The Networks Trap II: Disrupting a U.S.-led System

What could destabilize the emerging geoeconomic framework based on tech networks and alliances? An earlier post (“The Networks Trap,” 6 March 2024) examined how, as one result of the U.S.-China contest, the international system is dividing into two separate and distinct spheres for tech innovation, telecommunications, and military technology. In both the Chinese and American spheres these three sectors are being protected so that American technology will not be in Chinese networks and vice versa. Security alliances in particular, but also political alliances, are increasingly shaped by an emerging type of technological exclusivity. Most of the world would rather not have to choose between one tech ecosystem and another, but the viability of tech non-alignment seems to be weakening. “The Networks Trap” considered this in terms of Southeast and South Asia, where there are flourishing economies, strong domestic tech ecosystems, long-standing wariness of Chinese and American power, and a tradition of non-alignment. The post concluded that tech non-alignment will not be easy to maintain in the region and that the U.S.-led tech ecosystem was likely to prevail in competition with China’s own, even in China’s backyard.

What could disrupt this solidifying geoeconomic pattern?

One potential disruptor is India, which has pursued a technology-development path that avoids dependence on China or the U.S. India learned many lessons from China’s experience building an indigenous tech sector, including that if you welcome foreign venture capital it will come, but once foreign money and expertise have helped you build domestic capacity it might be best to unwelcome foreign capital except under conditions determined by the domestic private sector and the state. (It is perhaps an irony that much of the capital India welcomed and then unwelcomed was from China itself.) India learned from Europe that simply burdening foreign (American) technology with regulations gave no guarantee that domestic entrepreneurs would seize their opportunities. Like most countries, India has neither China’s technocratic relentlessness nor Europe’s high-end purchasing power. After decades of poor results, non-alignment is finally paying off for India. In principle, it could serve as a third-way model to others, such as Nigeria, Indonesia, and Brazil, and this could undermine the U.S.-China-driven tech-telecoms-security alignment currently under way.

However, India’s security worry is not the United States. It is China and its ally Pakistan. India’s security relationship with the U.S. keeps getting tighter, despite very considerable wariness on both sides. What India covets, as the U.S. well knows, is defense technology sharing and joint R&D — as distinct from arms sales. This gives the U.S. leverage to bring India into its networks and even its tech-innovation ecosystem. China’s comparative ability to do this is very weak. India will continue to seek non-alignment but the trend will nonetheless be toward stronger ties to the U.S.

A second potential disruptor of U.S.-China tech bipolarity is South Korean and Japanese dependence on tech exports. South Korea, Japan, and the United States are growing closer in terms of the tech innovation, telecommunications, and security triad. (The Center for a New American Security will release a report on this next week.) The difficulty is that South Korea and Japan, as aging and immigration-resistant societies with thin resource bases, rely on technology exports for growth at just the time when the U.S. is attempting to locate or relocate as much high-tech production to home as it can. This dynamic occurs with European tech powers and Taiwan as well. One partial solution is for these tech economies to relocate production into the U.S., satisfying the U.S. security requirement for production within American sovereign territory while retaining the earnings — in effect, an internationalization of U.S. production that also makes it possible for Japan, South Korea, and the rest to sell into the U.S. market without difficulty. But U.S. preference will still go to U.S. companies, as the extraordinary subsidization of Intel ($8.5 billion in grants and potentially even more in loans) shows. Powers like South Korea, Taiwan, Japan, and Germany cannot hope to be non-aligned in the way India aspires to be, but all these relationships will need to be sensitively managed on all sides, especially the American side. The economic fruits of a U.S.-led tech alliance cannot go disproportionately to the U.S. or its companies.

There are other potential disruptors. China and Chinese tech companies could extend their established practice of selling into markets too unremunerative (much of Africa and Latin America and parts of Asia) or ethically too dodgy (MENA) or both (Central Asia) to appeal to American, Korean, and Japanese tech companies. That would give China a significant advantage. Another possibility is that cybersecurity will become too difficult to maintain across a large number of semi-allied American partners, resulting in resentment of the core — say, the Five Eyes plus Japan, Taiwan, South Korea and some Europeans — by the periphery and political weakness throughout the network.

