Is Venezuela the Final Nail?

By Dee Smith

The Trump Administration’s action in seizing Venezuela’s president — accomplished through an apparently movie-perfect special forces/combined military action — may be the final nail in the coffin of the Liberal International Order (LIO), also called the “rules-based” international order. It is in addition a textbook example of why it is necessary to look beyond the obvious to understand what is going on in almost any situation.

The LIO was partly a product of the desire of Western leaders, after World War II, to create a system of international governance through multi-lateral institutions (like the United Nations) to manage conflict in order to avoid a repeat of war on such a devastating scale, particularly in the emerging age of nuclear weapons. It was at the same time an effort to grow and maintain the economic and military primacy of the United States and of the West in general.

The LIO largely accomplished these goals for 50-odd years, but the system has been teetering for a quarter of a century. A series of events, including the U.S. invasions of Afghanistan and Iraq, and the Russian invasions of Georgia and Ukraine, eroded its reality and credibility. The first two were conducted with some semblance of international cooperation (a “coalition of the willing”). Russia’s actions, and now the American defenestration of the Chavista regime — not to mention various parties’ recent actions in the Middle East and South Asia — have revealed the LIO as no longer fit for purpose. When no one even tries to look as if they are playing by the rules, it is over. Such a structure is unlikely to be revived any time soon in any recognizable form.

Realpolitik, spheres of influence, balance of power, and other elements of the 19th century geopolitical environment have returned with a vengeance. The open lack of interest many governments display toward the multi-lateral institutions and international law — or their purely self-serving invocation of them — complements the normalization of rising elements such as nationalism, isolationism, non-alignment, and identity-based politics. These occur within as well as among nations.

This, of course, means a much more conflictual world. Decisions that were always based on emotional (particularly fear-driven) factors and desires are now being pursued without even the window-dressing of spreading democracy or any other political philosophy. They are now overtly based on self-interest. They always were, to be honest, but the desire to be seen to be playing by the rules of the LIO provided some amelioration of naked self-serving actions.

Consider the difference between the recent U.S. actions in Venezuela and the seizing of Manuel Noriega, the president of Panama, 36 years ago. The latter was cloaked in the democratizing language of liberal interventionism. No such justification is given for last week’s action. It is presented as simply in the national interest of the U.S. This is a harbinger of how power will be projected and justified in the foreseeable future.

We are increasingly becoming an overt “might makes right” world. That is a reality in which mid-sized nations are more fearful of what the largest nations may do to them, but also in which mid-sized nations feel they have more cover in pursuing their designs on smaller bordering nations.

Things are almost never what they seem. There is still some desire for “cover”, but it is primarily for domestic consumption, as with the drug trafficking charges against Maduro. Conventional wisdom (it is notable that “conventional” wisdom can be almost instant!) now says — buttressed by the statements of President Trump — that the Venezuelan operation was really all about oil. But was it? Given the nature of Venezuelan oil (tar sands, at least onshore), and the penetration of the Venezuelan state by China and Russia, it is arguably much more about China. It reflects the desire of the US to weaken China’s presence so close to America, a presence that would make operations in the Caribbean very difficult for the US in the case of a kinetic war with China.

The implications of this return to an older mode of international dealing, and what that means, should not be underestimated. It is well past dawn in the emergence of a much more conflictual day.

We have seen this movie, and we know how it goes. We don’t know how it ends, but it is very hard to find scenarios that end well in a world bristling with nuclear and more recent weaponry (drones, autonomous killer robots, loitering munitions, lasers and other directed-energy weapons, hypersonic directed missiles, cyber conflict, etc.). It is not your grandfather’s warfare.

The dream of the LIO was in part a result of the horror of nuclear weapons. After the fall of the Soviet Union, I heard an old Soviet general comment that his was the last generation of military and political leaders who had actually walked the field of a nuclear explosion. He believed that, as long as his generation was in charge on all sides, the chances of nuclear exchange were very small . . . but that when they were gone, it would become much more likely. Sadly, we are there.

It can be very hard and troubling to attempt to be truly, analytically objective. It means accepting many things you don’t want to believe or don’t want to admit. There are many who cannot accept that the “one brief shining moment” of the LIO is over. But the Zeitgeist has changed, and the 20th century rules are worn beyond repair. The leaders and nations pursuing more aggressive policies are a reflection of that change. And that change is a reflection of loss of faith in the unfulfilled promises of the old order.

Oh, Brave New World.

Changing Patterns of Foreign Direct Investment

The McKinsey Global Institute has published a report on patterns of foreign direct investment (FDI), specifically greenfield (new project) investment. It is both a thorough and  a methodologically innovative report. Interestingly, the report rather buries its headlines. This might well be because the MGI, like McKinsey itself, to the limited degree that it has a political perspective, is for efficient global markets based on mainstream economics, and therefore “for” globalization. It is not the McKinsey Institute for Successful Economic Nationalism. Given that this is an era dominated by economic nationalism, the MGI’s commitment to political neutrality probably makes it hard to rank its findings by significance.

For example, is it good news or bad news to show that announced greenfield FDI flows into China have decreased by 70 percent since 2022, in the teeth of Chinese policy? Is that finding more, or less, important than the related finding that Chinese outward FDI investment is dominated by what MGI calls “future-shaping industries,” which mainly means AI data centers? Similarly for the US, the report finds that announced inward greenfield FDI has soared but it is mainly in semiconductor manufacturing and, again, AI data centers. The report also notes the huge role of Gulf Cooperation Council countries such as the UAE and delicately acknowledges that much depends on “the ultimate form of trade deals between the United States and its partners.” It would take a brave investor to decide with confidence what that form would be or indeed whether those deals will ever have an “ultimate form.”

Another possible headline might have been built around the finding that FDI announcements in advanced economies other than the US have been anemic since 2024, with data centers barely picking up the slack from drop-offs in energy and advanced manufacturing.

