth.

>> There is a lot of low-hanging fruit that could drive growth forward from here. We've seen, for example, that private investment in Europe is exceptionally weak, and that is translating into weak productivity. The labor market side has improved significantly little by little over the last 10 years, so really, the problem in Europe is on the investment side, and there are things that policymakers can do to try to bolster private sector investment growth. First is to drive public investment. That often helps private investment, especially around infrastructure projects, and then another area around driving growth is just breaking down some of the internal barriers within the European Union. We're not really fully feeling the benefits from an economic perspective of having a truly single market with free-flowing labor and capital. So I think there are things that policymakers can do in Europe that would drive growth, going forward, and they should have pretty high conviction that they can do this. Because we've seen, for example, during the pandemic, where European policymakers really made a focus to improve growth prospects. Countries like Italy and Spain, which benefited from these huge fiscal transfers that were agreed during the pandemic, have been growing and have been investing, which means that they should continue to grow in the future, or at least at higher rates than they had in the past.

>> Greater integration would also benefit EU countries in terms of trade, especially as increasing tariffs complicate trade relations globally.

>> You have barriers within the EU that, if you reduce them, would give you access for any individual member state to a market that's probably roughly the same size as the US. And we've seen that in the recent past, when the EU has chosen the path of greater integration, it has actually led to higher growth. So whilst I think most economists would tell you it is not economically efficient to have a trade war, that it's not good for either side, the EU in some ways is quite fortunate that against that backdrop, it does have a large economic region that is of a similar size, where it holds the pen in terms of deciding for itself what those barriers look like within the EU. They're currently high. That's a political choice. And they could come down and support growth in the usual way to reducing trade barriers has increased growth in the past.

>> On the surface, today's tariffs look a lot like economic sanctions of the past, but they don't necessarily have the same effect.

>> If you're comparing tariffs and sanctions as weapons of economic warfare, tariffs are a significantly weaker tool. If we were to put a tariff on Russian oil, a 25% tariff, American refineries could still buy Russian oil. They would just pay 25% more. An embargo on Russian oil or sanctions on Russian oil companies would mean that it's illegal for US companies to buy Russian oil. And more to the point, a major Russian oil company like Rosneft were to come under sanctions, it would be fully cut off from the dollar-based financial system. It would be significantly constrained from doing business overseas beyond even the United States. A lot of the times, there's hype around these sanctions are going to get Russia out of Ukraine, and then they don't work. But one question I never heard when I was working at the Pentagon, when I was working for the chairman of the Joint Chiefs of Staff, Marty Dempsey, is does a bomb work? Well, a bomb does work to blow things up. But it's much harder to actually use that damage to get a political outcome that you seek. I think the same is true of economic warfare. Because the United States controls the critical choke points of the global economy, like the dollar-based financial system, the US government has the ability to impose tremendous economic damage on foreign countries. What's much harder is to translate that damage into political outcomes that we seek.

>> For those tariffs driven by geopolitical tensions, much of the focus has been on those countries affected and on the amounts. But another important aspect that's rarely discussed is the exit point.

>> The question of how you unwind these kinds of measures is something we don't have a lot of precedent for. Usually, you have trade measures that are imposed to address a trade imbalance or a trade disagreement. And then, when the underlying trade disagreement is dealt with through some negotiation or adjudication, then the tariffs go away. Or in some cases, maybe they're put on the back burner, they're suspended, but maybe not removed. But, you know, suspension is good enough for the near term. In cases where tariffs are imposed because of political behavior, it's much less clear how you can unwind those.

>> Given the new normal of higher tariffs and increasing defense budgets, which countries stand to gain the most? The list includes countries that are big exporters of defense, like France, Italy, and Germany. But they're not the only ones.

>> Because this shift in security is happening alongside a shift in trading relationships, it is creating some opportunities in maybe somewhat surprising places. What you've seen in Poland, for example, is quite a significant interest in Korean and Australian defense capability. So maybe shifting away a little bit, looking to diversify where it's importing its non-EU defense capability away from the US. You also see within the EU that France stands out as having quite a unique and, in some ways, serendipitous -- for France, they have an exceptionally vertically integrated defense industry. So they're not reliant on imported inputs in any point of their supply chain, which makes them really quite self-sufficient when it comes to defense. So it's all about just scaling up. Again, I don't know of any other country really within Europe or that Europe would trade with that has a defense industry that is organized in this way. You're also hearing about attempts between the EU and the UK to sign a defense pact, which would potentially allow the UK to access some of these EU loans that have been recently agreed under the banner of ReArm EU. So there are these new areas within the defense sector, new alliances or deepened alliances that look to be gathering pace in this new reality that we are in.

>> Dynamics are also shifting among European and Asian countries, both in terms of trade and security.

>> You've had a growing focus from European countries, not only on the economic dynamics and the competitiveness dynamics in what people call the Indo-Pacific, but also on security in the Asia-Pacific region, whether that is questions of freedom of navigation, the status of Taiwan, the concerns that Japan, Philippines, other countries also in Southeast Asia have about an increasingly aggressive Chinese posture toward territories that China claims for itself in the South China Sea, for example, or in the East China Sea. So Europeans see this as an area where they have their own interests at stake because they are open, globally active economies that depend on the free movement of goods around the nation's oceans, and because some of their most important partners feel threatened by these developments. And that's why you've seen countries like Germany, also Spain, France, and the UK have always had a presence of one kind or another in the Indo-Pacific, and that has strengthened, too. You see European countries taking a growing interest in not just the economic and trade relations in Asia, but also in the security aspect. So this is potentially a way of reassuring and of bolstering the open market economies and advanced industrial democracies in Asia as they build out those relations. Now, is Europe going to replace the United States as a security provider in the Indo-Pacific? Absolutely not. But it complicates the calculations of an adversary or of a disruptive power.