But the greatest threat is probably an American inability to share either power or wealth. The U.S. is currently engaged in developing defense-production partnerships around the world. The immediate spur has been the Ukraine war: even the Europeans and the Americans together have struggled to keep production at the necessary levels to meet official commitments to Ukraine. Their defense industrial capacity has barely been up to it. The reason is not a lack of military manufacturing capacity per se. Rather it has to do with the downsides involved in the allocation of that capacity to military purposes, which economists generally understand as among the least productive of economic activities: If you manufacture an automobile, it will be used by its purchaser for a variety of purposes that will themselves be economically significant; if you make a tank, its one purpose will be to destroy value, if it is ever used at all. Defense contractors are therefore peculiar animals, protected by states, and enjoying preferential relationships and long-term contracts, in exchange for the preservation and refinement of industrial capacity to provide the arms a state might need to ensure its survival. But in most cases they are a drag on overall productivity, which is why states are often quite happy to buy arms rather than divert resources to producing them.

So for economic as well as political reasons the U.S. does not want to be sole supplier to Ukraine or others. Instead, the U.S. hopes to broaden defense supply chains, seizing what Assistant Secretary of State for Political-Military Affairs Jessica Lewis called “a once-in-a-generation opportunity to transition countries off Russian-origin equipment, improve NATO interoperability, promote transparency and accountability in security sectors, and strengthen our defense industrial capacity.” (Lewis’s Bureau of Political-Military Affairs handles approval of foreign weapons sales.) By “our” Lewis meant European allies, although she went on, in this December 2023 speech, to identify a similar dynamic in Asia. But is it politically or economically possible to internationalize U.S.-allied defense production? Can such an expansion be secure, in cyber and other terms? Will U.S. defense companies be willing to share the risks and profits of production with overseas partners? Will Congress, which determines the contours of defense spending, be willing to let them?

As the international system divides into two separate and distinct spheres for tech innovation, telecommunications, and military technology, one dominated by the U.S. and the other by China, the process has many potential disruptors. The greatest is that the U.S. will be unable to manage this new and untried variety of internationalism.

Dealing With Corruption: Part Two of Four

By Dee Smith, CEO

Understanding corruption is difficult because often there are detectable trends and tendencies that go in more than one direction and can even seem contradictory or paradoxical. However, it is essential to understand it to know how to deal with it. As I noted in Part 1, in many regions, society can be conceived of as organized into “social pyramids” that stretch from a very wealthy family at the top to street sweepers at the bottom, with reciprocal obligations up and down the social pyramid. As I also noted—via an excursion through the arguments of Bernard Lewis—corruption is widespread in the West, it just generally flows in the opposite direction: using money to get political power, rather than using political power to get money.

It is impossible to understand why these structures are—or seem to be—different in the West than in the rest of the world without understanding the backstory, which starts with the birth of the modern era. Drawing on Enlightenment ideas of the 18th century, and building on even earlier, primarily British ideas about governance, the past 300 years have constituted a great social experiment to see whether society could be organized rationally, formally and institutionally, instead of along more hereditary, informal and relational lines. This was related to the advance of science and decline of religion: Given the revelations of science and empirical observation, an increasing number of people could no longer believe in an active god and a life after death. For example, science had started to reveal what the heavens really were: other suns and planets, not a supernatural realm.

If there was no paradisiacal afterlife credibly on offer, quite a few European thinkers and political figures became enamored of trying to construct paradise on earth. This social experiment produced the United States, the French Revolution (and an early example of the dystopias that result from such idealism, the French Terror), modern European states, communism, socialism, commercial capitalism, state capitalism, the industrial revolution and all that followed it (up to the computer revolution and the current AI revolution), consumer culture, and a number of other rationalist and “scientific” approaches to better organizing human society.

For this Enlightenment project, the primary motivator of human beings was conceived to be rational (here, read economic) self-interest—an idea that has held until very recently, and may just be beginning to come apart under the growing realization that idealistic attempts to produce perfected societies often result in hell on earth.

In order to secure a society based on Enlightenment values like equality, liberty, fairness and freedom, many new kinds of “rationalist” rules governing behavior would paradoxically have to be developed by the state, and human needs provided for or guaranteed by the state,  rather than by the informal, kinship-based social structures that had existed since time immemorial.

Expanding population was also a factor. The argument was that you had to have more rational, directed, scientific management or you risked the kind of scenarios outlined by Thomas Malthus (1766-1834), in which population growth leads to poverty, famine, disease and war.