Yet another headline is in the finding that announced greenfield FDI investments in 2025 (to May) “in each of the emerging Asia, Latin America, MENA, and sub-Saharan Africa regions are at 20-year lows….FDI investments across these regions have fallen by 50 percent from their levels during the 2022-24 period, on an annualized basis.” So while total global FDI has grown, it has gone down in all the poorer parts of the global market, as well as barely straggling along in most advanced economies.

This could be seen as a victory of sorts for the US and the Trump administration, if victory is measured by the signing (not execution) of deals in AI data centers and semiconductor manufacture. However, the Trump administration gained power with promises to bring back traditional manufacturing, and the MGI report finds investment in that sector plummeting nearly everywhere in the world, including the United States.

There are several other possible headlines that could be gathered from the MGI report, which amounts to a map of the intentions or hopes of mega-scale capital. (The corporate drivers in the report are dominantly major multinationals signing megadeals — yet another headline.) In a crowded field, SIG’s own choice would perhaps be that investments in low-emissions technology, which doubled from the 2015-2019 period to 2022-2024, have fallen by 70 percent in 2025 for low-emissions hydrogen and offshore wind. Other energy forms have remained about the same or, as for conventional fossil fuels, gone down. Geothermal and nuclear announcements have more than doubled but from such a relatively low base that “they hardly dent the aggregate energy FDI numbers.”    

What this suggests is that even the biggest investment decisions made by the largest corporations having (as with energy companies) the longest and deepest experience of greenfield FDI are being decisively shaped by political developments, above all in the US and China but also in the Gulf. If the political winds of January-May 2025 were to change, as they almost certainly will, then further massive shifts in FDI flows will also occur.

So both investment capacity and policy influence, when it comes to global greenfield FDI flows, are being concentrated and profoundly politicized. That clearly does not mean that they are becoming more predictable, only that there are fewer decision-makers. In the global struggle for political-economic power, this could mean that victory will go to the major power that is most stable and predictable, which is presumably China. The high degree to which Chinese multinationals, as the MGI found, are engaging in greenfield investment outside China — as well as, of course, outside the US, where they are not currently welcome — also suggests as much.

Latin Risks Rising

Five years ago, the head of a major think-tank in the US could credibly say that “there are no geopolitics in Latin America.” But that not-for-attribution remark has become steadily less true ever since. Latin American economic prospects are now shaped by both regional inter-state tensions and broader geopolitical currents, not least the U.S.-China rivalry (see SIGnal, “Green Protectionism,” 25 April 2024). For now at least, investors have to accept that non-market considerations will have deep effects in some major Latin American economies.

The 2015 discovery of significant offshore petroleum reserves in territorial waters claimed by Guiana and Venezuela reignited a disagreement more than a century old. The Esequibo region, which holds around 15 percent of Guiana’s population but makes up more than two-thirds of its territory, has been in dispute since before 1899: the Paris Arbitral Award then designated it part of Guiana, but Venezuela never agreed. Late last year Venezuela held a referendum that designated Esequibo its 24th state. Venezuela’s move could well lead to armed conflict.

Meanwhile, more than 8 million Venezuelans have left the country in the past decade due to dire economic and political conditions. Many have fled to neighboring Colombia, whose citizens resent expenditures on refugees by the Colombian government even though many refugees are Colombians who fled to Venezuela during Colombia’s decades of insurgency and civil conflict.

Ecuador was until quite recently a safe country for residents and visitors alike. But in the last few years, suppression of drug smuggling through Colombia resulted in the opening of a route across northern Ecuador to the Pacific, and from there to the US and Europe. This has plunged the entire country into a violent spiral, and Ecuador is now one of the most dangerous countries in the world — due entirely to exogenous, transnational factors.

As social guardrails have been eroded across the region by the decline of religion and social institutions, the movement of populations into large cities, and by the resulting splintering and estrangement of family structures, the social prohibitions against violence and crime have also eroded.

The weakening of Latin American institutions has sometimes been worsened by democratization. The PRI (Institutional Revolutionary Party) held power in Mexico for 71 years, until 2000. The PRI had an informal deal with drug cartels formed in the 1970s to satisfy increasing illegal drug demand from the US. If the cartels did not let their violence leak into Mexican society, the government would leave them alone. As cynical as it was, the arrangement kept something of a lid on social violence in Mexico.

When Mexico became fully democratic with the election of the PAN (National Action Party) in 2000, the deal collapsed. This was in part because the PRI apparatus that had managed it was gone. Mexico had no independent civil service; most everyone in government was part of the PRI. When the “PRIistas” left, the arrangements and relationships that had controlled violence left with them. Elaborate anti-gang campaigns and the militarization of Mexican policing have had little positive effect. The number of gangs has increased, as has their violence. In Brazil, by contrast, gang consolidation and “professionalization” seem to have contributed to a reduction in violence.

Many of the conflicts in the region are attracting players like China, Russia and Iran — a major arms supplier to Venezuela. These countries have an interest in the oil markets, whether as consumers (China) or fellow producers (Iran and Russia). Chinese technology firms, increasingly frozen out of Western markets and facing strong competition in Asian ones, value Latin America. Chinese consumers depend on Latin America for foodstuffs from soybeans to cherries, fish and beef, the great majority coming from Brazil, Mexico, Chile, Peru and Colombia. As the foreign policies of China, Russia, Iran and others consolidate and harden around a core narrative of anti-Americanism, the United States, obsessed by migration, has been steadily losing political power in the region.

Yet the natural resources of Latin America are becoming more and more vital to the US, in an era of the weaponization of strategic resources like critical minerals (e.g. lithium), of nearshoring, and of decoupling from China and Russia, in particular.

