Are We Sleepwalking Into an Energy Disaster?

By Dee Smith

The Iran war, like many things in the world these days, is full of contradictions and cognitive dissonance. For example, multiple expert voices have, since early in the war, been predicting a dire energy supply crisis from the closing of the Strait of Hormuz, the narrow strip of ocean between Iran and Oman though which about 20 percent of the world’s supply of oil passes in “normal” times.

Such concerns have not abated. The chief economist of Rystad Energy told Fortune magazine on 6 May: “We’re still kind of sleepwalking into this approaching disaster. There is little doubt there is going to be a disaster.” Numerous other informed observers have made similar points.

But where is the disaster? Why have we not yet really started to feel it?

Some places have. South and Southeast Asia, for example, are already buckling under the price increases and shortages. And many companies—first and foremost airlines—are rapidly feeling such pressure that they are curtailing operations. Lufthansa has cancelled over 20,000 flights.  Spirit Airlines went out of business entirely, with a sudden loss of 17,000 jobs.

Nevertheless, the world as a whole and the West and China in particular are not yet visibly reeling. While prices are substantially up, oil markets have not shot to and stayed at the heights of over $140 per barrel that were predicted if the war continued this long. The prices of West Texas Intermediate and Brent crude hover at this writing between US$105 and $110 per barrel on the spot market (for immediate purchase of oil) and around US$80 to $85 on the futures market. The latter is a more reliable indicator of what traders are willing to bet money on. Notably, the divergence between the spot and future markets has been narrowing recently, reflecting what some are calling a “mini-glut” at present.

The reasons for this have been perplexing a number of observers. A few factors are invoked to account for it:

·      The reduction in imports by China (over 4 million barrels a day lower than a year ago), which is probably both price-driven demand destruction among consumers in China, and Chinese government policy since the start of the war allowing drawdowns of stocks and prohibiting exports.

·      The surprising increase in U.S. exports of petroleum and its products, which is nearly 4 million barrels per day above previous-year levels (much of this reflecting the drawdown of the U.S. Strategic Petroleum Reserve).

·      Rationing in the Global South, which has created demand destruction. The Philippines, for example, went to a 4-day work week shortly after the war started.

·      Oil stocks had been at or near a record high at the start of the war, with a similarly high level of oil in transit on the seas at that time.

But this reprieve is short-term, and it may end quite soon and quite abruptly. The U.S. administration, for example, may suddenly come to terms with how much of America’s stocks are being drawn down, what this is doing to gasoline and food prices, and do an about-face. An oil export ban is already being quietly discussed. China, similarly concerned about stock drawdowns, may start importing more oil. The war itself is at risk of turning into a “frozen” conflict, where each side essentially holds the other hostage. But even if hostilities ended today, it would take months to regularize the situation for reasons ranging from de-mining the Strait to physical destruction of various energy facilities in the Gulf, and simply the re-start-up time faced by closed facilities.

If—or perhaps when— a longer-term reconfiguration of energy markets happens, the consequences may indeed be dire. Prices could start to seriously rise again. Some informed estimates predict oil above $200 a barrel, perhaps significantly above.

But serious shortages loom even more threateningly than price increases.

The most alarming aspect of this for both social stability and for everyday life everywhere is the food-petroleum nexus. Food production is overwhelmingly dependent on fossil fuels. Diesel fuel is essential for transporting food from farm to processor to market, whether by truck or rail. But diesel is also essential to farming machinery. And shortages of urea and other fertilizer ingredients from the Persian Gulf will also affect farming.

Global supply chains are now so intrinsically intertwined that this could well evolve into an “everything crisis,” as CNN has put it. From plastic containers for food and water, to bags, solvents, industrial lubricants, medical equipment, cosmetics, footwear, microchips, and even condoms, so much is utterly dependent on petroleum byproducts or other resources of which a significant percentage comes from the Persian Gulf. It is a single point of failure.

When could this materialize? It is hard to say, due to the vagaries outlined above, but the best estimates are by mid-summer. Some sources are quietly saying we could start to see rising alarm again in the next 2 weeks.

Some areas, like Europe and California (which imports about 60 percent of its crude, 20 percent from the Persian Gulf), will be affected before others, but if the status quo continues, all will be affected, everywhere.

It is worth noting that this war—intended by some accounts to keep Iran from acquiring nuclear weapons—has provided Iran with another weapon even more actionable: the ability to close the Strait of Hormuz and essentially hold the whole world hostage. This is not lost on the Iranian regime.

We are suffering again from our recency bias—the conviction that the near future will be like the recent past—and the closely related problem of induction, which makes people discount the possibility of fast, radical change.

These potential events have huge social-stability, business, and geopolitical implications. It is worth restating the obvious point that when people have nothing to eat, they have nothing to lose.

Iran, the US, and Energy Dependence

The political and economic effects of the US-Israel attacks on Iran and Iran’s response seem to be much more about what is not done than what is. The extraordinary truth is that a “war” with grave immediate effects on the political-economy of the planet is taking place with nearly all the world’s states remaining on the sidelines. US allies and US enemies alike, poor and rich, global South and global North, are staying out of it.

This is not because of anti-Trumpism or anti-Americanism — two very different things. Nor is it because of international affection for Iran. At one level, it is because the US has a lengthening record of starting overseas conflicts it does not really win, from Somalia 1992 to Venezuela 2025. Until the current Trump administration, such conflicts had ideological, moral or strategic justifications that clearly meant something to the presidents who were executing them. That has not been at all clear since January 2025. There have been some justifications similar to those of the past, but they fall away when financial gain presents itself, whether in control of Venezuelan oil or a “very big present worth a tremendous amount of money” from Iran. Beyond good financial deals, whether realized or not, the White House’s main foreign-policy motivator has been the spectacle of using force and receiving displays of submission and deference from foreigners.

It’s not a strategy but it does reflect a cast of mind that has been consistent for over a year. The international scene has adjusted. People keep their opinions to themselves, waiting politely until the White House’s attention moves on. World leaders have learning curves too, and they studied the example of Ukraine President Volodymyr Zelensky in his notorious meeting with President Trump in February 2025. Global political behavior has traveled a long road from there to the extraordinary self-control of Japanese Prime Minister Sanae Takaichi as President Trump made jokes about surprise attacks and Pearl Harbor.