An alternative interpretation is now arising. Its adherents feel that they cannot trust governments to decide on their behalf, that they want to emphasize culture and family over traditional political organizations, and that they want to focus on smaller structures. They want radical action to stop climate change and environmental degradation, which governments—seen to be in thrall to moneyed interests—are believed to be unable to do. They are often strongly attracted to exclusive social groupings, often newly created but presented as ancient, defined by ideology, ethnicity or race. Equally confusingly, the extremes of what used to be left and right often meet in a kind of atavistic libertarianism.

To the extent that some of this is called “conservative,” it is not your father’s conservatism, and it is only really conservatism in that it harkens back to an earlier form of human social organization. It is to a certain extent related to the trends towards splintering so readily observable today in affairs from global to local, which can be understood as representing a rejection of the logic and rationality of economic structures and rationales (such as globalization) in favor of what economists sometimes call “animal spirits” alongside a desire for closely defined belonging and identity.

There are currently a number of variants of the reaction against the doctrine of progress and the presumed supremacy of rationality among human motivations. For example, in the UK, some proponents of Brexit said they would be happy to be measurably less wealthy if they could be measurably more British. A willingness to become less wealthy has not been seen in recent times as a politically conservative attitude. If these trends rejecting recent distinctions between legacy liberal and conservative orders continue to spread, what could this mean for existing political and business structures? That will be the subject of part three.

The Networks Trap

Now that globalization has entered its military or security-led period, what will be the implications for the world’s fastest-growing regions: India and Southeast Asia? These economies have been seeking to refurbish the non-alignment of the Cold War in the hope of benefitting from US-China rivalry. In their different ways, India, Australia, Indonesia, New Zealand, Vietnam, and others have succeeded at turning that rivalry from a zero-sum game into a win-win for them, if not for the US or China. Investment capital has rushed into their economies as a result, with India on track to become the world’s third largest economy. It is early days, however. Neither major players such as India and Australia nor minor ones such as Fiji or Brunei really know what to expect. And none of the state actors involved, even China, truly have the capacity to coordinate defense, commerce, and innovation policies in a harmonious whole. The same is all the more true for a body such as the 14-member Indo-Pacific Economic Framework in the news this week. The potential for policy and economic chaos is very high.

The military connection of the region into an undeclared bloc is not a new development. The Pentagon’s embrace of a strategy built around the China threat has blossomed, under President Biden and Defense Secretary Lloyd Austin, into an extraordinary network of linkages and cooperation agreements throughout Asia. Given bipartisan support for US-China policy in Congress, and the relative policy autonomy of the defense-industrial sector, the marriage of Asian defense strategy and alliance politics seems likely to survive even into a second Trump administration. As America’s domino-theory aggressions in Vietnam and elsewhere in Southeast Asia have not yet been forgotten, it is striking how eager regional powers have been to accept US military leadership in an unwritten SEATO agreement that stretches from Seoul to New Delhi. The world has the Chinese Communist Party to thank for this still rather incongruous development.

As successful militaries have become so dependent on electronics and electronic-network-based technologies, military cooperation and technological capacities have become inseparable. This is one of the two main roots of the global turn toward industrial policy and the repudiation both of globalization—even by national economies that have benefitted most from it—and of the neo-liberal orthodoxies that seemed so immutable not long ago. Political structures such as AUKUS and the Quad are as much tech alliances as security ones. The US is long accustomed to using American technological sophistication and power as a way to cement security alliances. It is equally adept at using security alliances to advance the US defense-tech sector.

At some point, as all the players must realize, there is defense-tech lock-in. And this is where the other main root of the turn toward industrial policy can be found. The strictly economic prosperity of modern nations is dependent both on access to technology and on indigenous capacity to innovate technologically, at least for domestic markets. As so much of new and future technology is dual-use, the overlap of military tech and every other kind of tech has become enormous and seems constantly to grow. Indeed, the term “dual-use” itself, so important a few years ago, already seems anachronistic. When everything seems actually or potentially dual-use, the term doesn’t have any useful work left to do . Semiconductors are simply the most obvious instance. Japan’s decision to revive its own semiconductor industry, at great expense, makes no sense from the old neoliberal globalizing perspective. In the new dispensation, however, it seems a clever policy, at least to the investors who have bid Japanese equities to the highest point in 35 years on the strength of tech companies. The amazing rise in recent years of electronics manufacturing in India — India’s tech weak point since the 1960s — is a similar example of inherently dual-use industrial capacity-building.