Latin America’s strategic importance is likely to grow, but the US has not sufficiently cultivated the relationships that would allow “win-wins” with countries in the region. The US should change course on this while there is still time.

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Trump 2024: What's in it for Modi?

In September 2019, more than 50,000 Indian Americans traveled to NRG Stadium in Houston to attend a rally in support of two of the world’s most prominent nationalist politicians: Prime Minister Narendra Modi and then-President Donald Trump. Modi modified his own 2014 campaign slogan for the occasion, proclaiming “Abki baar, Trump sarkar!” In other words, “This time, a Trump government!”

It seemed a natural political marriage between two bombastic campaigners who had overturned the political establishments of their respective countries largely through an innovative combination of aggressive social media campaigns, ethno-nationalist rhetoric, and thinly veiled antipathy to Islam. The event’s potential to benefit Trump’s cause was clear: in the offing was a possible infusion of support for his candidacy among a growing population of Indian Americans. Modi’s interest in joining the controversial and capricious Trump onstage was less obvious. He chose to associate himself very publicly with an American president whose popularity has never overwhelmed the Indian electorate, whose policies never favored India, and whose victory in the 2020 elections was by no means assured. It was far out of character for an Indian PM not only to take a public position on the domestic politics of another country, but to insert himself into a foreign election in support of a particular candidate. The move earned him tepid praise from Indian political commentators and, although one hears little else than acclaim for Modi’s India from Washington today, could not possibly have earned him any favor with the Biden administration.

Biden and Modi are aware that the geopolitical and macroeconomic logic pulling India and the US into a strategic embrace is inexorable. The embrace has thus far manifested in several cooperative initiatives between the two states since Biden took office in January 2021. The most notable has been the initiative on Critical and Emerging Technology (iCET), which aims to promote bilateral cooperation in areas from defense technology innovation to semiconductor supply and higher education. As Americans prepare to vote in another presidential election in November, investors in Indian industry would do well to consider what might become of the burgeoning partnership between the two countries if Trump were reelected.

The price of Modi’s endorsement appears to have been Trump’s tacit approval for the Citizenship Amendment Act of 2019, which made eligible for Indian citizenship all Hindus, Sikhs, Buddhists, Jains, Parsis, and Christians who fled to India from persecution in Afghanistan, Bangladesh, and Pakistan before December 2014, with the notable exception of Muslims. The Act was part of a series of legislative measuresdesigned to threaten the citizenship of Muslims in India who, like much of the native-born population of India, have little or no legal documentation of their citizenship. In keeping with Trump’s transactional style of diplomacy, the quid pro quo between the two leaders does not seem to have extended any further than this simple exchange. Both men are committed to protectionist trade policies that discourage foreign competition in many sectors of their respective economies. Under Trump, a skilled-worker visa program that had long allowed foreign workers (roughly 75% of whom were Indian) to live and work in “specialty occupations” in the US was suspended in April 2020 by presidential decree. The suspension was allowed by President Biden to expire in April 2021. The Republican-sponsored CAATSA (Countering America’s Adversaries Through Sanctions Act) began in mid-2019 to impose heavy sanctions on companies and countries that continued to import oil from Iran. India, as Iran’s then-second largest buyer of oil, was no exception, despite Modi’s personal and ideological alignment with Trump. Political amity was similarly insufficient to allow their administrations to agree the terms of a promised US-India trade deal, or even the “mini-deal” that was promoted in its place when it became clear that a comprehensive deal could not be hammered out. Despite Modi’s talk of taking the US-India relationship “to new heights” with Trump, evidence suggests that Trump’s two immediate predecessors did far more to advance that relationship, and that his successor has gone to still greater lengths to embrace India. A shared contempt for Islam and liberal hegemony is not, it would seem, an adequate substitute for sustained diplomatic efforts made in earnest pursuit of mutually beneficial cooperation.

Trump has been uncharacteristically consistent in his willingness to treat US commitments abroad as political hostages, holding aid, security commitments, climate agreements, and arms control treaties over the heads of US allies and adversaries alike in an effort to appeal to his isolationist base. If reelected, he might well hold hostage the fruits of Biden’s efforts to build a lasting structure for American cooperation with India. He might decide to treat India’s increasing access to American capital, technology, and manufacturing contracts under Biden as a privilege to be revoked at his pleasure, with few domestic consequences for his administration and many for Modi’s. The iCET is not part of Trump’s personal legacy and might well be considered disposable. India’s position as a regional counterweight to China makes it indispensable to American strategy in the Indo-Pacific, but even as President, Trump never confined his role to the pursuit of US interests abroad. Indeed, he often acted against them. In the announcement of his plan to impose a universal 10% tariff on all imports to the US, and in Modi’s ever-louder emphasis on Indian self-reliance, we can see that the indiscriminate protectionism that left a US-India trade deal dead in the water is alive and well.

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Dealing with Corruption: Part Four of Four

By Dee Smith

In the first 3 parts of this post, I discussed the nature and history of corruption in non-Western cultures and in the modern West.

Whatever we in the West tell ourselves about the “objectivity” of our institutions, a great deal of life still operates in terms of familial and friendship connections, affinity with like persons, membership in groups (from criminal gangs to professional and religious organizations), and reciprocal obligations. This is the result of human evolution. As we evolved in small societies of like individuals based on trust, outsiders were seen as untrustworthy at best and often presumed to be enemies unless proven otherwise. In many cultures, they still are. Group belonging and identity in all its forms is one of the constants across cultures and time.

There have been many concerted efforts to change these embedded practices. For example, “legacy” admissions of students at universities in the US have recently come under attack as being unfair (which they are). Sweeping efforts are being made to eliminate them, but it is likely they will change only in form, not in substance.