The result is that the world order is being remade passively, through non-participation. African states, European states, India, China and others have reacted in about the same way to the US-Israel-Iran conflict, which is to hope not to be asked the question. This is not only about the US (or Israel): Iran is seeing how little its African initiatives are producing in a crisis. Leaders including India’s Narendra Modi and China’s Xi Jinping preferred to focus on things other than the massive conflict threatening their energy supplies. (Iran became a full member of the China-founded Shanghai Cooperation Organization, its ninth, in 2023 after 15 years of hard diplomatic effort.) The BRICS group — Iran has been a member since 2024 — has been stymied. At the same time, the EU’s foreign policy head, Kaja Kallas, said simply, “This is not Europe’s war.” NATO chief Mark Rutte has made a variety of statements that noticeably contradict each other.

And so on. It is important to recognize the non-functioning of the BRICS and SCO alongside that of NATO, the EU and UN bodies. There is no world organization, sub-organization, leader or group of leaders able or willing to impose any kind of order. It is as much a crisis of the global South as of the global North or the West. The global South’s inability to speak up for one of its own is rooted in energy needs at least as much as in any hesitation to upset the White House. The industrialization and digitization of the poorer parts of the world have changed their international politics in so many ways. They have certainly changed the politics of energy.

The main result of the US-Israel-Iran conflict for investors is perhaps that any investment requiring stable electric power, which is of course most investments, has to include an assessment of energy sources and supply redundancies beyond what markets are able to price accurately. In particular, energy diversification away from petroleum — for national markets that lack their own petroleum supplies — is clearly necessary, without any reference at all to carbon-based climate change. The Trump administration made the burial of “green energy” a potent rallying call domestically, but US policies are having the opposite effect internationally. It isn’t simply about cars, trucks and planes. All AI and other Internet-related businesses, for example, require electrical power from some source, as does the manufacture of all their components.

Whatever the White House imagined at first to be the purpose of the Iran conflict, two striking effects have been the exposure of the weakness of all international groupings (Western or not) and the political-economic necessity for most markets of diversifying their energy sources.

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.

Déjà vu All Over Again

By Dee Smith

With his entry into the Israel-Iran war, Donald Trump seems to have gone over to neoconservatism, even invoking the goal of regime change, an old neocon favorite. It remains to be seen at this writing what will happen to the cease-fire he has imposed, but the interesting thing from a policy standpoint is how much this is both in accordance with — and violates — legacy patterns of US foreign policy.

Many Iranians outside Iran are pleased at Trump’s decision, even as they are desperately concerned about their families who remain there. Anne Applebaum cites an article from an anonymous Iranian source published last weekend in Persuasion:

knowing that the men who’ve held us hostage for forty-six years, who’ve ransacked our country, raped and killed our daughters and executed our men for asking for their basic human rights, are finally getting what they deserve—that brings me peace.

That view of the recent American action comes very close a classic element of the liberal international order in its later form: the “Responsibility to Protect” or R2P. Under this doctrine, the international community has a responsibility to intervene inside states that do not protect their populations from atrocities such as war crimes or genocide.

All of this is to say — with apologies to Mark Twain — that reports of the death of neoconservatism and of the liberal international order have been greatly exaggerated. They are gone, but also not gone. They are there, but so radically mutating they are no longer themselves.

That is characteristic of our entire world today. We are living in a time in which ideologies are both more important than ever, and the varieties of thinking and expressing ideologies are more confused and at odds with one another than ever, and in which many people are not sure whether they actually believe what they claim to believe … or want to believe.

This multi-directional confusion is characteristic of most elements of global society and culture: Multiple ideas, trends, and styles from the past are reinvoked and mixed together, often haphazardly. This extends to culture, both popular and “elevated.” It has been said that there is no direction in fashion today: you can wear whatever you want. This is also true in the visual arts. And “serious” or classical music currently includes almost any style—you can compose like Bach, Schumann, Ravel, Prokofiev, Stockhausen, or Glass and be taken seriously, and you can even mix those up in the same piece and get away with it. Beyond that, the lines dividing classical and popular music are dissolving. And popular music has 1001 idioms, genres, and styles, not to mention the almost uncountable “mash-ups.” Really, anything goes.

That is also true in philosophy and even in science, as new and resuscitated interpretations of new and old discoveries create visions and theories that are directly at odds with one another — in areas ranging from particle physics to vaccination science to the study of the nature of consciousness (which is of vital interest to AI) — all claiming to be supported by evidence and each taken seriously by knowledgeable people. It is certainly true in politics, ethics, behavior, and mores. There is simply no overall direction, and certainly no center. That is always true to a degree, but it is much, much more pronounced now.

It is all of a piece only by virtue of being, as Elvis Presley said, “all shook up.”

Some see this as a form of decadence. But it also represents a flailing about to try to find something that works … anything … in the radically divergent situations we face. We seem only to know how to look inside the old boxes we have, and they no longer contain anything fit for purpose. We are all, fearfully, practicing the politics of nostalgia. But the past does not work today, our current systems and ideas do not work, and we don’t see where a future lies that might work. We find ourselves at sea with no life-raft we can grab onto.

Sometimes this is called a “horizon problem” — meaning that the solution is over a horizon beyond which we cannot see from our present vantage point. During the energy crisis of 1979, President Jimmy Carter exaggerated when said we were in a civilizational crisis of confidence. That is no exaggeration today.

In Hemingway’s novel The Sun Also Rises, Mike Campbell answers the question of how he went bankrupt: “Two ways: Gradually, then suddenly.” This is how major change often happens. We would be wise to recall how quickly the Soviet Union fell in December 1991. It had seemed robust, threatening, and indeed almost impervious less than 5 years earlier, and looked reasonably secure even a few months before. But the decay had in fact been eating away at the system for decades.

The old Chinese curse, now repeated with tiresome regularity because it is so apropos to our day, says “may you live in interesting times.” We are indeed there.

Where will our situation lead? And how do we navigate it? These are among the most urgent questions for all of us today, and they extend across all the domains of life. If you have little idea where the future is heading, and you can’t rely on the elements you could in the past, then how do you prepare for it? How, for example, do you ensure the well-being of your family? How does an investor manage, let along hedge, a portfolio in circumstances like this? Aside from intensive vigilance, the ability and willingness to move quickly, and hope, it is very hard to answer these questions.

Writing in another tumultuous time at the end of the 17th century, the English poet John Dryden closed his Secular Masque with:

All, all of a piece throughout;

Thy chase had a beast in view;

Thy wars brought nothing about;

Thy lovers were all untrue.

'Tis well an old age is out,

And time to begin a new.

A View from the Gulf - Part 1 of 3

What do artificial intelligence, national identity, family values, and ethno-cultural tolerance have to do with each other? They provide interlocking means toward the goal of having an adequate labor supply for a coherent nation in a globalized world. How this works is perhaps nowhere clearer than in the United Arab Emirates. This three-part series will discuss the UAE based on conversations there during a recent visit. The first part will look more at the emirates in domestic terms; the second will place them in geoeconomic context; the final post will assess the implications of the emirates for the wider re-networking of globalization. The implications for investors are considerable. Understanding the re-networking of globalization is key to investing in it successfully, and for a variety of reasons the nature of this re-networking is revealed with particular clarity in the UAE.