>> Trade, security, and other alliances are shifting rapidly around the world, from Asia to the Americas.

>> Since 2016, the EU has deepened its trading relationships with Canada. We've seen them deepen their trading relationships with Japan. We're seeing some movement also to deepen trading relationships with Latin American countries and the EU. So we could actually see that these other relationships with countries outside the EU are deepening. We're hearing a lot of discussion around could the trading relationship between the UK and the EU change and be improved after Brexit, on the back of closer security relations between the UK and the EU? So these things are really going hand in hand and, of course, creating new opportunities elsewhere in ways that we really weren't talking about even just a few years ago.

>> What might the current geopolitical environment mean for economies in Asia in particular?

>> So I think for the democracies in the Asia-Pacific, the American allies in the Asia-Pacific, if they play their cards right, I think they can really benefit in this new era. They are really the front lines in the US-China economic and security competition. And both sides know that. And that's why, I think, you're seeing now China trying to take advantage of Trump's tariff threats by trying to rebuild relationships with the Koreans and the Japanese that had frayed in recent years as the United States had brought both Korea and Japan closer into the United States' orbit. I think if Trump plays his cards right, on the other hand, he could deepen these relationships with the Japanese, the Koreans, the Australians, and the Taiwanese. So I think that this is the key battleground geopolitically. And because these countries know their significance, they know that both sides, both the United States and China, are really courting them and are hoping that they can attract them into their orbit, that they have quite a bit of leverage. And I think that they have a chance to really thrive in this new environment.

>> It's important for investors to understand this new era of geopolitical competition and the implications for expected risk and return.

>> The global economy is still designed for the benign geopolitical environment of the 1990s. But we're living in this period of intensifying geopolitical competition. And by the way, that's felt everywhere. This mismatch between the shape of the global economy and the realities of the geopolitical playing field. It drives feelings of insecurity in the United States, in China, in Europe, in Japan, really every single country. So what does that mean from an investment perspective? I think at a sectoral level, it means that industries like the defense sector, like companies who are building cyber defense tools, financial technology, regulatory and compliance technology. Those are areas that are growth industries that each country is going to be investing in significantly more than they have in previous decades. I think from a regional perspective, it's harder to suss out. As we've seen in the initial years post-COVID, the US was outperforming other economies around the world, including China and the European Union. So far, though, in the new Trump administration, with the US wielding tariffs and sanctions against really the entire rest of the world, we're seeing that European markets are outperforming American markets so far in 2025. And so I do think that there's a risk that if the US is seen as geopolitically unhinged, that you could see a reallocation of assets away from the American market to markets like Europe and East Asia.

>> As the saying goes, all politics are local. And although larger firms dominate the headlines, small and medium-sized firms may have a harder time navigating these new waters.

>> A lot of these small and medium-sized enterprises have reconfigured their value chains in order to deal with the growing friction, especially between the United States and Europe with regard to China. The experience, though, of small and medium-sized enterprises is different. That's a broad category. And so you have some of these enterprises which have enough of a critical mass that they can reconfigure their supply chains and deal with the uncertainties by having production chains in Asia as well as in Europe or in the United States. Those on the smaller side of that category, however, don't have the same flexibility to reconfigure and to redeploy. So I think within those companies, you may see new vulnerabilities coming to light and that are going to have to be addressed by the private sector, possibly in new ways.

>> It's crucial that management understand deeply how their firms might be impacted in this new environment of economic warfare.

>> Companies have gotten by largely over the last several decades, not having deep geopolitical knowledge at the top. And I think that's because the assumption was that we were just living in an open global economy and that, you know, you could find investments with the best return, regardless of geopolitical factors. That's clearly not the case today. And so I think every major company that does business abroad needs geopolitical knowledge at the very top. That's at the executive level and in the C-suite, but also at the board level, where you need things like chief geopolitical officers and board members who have real geopolitical experience that can weigh in on these topics. Something that people do not realize about economic warfare is that the frontline infantry in America's economic wars are not officials in the Treasury Department or State Department. They're executives at banks and compliance officers who are making decisions about which countries to do business in, about which clients to take on. Increasingly, they are executives at Silicon Valley companies, semiconductor firms that are deciding what type of relationship to have with foreign markets like China. And I think that government needs to have close relationships and close, open communication with executives in these industries in order to make policy work as intended. You can't just be complying with the latest sanction or export control or tariff. You have to be able to see where the trend is headed. It's very clear that we're living in an age of economic warfare. Sanctions, tariffs, export controls, they've become the primary way that major countries compete with one another. And I think it's incumbent upon all of us -- if we're going to run our businesses effectively, if we're going to run our government effectively -- to really plus up our knowledge of economic warfare.

>> For investors, the challenge may be in staying informed as situations evolve without getting distracted by the noise. Thanks to Katharine Neiss, Jeff Rathke, and Edward Fishman for their insights on national security and global trade. The Outthinking Investor is a podcast from PGIM. Follow, subscribe, and if you like what you hear, go ahead and give us a review. If you enjoyed this episode and want to hear more from PGIM, tune into our Speaking of Alternatives podcast. See the link in the show notes for more information.

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