Corruption in Africa, the Middle East, South and East Asia, and Latin America has been profoundly influenced by European conquest and colonization. As an example (and to vastly oversimplify): Latin America was mostly colonized by the imperial powers of Spain and Portugal, and their fundamental goal was to extract wealth and send it back to the regent. The British colonization of India, in contrast, was for centuries managed by a private enterprise, the East India Company, and the goal was to enrich shareholders back in the homeland.

Enriching shareholders in the homeland was also sometimes the goal in North America, for example with the Hudson Bay Company. In many cases, however, North America was settled by individuals and small groups (who were not state-sanctioned), often from the lower rungs of society, fleeing religious and other persecution, and seeking to create a new life in a “new world”—essentially by seizing it from its inhabitants. The goal of these colonists was to produce material prosperity for themselves, in their new homes, not to send it back to the motherland. The legacy of those very different goals informs social realities in Latin America and North America, respectively, to the present day.

Corruption, as we have seen, is a complex issue, and trying to understand it is a monumental task. Generally, it is over-simplified to the point that the descriptions correspond little with the actuality. And all too often, it is simply a blame game where “I’m right and you are wrong.”

From a practical standpoint, what is a Western businessperson to do when confronted with corruption in Africa, Latin America, or anywhere? Lecturing people from other cultures about “their” corruption is very bad form and therefore often bad for business. Furthermore, as we have seen, corruption is equally present in the West—it just works in a different direction—and much of the pronounced culture of corruption that exists in such countries is a legacy of the colonial and commercial goals of the Western powers that colonized these countries and extracted their wealth.

On a practical basis, for many reasons—legal, ethical, moral, or financial—a businessperson from the U.S., the U.K., or many other Western countries simply cannot engage in activities that their own jurisdiction defines as illegal corruption, however endemic it may be in a country in which they are working.

My advice is threefold: first, do your homework and make sure before you initiate talks with a potential partner that they do not represent an individual, family, company, or other party known for egregious corruption. Stay away from those.

Second, be very well informed in advance of what specifically is defined as corruption in the laws of your country, of the country where you are operating, and of the countries in which your investors or other partners are based. All are crucially important.

Third, if and when you are confronted by corruption, the best procedure is legalistic. Something like the following is a good approach: “I simply cannot do that or anything associated with it. It is against the law in my country. If I did it, it would threaten my ability to continue to do business, and quite possibly threaten my personal freedom.”

In that way, you are not “calling out” anyone, you are not making a value judgement of right or wrong, and you are not on a high horse criticizing anybody’s culture. You are simply drawing a bright-line around what you can and cannot do—a bright-line required by the legal regime of your country.

And then, if you have to, you need to be willing simply to walk away.

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Dealing With Corruption: Part Three of Four

By Dee Smith, CEO

The 18th century European Enlightenment made the West quite distinct in terms of intellectual, social, economic forms, even WEIRD:  Western, Educated, Industrialized, Rich, and Democratic, as the phrase goes.  In parts one and two of this series, I looked at how corruption in many non-Western societies has been structured by “social pyramids” that link the high and low of a specific social group in mutual obligations, including cooperation in securing political power in order to succeed economically. This structure I contrasted to that of the post-Enlightenment West, where corruption uses money to get political power. I then argued that Western rules-based social orders, which made it possible to separate corruption from the social pyramids, are breaking down. One way to look at the rise of identity politics in the West is as the re-emergence of kinship- and identity-based structures similar to those of societies structured by social pyramids. The implications of this for society and for the evolution of corruption will be substantial.

Nineteenth-century European and North American societies, as they industrialized and previously rural people were forced to compete for survival in fast-growing cities, came to depend on science, technology, and eventually modern education. These societies developed distinctive hierarchies to manage their growing complexity, increase productivity, and compete with rival societies. Complex hierarchical structures were very different from the old social-pyramid hierarchies, although the two long existed side-by-side and in some ways still do. One difference was that they required social mobility and the possibility of advancement by merit. Dynamic merit-based hierarchies gradually replaced the social-pyramid hierarchies and developed merit-based elites.

“Merit” was and is a social relation, changing over time according to social demand. Imperial China’s merit-based examination system for civil servants rewarded expertise in classics of Chinese literature, rather as Britain’s elite educations emphasized classical Greek and Latin. When social demand for very different kinds of merit strengthened, these systems had to adapt or die, particularly as societies like Japan and the newly unified Germany quickened their pace of industrialization, militarization and social engineering.

Merit-based modern societies create a particular kind of private anxiety in that the creation of open opportunities for personal advancement puts the burden of failure, as well as success, on the individual. The protectiveness  of social pyramids, as well as of mass participation in collective religious rituals and a shared spiritual life, could not survive the rise of merit-based hierarchical societies. The old social pyramids had cared for the people within their structures through a sense and practice of reciprocal responsibility. Modern societies deracinated this—each person is on his or her own. Official, bureaucratic systems now “care” for those who, because of nature, nurture, or accident, cannot care for themselves. Everyone else is homo economicus.

“Economic man” and societies based on competition and maximal efficiency dominated the 20th century to such a degree that almost everything was seen to operate in terms of economic “laws.” Yet markets are human constructs, and we forget that at our peril. The disruptions and anger we see in societies today may be connected to this in more ways than one.

Market-based maximal efficiency undermines social structures in part because it directs capital to technologies that themselves lead, unpredictably, to social transformation. More than 80 percent of unemployment in manufacturing in the US in the last 2 decades is due to automation, not to offshoring (whatever politicians may say). With the rise of generative AI, we face a tsunami of unemployment, coming now for white-collar employees. As Yuval Noah Hariri has noted, we are living for the first time in history without any real idea at all of what jobs will look like in 10 years! What’s a young person—or anyone—to do? People feel profound uncertainty about change that does not seem to have an identifiable logic or purpose but is nonetheless pushed forward relentlessly by developments in technology, from dependence on cyber systems and their vulnerabilities, to bio-error and bio-terror, to generative AI and the possibilities of Artificial General Intelligence.