The usual narrative one hears about UAE history stresses that the emirates once thrived on the trade in pearls. When artificial pearls were invented, the emitates’ economy collapsed. When oil and gas were discovered in 1958, the emirates got a precious second chance at developing a modern economy. Sheikh Zayed bin Sultan al Nahyan, the emir of Abu Dhabi, sought to join the Organization of Petroleum Exporting Countries (OPEC) in 1967. Sheikh Zayed, in collaboration with Sheikh Rashid bin Saeed al Maktoum, emir of Dubai, formed a federation of six emirates in 1971, which immediately became a member of OPEC. A seventh emirate, Ras al Khaimah, joined the initial six the following year. The UAE took on its current form, dominated by Abu Dhabi and Dubai with the emirate of Sharjah as the third power in the federation.

The core purpose of OPEC was to resist control by the industrialized, and often formerly imperial, powers that had the technology, expertise, and capital to develop oil and gas resources. Britain had dominated the emirates before withdrawing east of Suez in 1968, and the formative impulse of emirati federation was anti-imperial and developmental. The distinctive dynamism of the emirates is rooted in the fact that Dubai, while powerful, has few natural resources: 94% of emirati oil is in Abu Dhabi, which became the capital of the UAE. As a trading economy, Dubai led in diversifying the UAE’s development away from dependence on oil and gas. The relationship between Abu Dhabi and Dubai is often compared to that between Washington and New York, while the most frequently cited model for the UAE as a whole is Singapore.

The crucial point is that the UAE’s core political and economic driver was to grow through negotiating power with and among major industrialized countries that needed its petroleum resources to fuel their own development. To do so, it needed not only luck and skill but a labor force well beyond the capacity of a country with a population of roughly 300,000 in the 1970s. So it imported what it needed, usually on a contract basis and particularly from India, with which the emirates had long-standing commercial ties. The working conditions of this imported working class were often harrowing.

The country grew. Today the UAE’s population is over 10 million. About 10 percent are emiratis, Another 3 million are of Indian descent, a further million from elsewhere in South Asia. Emiratis grow up on Bollywood films. Mumbai is a two-hour flight away; it takes twice that time to reach Beirut. The emirates are effectively multicultural, with a decided orientation toward South Asia. This makes them different from other Persian Gulf cultures, and is a key to their prosperity, along with a commercial language and institutions taken over from imperial Britain and extended through relations with yet another former British colonial nation built on imported labor, often under very harrowing conditions indeed, the United States.

 As a minority in their own country, the emiratis kept tight control over their own political and economic power, led by a highly effective monarchical aristocracy accustomed to sharing out decision-making and commercial rewards. Intermarriage with non-emiratis was – as emiratis today tell the story – more common into the 1990s that it is now. The nature of emirati identity is a live issue, although not one that is easily aired in public discussion. Membership in emirati families brings privileges such as free land and healthcare. It also brings obligations of fealty to the monarchy, which can and does, for example, forbid travel by emiratis to states at variance with UAE policy. A variety of people can gain UAE residence permits and, increasingly, passports, but actual emirati-ness is recorded in a “family book” and conveys an identity and social power beyond citizenship.

To deal with the resulting tensions, the UAE has, among other measures, empowered emirati women and stressed productivity and discipline among emirati youth, particularly through subsidized education (including at top international institutions), military service, and sport. (Government ministries compete against each other in sports leagues.) Senior emirati ministers and other officials are strikingly young and very often female. The empowerment of women has the usual implications for overall fertility, and a notable aspect of government policy is a growing emphasis on pro-family measures. The three emphases of recent UAE strategic policy—AI, family, and national identity – represent an attempt to ensure and extend emiratis’ future as the core population of a country in which they are highly likely to remain a minority.

So, too, does the government’s emphasis on diversity, in several senses. Alongside a ministry for national identity is a ministry for tolerance. This only appears to be a paradox. To judge from numerous conversations with UAE officials and other emiratis as well as expatriates – an inadequate term for 90 percent of the population – the UAE leadership is keenly aware that the country can continue to thrive only through the tolerance of diverse religions and cultures. Managing a dynamic relationship between nationalism and internationalism might not be to every emirati’s taste but it is essential to survival, whether cultural, military, or economic. But especially, perhaps above all, economic: the UAE has enshrined in its basic strategy documents a commitment to private-sector-led development, and the government is trying every means to get young emiratis into private positions rather than having them follow the easier path of government service.

The next post will look at how the UAE is using this distinctive combination of national identity and market-driven economics to drive its political-economic growth.

Wicked Problems and North Carolina

By Dee Smith

The continuously escalating complexity of the world that we have built has arguably outstripped our ability to understand and deal with it. The tools we have are insufficient. Change is becoming more radical, meaning that it takes us further and further away from what we have known, and from what we have assumed would exist in the near future. This accelerated, non-linear, radical change has very real and immediate effects on us all.

Enter the “hyperobject.” This is a term that came to public attention in the mid-2010s through the work of Timothy Morton (it had been used by computer scientists since the mid-1960s). Hyperobjects, as Morton described them, are massive agglomerations of people, institutions, technologies, ideas, and other elements that we can barely comprehend, let alone control or make sensible decisions about. They increasingly constitute the world today. In technical terms, hyperobjects are “n-dimensional non-local entities.”

Examples of hyperobjects include . . . oil spills, all plastic ever manufactured, capitalism, tectonic plates . . . the solar system . . . the sum total of Styrofoam and plutonium we have littered across the Earth over the past century, which will remain for millennia. A human being may see evidence of hyperobjects—pollution here, a hurricane there—but try gazing off into the distance to see the totality of them . . . and they disappear into a vanishing point.

Hyperobjects engender and embody non-linear risk. A great deal was learned about non-linear complex systems during the 20th century. Sophisticated mathematical analytical tools to understand them were developed. Very generally put, the more complex a system is, the more non-linear it becomes. The more non-linear it becomes, the more unpredictable its effects and outcomes will be. And the more suddenly it can change. Since we have the most complex human system ever to exist, we are dealing with levels and types of risks that we never imagined: risks that are unexpected, sudden, long-tailed, fat-tailed, multiplicative, and cascading.

Our incumbent complex systems developed during a time of relative stability, from the end of WWII until just a few years ago. That period, it seems clear, is now ending.