Spending state money to build this kind of capacity, which in the old globalization would have seemed absurdly counter-productive in its inefficiency, has begun to seem sensible because it amounts to states investing in their own relative political and economic autonomy. The alternative is to become passengers on networks designed and controlled by others. The question is: Where does this process end? Where are the network boundaries of sovereignty and where are the network boundaries of alliances? The Biden administration’s turn last week toward the potential threats posed by Chinese electronic vehicles is a case in point. Logically, the threat posed by a Chinese  telecommunications network (Huawei, ZTE, China Mobile) is not very different from the threat posed by what the administration identifies as “connected” EVs — or as Commerce Secretary Gina Raimondo has called them, “smartphones on wheels.” The principle extends, perhaps indefinitely, to ships, planes, trains, and any other data-delivery or supply network. The semi-success of an agreement on supply-chain security by the nascent Indo-Pacific Economic Framework should be understood in this context. Even when the supplies as such are not high technology, their transport and distribution networks are. States will continue pushing to secure as much room for maneuver as they can. The brightness of their economic and security futures depends on it. In such a networked environment, however, the scope for non-alignment is shrinking. A later post will consider the factors that could make the emerging geo-economic structure unstable.

Dealing with Corruption: Part One of Four

By Dee Smith, CEO

In Latin America, Eastern Europe, the Middle East, Asia, and Africa, corruption is one of the most difficult and feared realities that businesspeople confront. There is certainly corruption also in North America, Europe, Japan and Australasia, but it is not as familial, for lack of a better word, and legal prosecution is far more thorough and predictable. Corruption in a place like Africa or Latin America isfundamentally based on the structure of society and inseparable from it. Dealing with it as an investor is fraught with risk.

In Latin America, for example, society can be conceived of as generally organized into social pyramids. These can stretch from a very wealthy family, or set of families, at the top, all the way down to street sweepers at the bottom. It is an extended family, whose members have obligations to one another, up and down the social pyramid. If someone becomes ill, it is the responsibility of persons around and above her to take care of her. If a member of this extended family gets into trouble, it is the obligation of the others to do whatever they can to help him. Or, in some cases, to discipline him.

At the top of this kind of pyramid sits one person, usually male: the patrón. The job — more than the job, the social responsibility — of that person is to provide for everyone below him in the pyramid. That is his primary social responsibility, even if it involves taking money illegally from the state, which is not necessarily seen as socially wrong. This is because the extended family surpasses all other considerations. The social system is geared to the patrón and his activities on behalf of the people beneath him. Isn’t the patrón enriching himself and his immediate family? Of course he is. But he isn’t just doing that. He is providing for the well-being, even the continued existence, of the entire social pyramid beneath him and of the lives of the people within it, even if he is also often ruling it with an authoritarian hand.

Within this kind of society there are many patróns with their social pyramids beneath them. Some of these pyramids are larger and richer, some smaller and less rich; some much taller or much shorter. The major families keep smaller families from growing beyond a certain point — unless there is a merger, for example, via marriage. This is why it is so important to have the right business partners in such countries If you haven’t done your homework, you can find that you are in business with a local partner who simply cannot grow your joint venture past a certain level. His business is allowed to continue to exist, because it would be morally wrong, and socially disruptive and dangerous, to remove the support for a whole social pyramid. But its growth may be strictly limited.

This overall structure of neighboring social pyramids is a fundamental part of the organization of this kind of society. Here is where history and anthropology become extremely relevant. There is evidence that this is a foundational structure of most human societies that become complex beyond a certain point. It was the social structure brought to the Americas by the conquering Spanish and Portuguese, which is why a certain amount of generalization is relevant for areas colonized by them. But it was also the social structure already present in ancient America. Ancient civilizations in what is now Latin America, like the Aztec civilization, had very similar social structures. So did ancient Rome. Similar structures are widespread in the Middle East and in many other parts of the world, from the rise of early chiefdoms more than 10,000 years ago to the present.