In such an environment, people long for connection to something meaningful and concrete. They long for stability.  “I don’t even recognize my own country any more” is a phrase I have heard all over the world, in societies very distinct from one another. People thus seek kinship, identity, and affinity with others who share their culture, concerns, maladies, and even bloodlines. And if they do not have a community offline they will find one online, with results that, over the past decade, seem to have been more negative than positive.

It is possible that these changes represent not partial revolutions, as in 1848, nor even the kinds of anti-capitalist revolutions seen in the first half of the 20th century, which were also built around homo economicus. The changes to come may represent a more profound transmutation, into a system (or systems—the outcomes may be very different from place to place) whose nature we cannot, at present, see. If large numbers of people decide their future looks worse than their present—which many perceive as already worse than their past—they may decide that the systems and rule sets and leaders they have been living under are no longer serving their needs. That they are no longer fit for purpose.

And then what? Will we see the rise of a revised form of social pyramids with internal obligations, because people do not feel they can rely on government promises and systems, and do not like the isolation and radical uncertainty that modern life forces upon them? Will the nature of corruption in the West begin (again) to resemble that of the non-Western world? Or will we see something entirely new?

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.

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.)

India’s “New Era”

Growing tension and economic decoupling between the US and China have prompted many investors to move their capital from China to India or other growing Asian economies. India is projected to maintain growth between 6% and 7.5% into the second fiscal quarter of 2024, and Morgan Stanley and Goldman Sachs alike expect it to be the focus of international investment in developing economies for the next decade, much as China was earlier. India offers a business environment that is comparatively free from the demands of an authoritarian state in the China mode. For different reasons, the United States is also investing a lot of political capital in India. But while India is an attractive alternative to China there are important reasons for investors to be cautious as well.

Freedom of the press in India and access to accurate information have become serious problems as major publications and platforms are now dominated by wealthy individuals or conglomerates loyal to the ruling BJP party. Party activists have been mobilized to monitor and harass journalists or sources who might be inclined to criticize government policy.

Political success requires large amounts of money and the BJP has been nourished by crony capitalism. The system was described by the Chairman of the Reserve Bank of India, Raghuram Rajan, as a “cycle of dependency”:

The crooked politician needs the businessman to provide the funds that allow him to supply patronage to the poor and fight elections. The corrupt businessman needs the crooked politician to get public resources and contracts cheaply. And the politician needs the votes of the poor and the under-privileged.

In the process, however, the economy is reduced to a kleptocracy from which open markets, competition, rational price mechanisms, transparency, and the rule of law disappear. The most outrageous example in recent decades has been the career of Gautam Adani, who rose to power along with Narendra Modi after religious riots in Gujarat in 2002. Adani was briefly the third richest man in the world until Hindenburg Research published a report that implicated the Adani Group in fraud on a massive scale.

The government has also begun to weaponize the Indian Revenue Service against its opponents. When the BBC released a documentary last year that was critical of policies towards Muslims, the government responded by banning the film and ordering the IRS to raid BBC offices in India on suspicion of tax evasion. This is only one of the more prominent examples of the BJP’s use of government agencies to bully political opponents and discourage open criticism.

The judiciary has attempted, with some success, to retain its independence, but the BJP has persevered in its efforts to dismantle the Supreme Court’s defense of precedent and constitutional law. This has allowed a powerful executive branch to delay or disrupt the judicial process and, with a compliant Chief Justice, to assign politically significant cases to judges sympathetic to the ruling party. Investors should bear in mind that political expression is no longer entirely free in India. The V-Dem Institute in Sweden now describes the country not as “democratic,” but as an “electoral autocracy” similar to Hungary, Turkey, or El Salvador.

The accusation is no more troubling for Narendra Modi, leader of the BJP and Prime Minister of India since 2014, than it would be for Recep Tayyip Erdoğan in Turkey. It may still not appear to be a serious concern to foreign investors in India. But even if foreign journalists are inclined to treat the economic success of India as if it could be distinguished or detached from aspects of BJP or Modi himself that they regard as unethical or even criminal, it is far from certain that this can be done.

The Biden administration seems to have calculated that the US-India strategic relationship must be maintained regardless of the BJP’s rhetoric or policies. In 2005, Modi had been banned from entering the US due to his “severe violations of religious freedom” while Chief Minister of Gujarat. He was only allowed to enter the US after he became Prime Minister in 2014. Now, however, he is welcomed with lavish receptions at the White House, a confirmation of the place that India has come to occupy within the global network of American partnerships. Barring any extraordinary shifts in the strategic balance between the US and China in the Indo-Pacific region, it can be assumed India will not be subject to economic sanctions or other punitive measures by the US or its allies, even if there were otherwise reason to apply them.

The BJP and its rhetoric recall the politics of the far right in Europe: a profound sense of grievance, an appeal to a mythic past, and repeated calls for public mobilization. Modi has described a Hindu majority under Muslim rule as having suffered “a thousand years of slavery” that India will no longer tolerate. He has increasingly shown what that might mean, for example with his commemoration a famous attack on a mosque.  On 6 December 1992, some 200,000 Hindu nationalists attacked the Babri Masjid, a mosque built by the Mughal emperor Babur. The violence would not only provoke rioting across India, it would also transform political and social life in the decades that followed. In January 2024, Modi presided over the lavish inauguration of a new Hindu temple where the Babri Masjid once stood. “We must not bow down anymore,” the Prime Minister insisted as he announced the beginning of “a new era.”

Other mosques are now being targeted for demolition and other excavations at other monuments continue as the BJP attempts to create a new history from tales in ancient epics, but its quest for a purified Hindu India is based on the assumption that one community will win as another loses. It is all too easy, however, to imagine a future in which both will be diminished.