All of these changes drastically increase the incidence of “wicked problems.” A term developed by city planners, a “wicked problem” is a singular problem that typically has no clear definition, in part because it overlaps with other problems. It can probably never be completely solved. Wicked problems have multiple causes and exhibit effects at multiple levels and scales. They also have multiple stakeholders (affected parties), who have conflicting agendas and needs. Wicked problems cut across organizations, disciplines, and sectors. Even attempting to understand them and evaluate possible solutions is very difficult. When applied, such solutions often ricochet unpredictably across the system. Solutions are only better or worse, not right or wrong.

Sound familiar?

Hyperobjects engender such wicked problems, which can manifest in “polycrises”—although that is far too linear a description of the processes, which is filled with hidden, “n-order” feedback loops. According to historian Adam Tooze, a polycrisis represents the “coming together at a single moment of things which, on the face of it, don't have anything to do with each other, but seem to pile onto each other to create a situation in the minds of policymakers, business people, families, individuals.” In other words, a polycrisis occurs when multiple separate but interconnected crises amplify one another, with wide, systemic, sometimes irreversible effects. This “piling on” effect is devastating to our ability to manage such crises—and to our individual or collective physical and psychological well-being. It has always been the American way—the ethos of the entire modern world, really—to tackle problems one piece at a time, until we can wrestle them to the ground. Polycrises make this extraordinarily difficult.

Now to the U.S. elections and North Carolina in particular. An important swing state, North Carolina was devastated by Hurricane Helene’s massive rain in early October: a release of water due to the much warmer-than-“normal” ocean temperatures in the Gulf of Mexico feeding the storm—which is a result of climate change. Large sections of important road arteries were simply washed away, leaving no way to reach many communities by ground. Absentee ballots were in the mail, and many have probably been destroyed. At least one post office in Ashe County is reported to have been flooded and hundreds of mailboxes simply lost. We do not yet have a reliable estimate of the total destruction.

One storm and one election! Think about it. This is not at all theoretical.

What if polling cannot be restored to a sufficient level by Election Day for the votes of North Carolinians to be accurately recorded and counted? Is North Carolina simply ignored? What if the situation randomly skews the results by enabling voting in an area that is strong for one party, while removing it in an area that is strong for the other? What if another storm creates similar effects in another state? (Milton? Florida?) Where is the line crossed . . . and indeed, what is the “line” that might be crossed?

An additional part of this polycrisis concerns the flooded mines in Spruce Pine. This one mountain produces about 90 percent of the world’s ultra-pure quartz, a pristine sand essential for producing the high-grade silicon on which semiconductors rely. It is not known the extent of the damage or length of time that the mines may be offline, nor the effects on global semiconductor manufacturing. It is, however, a clear demonstration of the fragility of our systems, with their single points of failure.

Put simply, socio-economic systems developed in the last 300 years, honed and applied particularly in the last half of the 20th century, were attuned to conditions that no longer exist. We and our legacy systems are woefully unprepared for the kind of future we face. We are on very thin ice.

How the Green Economy Grows

Generals are often accused of fighting the last war. The shift in US and, increasingly, European politics toward industrial policy in reaction to Chinese growth is beginning to look like an economic instance of the same phenomenon. The dominant narrative for many years has been that China accepted inward foreign direct investment in order to copy Western technology while undercutting Western wages and building domestic manufacturing capacity to flood export markets. Therefore, from a US perspective the policy answer has been to bring production back onshore, providing jobs for American workers and stemming the outflow of capital and intellectual property. This narrative and the proffered solution have, however, become outdated. It is China, with high unemployment, that is making greenfield investments outside its borders, while the US is already providing jobs for American workers at close to full employment — not least because of foreign investment in American manufacturing. The old narrative doesn’t apply anymore, so solutions that are based on that narrative are not likely to work.

China’s outward direct investment (ODI) was up by 13 percent in the first quarter of 2024, reaching an eight-year high. But in the second quarter it was up by an extraordinary 80 percent. There has been a striking focus on green-economy sectors. Chinese production of electric vehicles, solar panels and so on has reached the point of satisfying much of domestic Chinese demand. But rather than dump products on foreign markets, Chinese companies have been locating production overseas. Chinese companies are, or will be, making electric vehicles in Thailand, Brazil and Spain. While this will certainly create jobs, the most important effect is the transfer of technology. The greening of the global economy is increasingly being led by Chinese companies outside China.

This is not quite what China’s Communist government had in mind. A more immediately profitable outcome would have been to sell directly into rich-world markets. But of course the US and now Europe — with new tariffs approved this week — have been erecting barriers to Chinese exports. Like Japanese auto exports in the 1980s, Chinese green-economy exports threaten to undermine or even eliminate rich-world production of those same goods. Tariff walls go up accordingly.

The traditional result in this situation has been that the blocked manufacturers would jump the tariff wall and begin producing in the protected country in order to access its consumers. (Geoffrey Jones’s 2005 Multinationals and Global Capitalism is a must read on this.) A century ago, high US tariffs caused European companies to invest in America, a reality that has featured prominently in China’s thinking about its own growth trajectory. The 1980s backlash against Japanese cars brought Japanese investment in the US. Even today, Japan is the single largest foreign investor in US manufacturing.

But in the current landscape of globalization and geopolitical competition, the untraditional result is that Chinese ODI is not so much jumping the rich-world tariff walls — although there is some of that — as going sideways into places like Thailand and Brazil. Yes, part of the goal is to proceed by an indirect route into US and European markets. But Chinese capital is also building a presence in green-economy markets in middle- and low-income countries — while depriving the US and Europe of the technology-transfer benefits that would come from straightforward Chinese ODI in these wealthier markets. In several ways, then, rich-world markets are losing out on the benefits of Chinese green-economy innovation, while other parts of the world are gaining them. In particular, Chinese companies are investing in Southeast Asia. Chinese manufacturing investments in the region quadrupled in 2023, matching those of the US, Japan and South Korea combined.

Meanwhile the US is trying to build domestic green-economy production in an era of both low domestic unemployment and a severe shortage of the skilled labor needed for ramped-up manufacturing. Retirements, in particular, are driving down the supply of native-born skilled labor. This means, of course, that the salvation of US industrial isolationism will almost certainly lie in … increased immigration, which is no more popular in the US than it is in China.

These are all pretty perverse results, from a market-efficiency perspective, but they do offer opportunities. Publicly traded Chinese green-economy companies investing outside China are one. US and European companies investing in green-economy manufacturing outside their home markets are another. Southeast Asian companies positioning themselves to take advantage of Chinese technology transfers are a third. The dominance of political drivers in shaping this global economic landscape makes change unpredictable, but then that has been true since Columbus took a wrong turn in search of India and the modern world economy began.