Bernard Lewis, the British-American historian of the Middle East, observed that there is just as much corruption in the Western world as there is in the Middle East. But, he said, in the Middle East, corruption means using political power to get money. He was correct in that, and this is true in much of the world. However, he also stated that, in the kind of corruption prevalent in the West, money is used to get political power. So the two work in opposite directions, so to speak. Lewis said they were technically equivalent, but he believed that this change in the “direction” of corruption made a huge difference and that the Western version is less damaging.

But is it? It is easy to argue that they are equivalent in effect. Certainly, there are in the West many examples of people using money to get political power and, partly as a result, the wishes of the electorate often have little to do with what legislation is passed by the US Congress. What does influence what gets passed by Congress is money, as a Princeton study showed in 2014. We all see how the wielding of money puts certain people in a position of primacy and gets certain people elected, whatever their merits.

(Continued in Part 2.)

Europe’s House Divided

The recent focus in Europe has understandably been on security. The European Union committed to massive support ($54 billion) for Ukraine, Donald Trump again put America’s commitment to European security in question with his remarks on NATO, and Alexei Navalny died at 47 in a Siberian penal colony. These were the leading topics at last weekend’s Munich Security Conference. But poor economic performance is the deeper problem in Europe and will remain so after memories of the conference fade. There are solutions available. Whether Europeans will choose to pursue them is the question.

The single market has been the great success of European integration. However, the EU’s 27 member states retain considerable authority over defense, telecommunications, finance, and energy. The economic integration of the continent seems to be reaching its limit under the current governance structure. This harms competitiveness, because national entrepreneurial energies are directed to national companies that serve national markets, some of which are very small. While the overall EU market is enormous (448 million people), the great majority of European companies, especially small and medium enterprises (SMEs), develop and market their products for national markets.

One clear solution would be to reduce the inherent barriers that keep European competitiveness trapped in 27 individual boxes. This is likely to be the main focus of two reports for the European Commission, one on the internal market and another on EU competitiveness. The first will probably arrive in April and the second in July.

But will dramatic steps toward greater integration be taken? The chances don’t seem good. The EU’s recent embrace of industrial policy has hugely privileged the largest economies, Germany in particular. Faced with Covid and then the Russian invasion of Ukraine — followed by an American turn to industrial policy under Joe Biden, notably for green industries and products — the EU, under Commission President Ursula von der Leyen, turned on the aid spigots. The funding went to deal with Covid, reboot European weapons production, stimulate the greening of the European economy, and triangulate economic aid in relation to US priorities as revealed in the Inflation Reduction Act, among other goals. The biggest beneficiaries of this sudden largesse were the economies with the greatest capacity to answer policy needs. Not surprisingly, these were also the largest economies. About half the aid between March 2022 and August 2023 went to Germany — half, that is, of €733 billion.

In such a situation, the willingness of smaller European countries to give up what control they retain over defense, telecommunications, finance, and energy is going to be limited. The brain drain from smaller to larger economies has further fueled resentment of the major European powers and left large parts of the region populated mainly by the elderly or by younger people who are either determined to stay in place or feel that they have little choice. Given these dynamics, the growth of nationalism in smaller or medium-sized electorates, and in the less developed parts of larger ones, seems inevitable. It would directly militate against the political viability of further economic integration. So would the ongoing flow of European capital to the US in that it acts to reduce investment in Europe.

Still, the European model of governance innovation has always been a kind of crisis response and Europe is now rich in crises. Russia’s actions in Ukraine inspired a surge in European defense spending, reviving a sector that had been in decline. The first Trump administration delivered a severe shock to Europe; a second would do the same. Some European reformers joke that a Trump presidency might be just what it takes to reinvigorate the European project. Kamala Harris, at the Munich Security Conference, carried a message of reassurance about American commitments to Europe, but she might not be in any position to fulfill that promise.

Investing in Europe necessitates close attention to these dynamics. Large-scale EU industrial policy is likely to continue for some time. The EU is participating in an “onshoring” cycle that is just as vigorous in China, the US, and India. Each of these reacts to the others, deepening the replication of production in the world’s largest economies. Selling further integration to European electorates will probably require more emphasis on industrial policy rather than less, along with a serious commitment to making Europe more competitive and less dependent upon the US and China. This seems certain to create new trans-Atlantic tensions as the US reacts to European “protectionism.” In many ways, an integrated trans-Atlantic market seems to be the only long-term solution for a Europe in demographic decline, but the chances of it are getting lower.