Hedging the Middle Powers

As Central Intelligence Agency director William Burns has been understandably circumspect in making public statements, on or off the record, his article last week in Foreign Affairs made news. The FA promotional material stressed Burns’s reflections on how the CIA is adjusting, and must adjust, to the times. News coverage of his article focused on Ukraine, Russia, and Iran. In SIG’s view, however, the most interesting passages were on “middle powers” vis-à-vis US-China relations.

“In this volatile, divided world,” Burns wrote, “the weight of the ‘hedging middle’ is growing. Democracies and autocracies, developed economies and developing ones, and countries across the global South are increasingly intent on diversifying their relationships to maximize their options. They see little benefit and plenty of risk in sticking to monogamous geopolitical relationships with either the United States or China.” Unlike many in the US intelligence community, Burns does not go on to say that states will need to choose which side they are on. He simply accepts the situation as a reality that the US must accept and address rather than hope to reverse.

To be fair to the reporters linked above, Burns’s passage on the “hedging middle” was not new and therefore not really news. Somewhat surprisingly, the passage and indeed much of the FA article had already been published in July of last year in the Washington Post, an opinion piece that was itself adapted from remarks that Burns had made earlier that month at the Ditchley Foundation. Even the somewhat off-kilter metaphor of open geopolitical marriage survived from the earlier speech.

Still, Burns’s acceptance of the legitimacy of middle powers keeping their options open is important to register. It is one thing to say, as Burns has been saying for a number of years, that the days of US hegemony are over. It is quite another to draw from this the conclusion that the US just has to make do with autocracies or democracies, as the case may be. Indeed, that implication runs counter, at least in spirit, to President Biden’s “summits for democracy” policy.

Burns’s vision is probably close to what Biden actually thinks about alliances and democratic values, as distinct from what he sometimes says. After all, Biden would have had opportunities, in eight years as vice president, to push the Obama administration toward an explicitly values-based or activist foreign policy. But Biden, who was the youngest member of the Senate Foreign Relations Committee in the mid-1970s and left it as chairman in 2009 when he entered the White House, tended to come down on the pragmatist side as vice president and has kept to that path as president.

This was a departure from the Clinton-era Democratic Party. It emerged in the Obama administration. Obama’s antagonism toward the foreign-policy “blob” normalized a pattern of public idealism atop policies of taking “the world as it is,” a phrase that gave top Obama foreign-policy advisor Ben Rhodes the title of his memoir. The pattern has continued under Biden and solidified into a doctrine, or at least an idea, of how to deal with “middle powers.”

It's hard to know where the idea originated, but one can easily imagine Burns playing a major role. The son of a general who was very active in policy-making, Burns was the most celebrated professional diplomat of his generation. Of the Biden national-security triumvirate of Blinken-Burns-Sullivan, Burns was the only one with many years of experience dealing directly with foreign friends and adversaries. This made him unique among CIA directors, and his unusual para-diplomatic assignments under Biden, along with his being given cabinet status, have reinforced his unique position. So do his singular personal qualities. As anyone who has met him will attest, he is an almost extravagantly modest person, starkly different in that respect from many of his predecessors. (A collection of oral histories about Burns’s State career captures this and similar qualities in the words of his contemporaries.) He has a mesmeric ability to inspire trust among enemies as well as friends. His personality and professional practice alike suit him to accepting and dealing with a “hedging middle.”

This could soon have domestic political consequences. It has often been noted that Biden’s China policy continued Trump’s China policy, and as a result has enjoyed a bipartisan support otherwise almost absent from US politics. Biden has even taken the approach to new lengths with his adoption of a China-focused industrial policy and a much more extensive program of techno-containment than Trump had attempted. The trade deficit with China has shrunk to the level of 2003, and US tech companies are benefitting from government encouragement while China’s tech sector is still struggling to adjust to Xi Jinping’s much more heavily interventionist policies. But the Biden administration has not stressed either the Trumpian “business” approach, which emphasized that China was an unfair competitor, or the values approach, which was more an appeal by Trump’s advisors for a moral confrontation with Chinese Communism. Both of these can be expected to form the core of the Trump campaign’s attempt to differentiate its China policy from Biden’s. It is hard to imagine a second Trump administration displaying any tolerance for a hedging middle constantly weighing its options. As before, nations will probably be pressured to make a choice between the US and China.

Between now and November, the Biden administration will likely stick with its policy of trying not to force other countries to choose between the US and China or between democracy and autocracy. The policy has the public endorsement of Burns and Sullivan, and a bit less enthusiastically of Secretary of State Blinken. It is definitely an investor-friendly policy and, in its way, globalization-friendly during a period of anti-globalization still under the shadow of Trump’s successful appeal to economic nationalism. But it might not be permanent, and investors will want to do some hedging of their own in preparation.

The Davos Myth

The peculiarities of the World Economic Forum meeting at Davos look more peculiar each year. The WEF’s 2024 risks report again used a proprietary poll of global leaders to foresee global trends, but the Davos definition of “global” may finally have transitioned from eccentric (or nostalgic) to misleading: 38% of respondents were from Europe, 18% from “Northern America”, and just 5% from “Eastern Asia”. In the breakdown of national responses, China was notably missing. In what sense is this global?

Similarly, the Davos analytical frame continues to look at world trends independently of particular actors. The 2024 report, in line with WEF tradition, leaves out names: no Trump, no Xi Jinping. Nations also get little attention as independent political-economic actors.

The idea of the WEF was always to both reflect and nurture a view of globalization in which economic forces could be relied on to overwhelm politics, preferably for the better. In that odd way that neoliberalism and Marxism have of blending into each other, the Davos view is of what Marxists call “the forces of production” structuring the surface phenomena of states and political leaders. As long as the theory is sound, then it might not matter that only 5% of respondents are from China/Japan/Korea/Taiwan, which is presumably the group forming the “Eastern Asia” category.