The Energy-Transition Paradox

At this point it seems safe to say that the Green Revolution is not going as planned. In particular, mineral resource extraction was meant to decline as part of the energy transition away from fossil fuels, but it is doing the opposite — even as fossil-fuel consumption also hit a new high last year. Wind and solar power are mineral-intensive.  Mineral resources like manganese, graphite, cobalt and lithium are critical to the batteries used in electric vehicles; electric vehicles are critical to the energy transition; therefore the mining of these minerals, which can be a very environmentally damaging process, is expected to take place on a large scale, damaging the environment in order to save it.

The other main driver for increased mining is digital technology. Part of this is again demand for batteries. Rechargeable batteries require lithium and cobalt. Without them there is no mobile Internet, no laptops or mobile phones. But digital technology also uses other minerals, like rare earths, and above all it uses minerals that produce energy. The data-center infrastructure that digital communications have come to depend on is making huge energy demands that are expected to increase in order to support energy-intensive artificial-intelligence computing. The digital revolution was meant to be good for the planet. All those books and newspapers that would no longer have to be printed, transported, and sold by retailers. All those carbon-footprint business trips that could be replaced by meetings online. Yet digitization seems to be resulting in more rather than less resource extraction. The digital world is damaging the physical world while pretending to transcend it.

The energy transition seems to be entering an era of paradox. It isn’t simply that green and digital technologies are dirty. It is that they are getting dirtier because major states seek both energy independence and secure high-technology supply chains. Climate change, it is often said, is a global problem requiring global solutions. But if the solutions are to be found, it appears that they will be found through the complete opposite of global cooperation. The Biden administration has just announced plans to spend more than $3 billion trying to secure US supply chains of critical minerals and build upstream capacity. That means, for example, $225 million toward the mining of lithium in Arkansas, and $166 million to help extract manganese in Arizona.

As US National Economic Adviser Lael Brainard explained, the goal is “an end-to-end supply chain for batteries and critical minerals here in America, from mining to processing to manufacturing and recycling, which is vital to reduce China's dominance of this critical sector." If a nation other than China were producing 77 percent of the world’s  graphite supply or 60 percent of its rare earths, the situation would be different. As it is, geopolitical circumstance are shaping the energy transition into forms it would not take on a market basis. The desire for national data security, combined with the energy needed for data processing, points in the same direction of nationalized production that is inherently inefficient. 

From an investor perspective, one clear option is to invest in extractives. However, the political risks can be high. If the US-China race to create mutually exclusive economies can be taken as a constant for the next generation or two, the specific policies will vary. If Donald Trump returns to the White House, he could well de-fund the EV battery projects, endangering new mining in Arizona and Arkansas. More interesting are investments that, in effect, eliminate political competition over a resource. For several years, electric-vehicle automakers have been trying to reduce their political exposure to Chinese dominance of rare-earths production. Of course one way to do that is through diversifying mineral supplies. A new project in Canada aims at just that. But another way is to engineer EV batteries that do not require rare earths. BMW in its newer EV lines has eliminated rare earths. In that instance, geopolitical supply-chain worries led to a reduction in resource extraction. Private-sector innovation could yet produce more ways of avoiding politically driven supply constraints. It would be a peculiar way to move toward the global transition away from carbon but it might be one way that really works.

Bipartisan Consensus on US-China Policy: Will Continuity Mean Instability?

The US presidential debate re-affirmed the centrality of an industrial policy aimed at confronting China. Donald Trump rightly pointed out that the Biden administration continued his China tariff policy. Kamala Harris attacked Trump for not having taken his own (Trump’s) policy a step further in the way Biden did — to cover semiconductor chips. The actionable point is that the two candidates were outdoing each other in advocating US industrial policy as a way to combat the rise of China and the Chinese Communist Party. Whatever else happens in the next presidential administration, this area of policy should remain roughly the same.

How is it likely to roll out? The benign version, advanced by both political parties, involves blocking the export of military technologies to China, keeping Chinese technology out of Western and allied markets and digital networks, and resisting Chinese dumping of export products that are subsidized by the government, such as electric vehicles. When the policy is expressed in these broad terms, it seems sensible and measured. It is not surprising that the House on Thursday voted through an extraordinary set of China bills that had been teed up for this first week after the Congressional recess. The proposed laws, covering biotechnology, drones, and more, will now go to the Senate. Most received bipartisan support in the House and are expected to pass in the Senate and be signed by President Biden.

Unfortunately, what seems straightforward as policy — keeping Chinese-made drones out of US skies, for example, sounds simple enough — will be extremely murky in its results. As discussed previously in SIGnal, the concept of “dual use” technologies — ones that have both civilian and, at least potentially, military uses — has become infinitely expandable. Keeping Chinese technology out of Western and allied markets is possible at the retail level but nearly impossible at the component level. And Chinese subsidization of electric-vehicle manufacture is both hard to distinguish from other governments’ subsidization of the green economy and a crucial source of support for green efforts on a global scale. Chinese companies like BYD (electric vehicles) and CATL (batteries) have been pioneers in developing technological solutions to address climate change. These advances cannot be undone or ignored.

That is why Europe’s leading car-making states (Germany and Spain) oppose shutting Europe off from Chinese electric vehicles as the US has done. In essence, European partnerships with Chinese companies make it possible for European companies to stay in the game, whether by using Chinese components, manufacturing in China itself, or selling to Chinese consumers. The current EU tariff proposal — up for a decision next month, with a term of five years — could very well result in an increase in Chinese exports to the European market, because Chinese EV-maker profit margins are sizable enough that companies could pass the tariffs on to consumers and still make money. Meanwhile higher prices are likely to dampen European consumer demand, slowing the green transition.

The proposed US biotech law could have a similar effect of driving up prices of drugs without pushing the Chinese government to any change in policy. Higher prices could shrink demand. US biotech corporate margins could be thinned, with negative effects on R&D and innovation.

It was only a decade or so ago that analysts were wondering whether Chinese companies would ever be able to get beyond copying (or stealing) Western technology and compete at innovation. That question has been answered. The terrible irony of current tariff and industrial-policy moves in Western markets is that they could have the effect of reducing Western innovation rather than increasing it. Meanwhile, Chinese companies look to demographically younger markets with increasingly empowered consumers — in Africa, Asia and Latin America — where wider margins make them more competitive than their Western counterparts.