But the theory is not sound, which is why the 2024 report looks so odd. Xi Jinping’s mode of responding to globalization — remaining open to foreign capital and technology while protecting domestic firms from competition in the home market and subsidizing their growth abroad — made WEF globalization anachronistic, as did the self-protecting responses of the US, India, and to a degree Europe. The relief with which Xi was greeted at the 2017 WEF did not last very long. Neither did its embrace of India, which weakened under the pressure of Narendra Modi’s India-first policies. Vladimir Putin crushed WEF’s Ostpolitik while Donald Trump made “economic nationalism” great again in the US. Individuals, states and politics really do matter.

This week South Korea, for example, announced it would direct nearly half a trillion dollars to improving semiconductor production on its own territory. Korea, whose Samsung currently runs a distant second in semiconductor production to Taiwan’s TSMC, is partly reacting to increased domestic semiconductor subsidies in Taiwan and Japan.

Meanwhile, in the US the grip of national-security priorities on the tech sector has steadily increased. Concerns about the sturdiness of the American DIB (Defense Industrial Base) were once a fringe obsession, but now every four-star is an authority on the economics of manufacturing.

Interestingly, some WEF survey respondents identified this bending of national economies to a kind of security-driven tech hoarding as a major risk in 2024. SIG’s view is that they are right to do so.

Investors, therefore, are wise to continue evolving away from a faith in globalizing forces and toward close analysis of particular people, states, policies, and political pressures. The most difficult, and most important, area to watch is the intersection of nationalist priorities and globalized markets. It is the Xi Jinping intersection, but it has grown far beyond his signature twinning of Made in China 2025 and the Belt and Road Initiative. Now all the major economies are playing the same game. When economies as diverse as those of the US, Korea, Japan and India are reaching for many of the same policy levers in trying to achieve the China goal of insulation from global forces combined with export promotion, globalization has changed its nature. It is not about less-developed countries “catching up” with more-developed ones. The process, if that is the right word, is much more discontinuous than that, more subtle and less predictable. Against most post-Cold War predictions, the power of states and individual leaders is increasing, as are popular expectations about what states can and ought to do for them.  All of this fuels interstate competition in ways that the Davos worldview is ill equipped to handle.

Rising India and a Murder in Canada

Rising India and a Murder in Canada

Canada is embroiled in an increasingly bitter diplomatic argument with India. As Canadian Prime Minister Justin Trudeau has accused India of murdering a Canadian citizen on Canadian territory, this is hardly surprising. For many observers the most curious aspect of the scandal is a lack of support for the Canadian position, apparently due to the failure of Justin Trudeau to present convincing evidence. But there is more support than meets the eye, and Trudeau has moves yet to make.

The murder in question was the shooting of Hardip Singh Nijjar on 18 June in Surrey, a southern suburb of Vancouver, BC. The incident was recorded on security cameras that confirmed the involvement of at least 6 individuals and 2 vehicles. Nijjar died at the scene. The assassins, who were masked, drove away and have not been apprehended. The identity of the individuals or institutions behind the murder has not been revealed. The evidence is closely guarded, although the Canadian government claims to possess signals intelligence as well as human intelligence that confirm the involvement of Indian diplomats or agents in Canada.

Nijjar was a plumber. He was also the president of Surrey’s Guru Nanak Sikh Gurdwara, a “residence of the guru” that contains a copy of the Sikh scriptures known as the Guru Granth Sahib. Nijjar was not only the president of a gurdwara, he was also a Sikh nationalist who claimed to support a peaceful referendum in India but had been designated a “terrorist” by India.

More Sikhs live in Canada than in any country other than India and 82 gurdwaras have been built in British Columbia alone. The number of Sikhs in Vancouver is almost a quarter of a million, nearly 10 percent of the total population. They are there, in the main, as a response to persecution in India.

The Sikh community emerged in the Punjab at the end of the 15th century and follows the teachings of Guru Nanak and the nine Sikh gurus who succeeded him. As their beliefs were distinct from those of Hindus or Muslims, they have been subject to intense persecution throughout their history. They have responded by emphasizing military prowess, creating a Sikh ideal that embodies the virtues of soldier as well as saint. 

Hopes for a separate Sikhistan were discussed formally in 1944 while plans were being prepared for a post-colonial India. They were never ratified. Sikh aspirations were frustrated by official indifference and corruption, as well as by the narrow confessionalism of political parties such as the RSS and the inability of the Congress Party to counter it. Attempts by successive governments to suppress Sikh militants reached a bloody climax in 1984, when Indira Gandhi sent troops into the Golden Temple at Amritsar to remove fighters who had gathered around Sant Jarnail Singh Bhindranwale and turned the shrine into a military complex.

Two months later, Gandhi was assassinated by Sikh bodyguards, an event that provoked anti-Sikh riots across northern India. Sikhs sought refuge in Canada, where they retained their dreams of an independent Khalistan, or “Land of the Pure.” They brought the conflict with them. In June 1985, Air India Flight 182 from Montreal to London was destroyed by a bomb that caused the death of 329 passengers. The attack was often seen by Canadians as a foreign affair and is barely remembered, although the casualties were mostly Canadian and the atrocity was planned in British Columbia. It has not been forgotten in India.

Since 1985, Indian politics have changed dramatically, the ideals of an earlier generation of Indian politicians replaced by the more rigid ethnic and religious nationalism of Hindutva. Narendra Modi’s agenda offers citizens who are not Hindu – such as Muslims, Christians, and Sikhs – little more than a second-class status. But if the hopes of Sikhs in India for an independent Khalistan have been suppressed, they survive in British Columbia.

How important a question is Sikh political aspiration for Canada or India? Is it of any significance to anyone else? The Sikh community is undoubtedly a political force in Canada. The 33rd premier of British Columbia, Ujjal Dosanjh, was a Sikh who also served as a federal member of Parliament and cabinet minister. More important at the moment is the prominence of Jagmeet Singh, an MP from Burnaby, a Vancouver suburb. He is the national leader of the New Democratic Party, on whose support Trudeau’s minority government depends. Trudeau, no less than Modi, sees the Sikh community in terms of domestic political issues rather than international diplomacy.  

Elsewhere, however, interests vary. India is being courted because of its economic power, huge markets, its strategic position in Asia generally and its rivalry with China in particular. With so much at stake, there is little desire outside India and Canada to enter an argument over the death of a plumber in Surrey. Nevertheless, the US ambassador to Canada stated “there was shared intelligence among Five Eyes partners that helped lead Canada to making the statements that the prime minister made” and that US intelligence in particular had been sent to Ottawa.

This was an unusually explicit commitment that could make the case even more difficult to address. Would Modi be any more likely to admit culpability if detailed evidence were released? The activities of Sikh militants have been murky and may have included affiliation with Pakistan intelligence as well as international crime syndicates. The Indian position has been that the death of Nijjar involved enemies among the latter. What if this position were no longer tenable because the involvement of the Indian government was exposed?

The various parties involved have relatively weak motivations for fueling the controversy, India and Canada having now gone through some diplomatic tit-for-tats over the case. But releases of evidence could interrupt the desire to move on.

Japan's Power Play

Japan’s Power Plays

Coverage of the US-China agon has become ubiquitous, especially in the United States, where politicians turn to China policy with relief as the only major area of bipartisan accord. Military and economic threats are always news, and China and the US are both generating plenty of them. Coverage of Japan, by contrast, is comparatively rare. This is a mistake, because Japan — the third-largest economy in the world by one measure — is undergoing a strategic transformation of great significance. And it is much more than a sideshow to the US-China drama.

There is a great deal going on in US-Japan relations right now — the Center for New American Security has an excellent report out this week on the subject — but in many ways the most interesting Japanese moves have to do with regional and European relations. Japan-Korea relations went into a deep freeze in 2018 after the Korean supreme court ruled that specific Japanese companies should compensate individuals who had endured forced labor during the Japanese occupation of the peninsula that ended in 1945. Only three of the original plaintiffs remain alive, but Japan reacted negatively, Korea responded, and the two nations nearly ceased to communicate. The conservative government of Yoon Suk-yeol broke the logjam earlier this year with a plan to have Korean companies pay the compensation. Japan responded positively, although the three plaintiffs refused to accept Korean money, and Japan-Korea relations have blossomed. Both countries have developed new security strategies — in response to China, in particular — based on the fundamental needs that they share, as trade-dependent economies with shrinking populations, for free navigation throughout the Indo-Pacific. The US encouraged the Japan-Korea rapprochement, including greater security roles for both countries and culminating in the trilateral meeting at Camp David in August. But greater strategic autonomy for both Asian nations means greater autonomy from the US.

Japan has also prioritized relations with the United Kingdom. The reciprocal defense agreement signed by prime ministers Kishida and Sunak in January was hailed by one British defense official as the most important British-Japanese agreement for “more than a century,” presumably referring to the Anglo-Japanese alliance of 1902. (Japan had earlier signed a similar agreement with Australia, which more than a century ago was the sworn enemy of the Anglo-Japanese pact.) Just as important was the announcement on 12 September of closer cooperation between Japan, Britain, and Italy on the Global Combat Air Programme (GCAP) to produce “sixth-generation” fighter planes. The project is at once a way for the United Kingdom and Italy to address their own non-participation in the Eurofighter program, while also evading dependence on the Americans’ Next Generation Air Dominance platform (NGAD).  GCAP is the largest defense project that Japan has ever undertaken with European partners.

It is worth noting that GCAP is an example of what might be called strategic software autonomy. The fifth-generation F-35 fighter tied the buyer to the manufacturer (Lockheed Martin), who kept the code proprietary along with necessary software updates. The Pentagon itself didn’t like this level of dependence and is determined to avoid it with NGAD. The F-35 software approach did have the advantage for the US of bringing F-35 buyers into dependence on the US, creating a form of digital alliance in the name of interoperability. It will be interesting to see how the GCAP fighter, which is meant for export as well as for the British, Italian, and Japanese air forces, will handle the question of software and data. What seems clear is that US policy and Lockheed Martin’s contracts pushed some major US allies into developing defense technology that will reduce their dependence on the US. Japan now intends to build its own missiles to arm the GCAP fighter. 

Japan has also emphasized better military relations with India. Kishida unveiled Japan’s Free and Open Indo-Pacific strategy in India earlier this year and returned to the theme on 10 September at the G-20 meeting in New Delhi. The Quad (India-Japan-Australia-US) may always look curious from a diplomatic perspective, but it is having real results. Historians will appreciate, as the British defense official did, that Japan is revisiting its period of collaboration with the British Empire from the 1890s to the 1920s. There has even been talk over the past two years of Japan joining the Five Eyes intelligence-sharing group (US, UK, Australia, New Zealand, and Canada), another body created in the long shadow of empire.

Japan still has a constitution that limits its military to self-defense. Japan (after 1945) and South Korea are therefore relative newcomers to this kind of global jockeying. Their prosperity, their front-line status against not only China but also North Korea and Russia, and their world-class tech sectors combine to make them instant major players — if they continue to want to be.  

For global investors, this means that the policies and foreign-relations strategies of Japan, in particular, are now significant for investment decisions and will remain so for the foreseeable future. This had previously not been the case when investors were assessing participation in the world’s third-largest economy. Japan is creating more space for itself under the American umbrella. This has consequences; the GCAP program is only one example.