For investors, the US bipartisan consensus on China and US industrial policy looks like a promise of continuity, and in the obvious sense it is. But in many other ways it is the opposite: It distorts market mechanisms to such a degree that the results are exceedingly difficult to predict. Investors not only have to integrate political and policy analysis into investment decisions, they also have to do so on a dynamic basis as the landscape is constantly changing. Chinese biotech, for example, was meant to be the sector that would be left alone, and it attracted Western FDI accordingly. But then it all changed.

Looking for Silver Bullets

By Dee Smith

Recently, I hosted a not-for-attribution presentation on the causes and effects of climate change with a colleague who has expert scientific knowledge in the field. Discussion focused on causes (both human and natural), and particularly on the very dire consequences that we have already missed the opportunity to prevent or even mitigate. For example, it now seems inevitable that some parts of the world that are currently occupied will become uninhabitable by humans.

The question on quite a few people’s minds was “Okay, what should we do? Give us some action steps.” As one said: “What’s the silver bullet?”

If only it were that simple.

Instead, it is almost insuperably complex. Elements affecting climate change range from human factors, including not only increased CO2 emissions, but also increased methane emissions—and methane is between 24 and 80 times more powerful in the atmosphere as a greenhouse gas than carbon. Methane also comes from the melting of permafrost, itself a consequence of warming arctic climates.

Natural elements affecting the climate include solar radiation cycles, the El Niño/La Niña oscillation, the strength of the Gulf Stream, the temperatures and amount of ice in the Arctic and Antarctic, the stability of the jet stream and global ocean temperatures.

We were already in a part of the natural climate cycle in which temperatures were increasing. Human activity since about 1980 tipped the cycle into a real crisis. The consequences are almost too catastrophic to think about: mass migration (something like the equivalent of the entire population of the US in forced relocation around the globe), heat in which humans cannot live, potentially extreme food shortages, increased military confrontation over resources, and so forth. As much of this is now unavoidable, preparation and attempted mitigation are our only choices.

So, of course we are looking for silver bullets.

The truth is that silver-bullet solutions are much more complex than mainstream media proclaim. For example, the latest silver bullet in the climate change arena is Stratospheric Aerosol Injection: putting large quantities of substances such as sulphur dioxide (SO2) into the upper atmosphere to block the amount of sunlight reaching the earth and thereby slow warming.

This is said to be supported by an analysis of the eruption of Mt. Pinatubo in June 1991. The eruption injected 15 million tons of SO2 into the atmosphere. But a comprehensive analysis indicates that it did not lower global temperatures by 0.5 degrees Celsius for 18 months, as claimed. Global temperatures did not decline for the rest of 1991 after the eruption. They did decline by 0.2 °C from March to December 1992, but that timeframe coincided with a sharp drop in solar radiation and a shift from a weak El Niño effect to a neutral one. It was the combination of factors that accounted for the drop in temperature. The 1815 eruption of Mt. Tambora was about 18 times the size of the Mt. Pinatubo eruption and did have an impact for 2-3 years in lowering temperature. However, the effects were wildly uneven and often calamitous: no monsoons, disastrous floods, crop failures, and droughts.

The amount of SO2 injection needed to make an impact is a magnitude higher than generally believed and its effects are beyond our ability to predict. Unintended consequences are a real danger with planetary engineering projects like SAI. The system is too complex, and we simply do not know what the outcomes of SAI would be. For example, it might cool some areas and dramatically heat others.

We have created the most complex civilization that has ever existed, but more and more — or perhaps because of its very complexity — people want simple solutions. And climate change is arguably the most complex global problem we have ever faced.

“Just tell me what to do . . .” The well-intentioned will then generally try to do it for a while, until they forget, or it becomes too inconvenient, or the exceptions to doing it start to surmount complying with it. Or until it is imposed in a Draconian manner.

A few years ago, when the mantra of the day was reducing travel to reduce carbon emissions, someone closely involved with a very influential environmental organization said to me: “Well, I’m certainly not going to stop flying around . . .” And that is the attitude most of us have in the end. Most humans only make changes that we don’t want to make when there is literally no alternative.

But sometimes surviving requires very significant changes, whether in one's personal life or far beyond. Your leg is diseased and has to come off, if you want to live. The more you ignore the warning signs, the longer you put it off, the harder it will be to deal with.

We simply don’t want to hear any of this. And so, denial wins out. Or at least, things go along, business-as-usual, until it is too late.

But if we can accept that there are no silver bullets, and deny our denial, we may be able to find some partial — yet real, cumulative and productive — ways to proceed.

Private Fusion Takes Off

US-led Western policies aimed at the technological and, in effect, commercial isolation of China — exacerbated by China’s ongoing cooperation with Russia despite sanctions over its invasion of Ukraine — have created a situation in which leading-edge innovation is becoming fragmented in both the private and the governmental spheres. This is inherently inefficient. Yet it is also spurring state investment at new levels, such that the overall effect, over the medium term, could well net out as positive. Nuclear fusion is a particularly interesting example that merits a closer look.

Fusion has always seemed five years away, rather as Brazil has proverbially been called “the country of the future … and it always will be.” (The unkind line is attributed to De Gaulle.) But as the US-China dynamic has become an enduring feature of geopolitics investment in fusion has increased dramatically, particularly in terms of public-private partnerships.

The main global fusion project since the 1980s has been the International Thermonuclear Experimental Reactor, known as ITER. Born from a meeting between Ronald Reagan and Mikhail Gorbachev and based in southern France, ITER has the US, China and Russia among its permanent members. Each member state contributes some particular part of the central project, a reactor based on the tokamak method. There is no practical way to excise one or another ITER participant. Sanctions against Russia for invading Ukraine have so far not dislodged Russia from ITER, although its participation has been controversial since the invasion.

ITER illustrates a type of international cooperation typical of the Reagan-Gorbachev era and now apparently a thing of the past. However, the swift decline of globalist cooperation has been matched in the fusion sector by a growth in government financing, private investment and public-private partnerships. Public funding, according to a new report from the Fusion Industry Association, went from $271 million in 2023 to $426 million in 2024 so far, or roughly half the private share of $900 million. (Funding to date is on the order of $7 billion.) The US, EU, British and Japanese governments have all shown significantly increased interest in working with private fusion companies. ITER itself is turning more toward private partnerships. Meanwhile the Chinese government continues to prioritize fusion work in government labs, universities like Tsinghua, and the (Chinese-style) private sector.

The growth of the fusion industry is a demonstration of how private-sector approaches differ from governmental ones. Tokamak is just one of several leading technologies for fusion, and companies are placing a wide variety of bets on various technologies, any one of which could prove to be the winner. The number of private fusion companies has doubled in the past six years. Some major companies, like Shine (US, $800 million in funding to date), are working to develop viable revenue streams, such as producing Lutetium for cancer treatment, while keeping an eye on the moonshot of clean, cheap energy. Others, like tiny Terra Fusion, also in the US, are startups pursuing one particular technology that they hope will be the breakthrough. Roughly half of fusion companies are in the US. Globally, most fusion companies have university and defense partners — in the US case, the national labs (managed by the Department of Energy, as their earliest priority was nuclear power) and the Department of Defense.

There is also significant US participation from ARPA, one of many echoes of the Internet  development process of the 1970s. (The earliest Internet was the ARPAnet.) Unlike in that era, geopolitical fears are now combined with climate change.  Fusion promises an end to carbon-based energy systems. However inefficient it might be to have politically structured private sectors, it could also prove to bring a technological solution to climate change sooner than would otherwise have been the case.

Green Protectionism

Geopolitical competition seems to be leading away from the greening of global production. Major players like China, the European Union, and the United States are all trying to spur green industries like electric-vehicle production in their own territories and with their own companies. Taken as a whole, this has the effect of stimulating production and innovation, which should be beneficial for the planet. But it also raises prices by directing capital to redundant production, and it establishes a kind of green protectionism that seems certain to have unforeseen consequences. Successful investing in an industry whose major players include several antagonistic and powerful state entities is difficult at best.

The most interesting recent development has been the US decision to pressure Mexico not to welcome Chinese investment in electric-vehicle production. Mexico has, of course, benefitted from US-China competition in that companies like Tesla, Samsung, and Nissan have shifted production away from China to Mexico as part of global de-risking. Note that Samsung and Nissan are not US companies. The great appeal of Mexico apart from its workforce is proximity to US consumer demand. By pressuring Mexico to keep Chinese EV companies like BYD, Chery, and SAIC at arm’s length, the US is using the size of its consumer market as a political weapon in foreign policy. The policy goal is to deprive Chinese companies, private or not, of markets. (BYD is private, Chery and SAIC state-owned.)

The European Union has been doing something similar, having become alarmed last year at the growth of European demand for Chinese EVs and the barriers erected by the Biden administration to European companies prospering in the US market. Europe’s car manufacturers don’t want to lose their future domestic market to Chinese competitors. Biden moves to protect US domestic EV production deprived the Europeans of a crucial export market at the same time that Chinese manufacturers were selling high-quality EVs to European drivers at a 30% discount to European prices. These political-economic factors have combined on the Continent with a growing distrust of Chinese tech companies and China — rather, the Chinese Communist Party — more generally. The EU raid this week on Nuctech, a Poland-based Chinese scanner manufacturer long held in suspicion by Western China analysts, was made on economic grounds but has a strong security aspect as well.

Many Chinese argue that the root of these EV conflicts is that Chinese companies are simply better. Europeans and Americans counter that Chinese EV companies are state-backed, which is certainly true, such that the competition is unfair. None of this is wrong exactly but it misses the macro point: the major Western economies embraced extended global manufacturing supply chains and China did not, with the result that China now has innovative vertically integrated large-scale manufacturing companies that can compete globally. Because so many of those supply chains ran through China, the US and the EU are playing catch-up, and they are weaponizing their own consumer populations as well as alliances (as with Mexico) to do so.

One result is likely to be chronic high prices for North American and European electric vehicles, which means (in the absence of Chinese imports) a slowdown in EV adoption — which is already occurring. That in turn means a slowdown in carbon reduction. China’s aggressive, state-led pursuit of green industries was driven, to a great extent, by a desire to innovate out of a global climate crisis that has hit China quite hard. China’s pre-eminence in solar panels was initiallya responseto German rules on energy efficiency that could not be addressed with European products. But US-China competition has now transformed an environmental policy into something that has anti-environmental results. One can hope that all this duplicative effort will result, over the long term, in electric-vehicle and other green industries that will be able to expand around the globe and save the planet. But picking winners in such a roiling political environment is very hard, as Tesla’s investors will have been reflecting this week.

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Green Poverty?

The first wave of backlash against environmental, social, and governance (ESG) standards focused on the sacrifices in efficiency involved in compelling corporations and investors to comply with unclear standards that raised costs and redirected capital. A second and more subtle wave has been gaining momentum over the past year. Environmental standards are joining with social and governance standards to create a new global investment landscape. Some areas that were preferred destinations before ESG factors were considered have become less desirable, while other areas that once seemed too expensive for investment now seem more attractive. The emerging pattern is one in which supply chains are assessed in avowedly ethical terms, to the economic detriment of poorer parts of the planet. Whether this will lead to a world divided into wealthy and self-consciously virtuous countries and others that are regarded as chronically poor and chaotic remains to be seen. In SIG’s view, however, certain ESG trends are combining with technological and security-driven issues in ways that will ultimately shape the global distribution of wealth.

Europe has been the leader. Germany has played a leading role in developing standards that bring human-rights and environmental concerns together in ways intended to mold major business decisions. In particular, its concerns are expected to shape anticipated European Union regulations. Although such rules are not intended to make anyone poorer, the countries with the strongest records on environmental, social, and governance concerns tend to be wealthier, democratic, educated, and industrialized. When ESG standards are applied to domestic companies’ overseas investment decisions — or, what amount to almost the same thing, sourcing rules are applied for supply-chain inputs — one effect is to realign supply chains such that investment is biased toward countries that are already relatively high up the ESG ladder. As transport costs are a major factor in carbon use, ESG priorities also enhance the importance of geographical proximity, which itself often reflects the existing distribution of wealth. As the Financial Times put it in reporting on Macquarie’s record 8 billion euro infrastructure fund, “there has been a revival of interest in infrastructure as businesses seek to profit from transitions to cleaner energy and supply chains that are closer to consumers.” If a plant in Poland and a plant in Pakistan could deliver the same product to the European market at the same price, then the Polish product would prevail because its transport to market would be less. And as European infrastructure improved, the Polish advantage would grow.

Moreover, because there is a rough but clear human-rights and democratic-governance geography that privileges Europe, the island nations of east and southeast Asia, and the Americas, the application of human rights and governance standards unintentionally reinforces the physical geography of carbon reduction in transport. In effect, investment and growth become increasingly centered on geographies where they are already greatest.

Less-developed countries have long seen environmental standards as a way for rich nations that were once imperialist and colonialist powers to pocket the productivity benefits of two centuries of industrialization while spreading the environmental costs over the rest of the world. The reality is more subtle. After all, the expansion and diversification of production during the most recent episode of globalization, along with the provision of higher education and the dissemination of intellectual property, have all been driven by rich-world economies. In other words, the fruits of earlier, and very dirty, industrialization are beginning to be shared, albeit in ways that are also self-serving. The great rich-world universities, for example, have been fattened on inequalities of many kinds, but the excellence that resulted is now shared — at a price — with Chinese and South Asian students, most of whom will take this knowledge home. It is a heavily mediated and uneven form of redistribution, but it is still redistributive. The same is true of the diffusion, from wealthy centers, of intellectual property and productive methods and processes, as well as finance capital. In their universities, as elsewhere in their economies, wealthy countries seem to have more productive intellectual capital than they can absorb. Globalization has helped to redistribute that capacity, to the benefit of less developed countries.

The growth of ESG standards is likely to inhibit that redistribution, not just on its own but as it reinforces rich-world policies for reshoring production due to security reasons. Although the desire to have supply chains that are as green and human-rights-friendly as possible may not seem to have much in common with the wish to have a secure supply of semiconductors, all three point in roughly the same direction: the re-concentration of production in higher-wage areas that are physically nearer the centers of global wealth and power. Intellectual, industrial, and perhaps financial capital are likely to become less rather than more evenly distributed, as areas close to the centers of power gain further advantage.

In Latin America, for example, the US is determined through the framework of the Americas Partnership for Economic Prosperity (APEP) to support the growth in Latin America of production capacity in clean energy, semiconductors, and medical supplies. This is the classic post-Covid trifecta of environmental, technological, and public-health as shaped by ESG and security concerns. APEP’s spring 2025 meeting in Costa Rica will focus on semiconductors. Investment in that sector in Central America would not be as likely in the absence of the near-shoring effects of ESG and security priorities.

So is the change in patterns of green investment simply another vector for the division of the globe into production blocs? Not quite, or not yet, mainly because China is investing in many of the same sectors in many of the same locations. Its Latin American priorities have shifted from traditional infrastructure to data centers and 5G networks. In line with its own strategic priorities, China is now stressing clean-energy and agricultural biotech investments in Latin America as well. China may not care about social or governance issues, but it cares very much about clean energy and the global food supply. Both are critical to its long-term survival and it cannot secure either on its own. This in turn has led China to invest heavily in green shipbuilding, part of a large and ongoing Chinese effort to increase its share of the industry. As China already produced 48% of global shipyard output in 2022, countries such as the United Kingdom have begun to invest more in their own capacity to avoid dependence on China. In short, neither strategic competition nor green initiatives inevitably cause an in-gathering of production. In some cases and at some times, they can have the opposite effect. Factors of production can become more diffused despite the wishes of the major players.

Betting on Different Horses

Today, only the most ideologically committed, old-school liberal internationalist would hold that we have not moved out of the world of the “rules-based international order,” in which countries were all meant to obey a set of common rules — rules established by Western powers during the Cold War and thought to be triumphant after that war’s end.

As Julien Barnes-Dacey and Jeremy Shapiro, both of the European Council on Foreign Relations, wrote in Foreign Policy:

[T]he West has embraced a comforting illusion about a liberal rules-based order . . . International law could tame war, defend sovereignty, and protect human rights, all the same time.

It was a wonderful vision, but it never had a chance. The temptations of power meant that the West repeatedly violated its own rules. Western actors invaded countries when they felt the need (Iraq), hired fancy lawyers to exempt themselves from the laws they expected others to follow (Kosovo), preached human rights while cutting deals with authoritarian regimes (Saudi Arabia), and set up an International Criminal Court to try African leaders (including those from Sudan) while refusing to recognize its jurisdiction over themselves (the United States). For the less powerful countries, the rules-based order based was always little more than hypocrisy on a global scale . . . [and they] have become increasingly vocal in their frustration about the hypocrisy at the core of the global order.

They have taken particular issue with the West’s demand that they sacrifice core material interests in defense of this so-called order, a step that the West has always been wholly unwilling to do itself. So U.S. and European entreaties that global states cut financial and energy ties to Russia following the invasion of Ukraine have fallen on deaf ears, while Western attempts to rally international support behind Israel have faltered.

A key point that is now fully evident — as discussed in a recent post on the SIGnal blog (see “The Pulling Apart,” 1 November 2023) — is that we cannot even agree what the rules might be for a rules-based international order. And it has become clear that many of us do not really want to agree, because different rules reflect different identities. In effect, they say :“I am different from you, I don’t believe what you believe, and I don’t follow your rules.”

So if we have moved de facto if not yet entirely de jure out of the rules-based order, then what have we moved into?  

We now live in a multi-polar world, with two superpowers, possibly two other major powers (Russia and the EU), and many more middle powers — countries such as Turkey, India and Brazil, with powerful economies and sometimes powerful militaries. Most of these are in no mood, and see no need going forward, to kowtow to Western interests, policies or rules. We have moved into a world that is fragmented and continues to splinter, very probably with more transitory international alliances based on the practical or Realpolitik needs of the moment — a world, unfortunately, of more conflict  between states, among states and non-state actors, and within states themselves.

It is also a world in which economic factors will probably not move nearly as much in tandem. In a de-globalized world, what is sauce for the goose is not necessarily sauce for the gander. Events that significantly disadvantage one region or nation have always had the potential to significantly advantage another region or nation. The tightly coupled globalized order has to some extent dampened this effect. The dampening is now likely to decrease or even end.

Climate change and related resource challenges will exacerbate this “performance decoupling” and will do so in ways that are largely unpredictable. Expanded geopolitical conflict — related to all the factors mentioned above — will add fuel to the fire. Finally, these and other factors are rife with feedback loops that can intensify effects, again, in ways that are often not detectable until they are manifest in events.

All of this means that the performance of economies and of investments in different places — and in different sectors in different places — are likely to be far more variable, discontinuous and uncoupled than has been the norm during the past 30 years.

This brings both risk and opportunity. Investors who keep their eyes on the ball can take advantage of opportunities related to performance discontinuities, arbitrage and the like. In other words, they can bet on different horses. Nevertheless, we will not be living in the simpler environment of the past few decades, a time when stable trends could be projected to drive overall macro performance. Change closes off old possibilities and opens up new ones. We need to think differently to maximize them.

Food’s Carbon Footprint (I&W)

Food’s Carbon Footprint

Twenty years or so ago, premium pre-packaged pineapple from Ghana began appearing on the shelves of Waitrose supermarkets in London. Advertised on the label as helping to fund smallholder community projects in Ghana, the pineapple’s appeal lay in its being unusually sweet and juicy. This was apparently due in large part to the local climate in Ghana being drier than that in many other pineapple-producing areas and thus concentrating sweetness in the fruit. The pineapple was hand-picked, trimmed, and packaged in Ghana, helping to keep more of the value chain in-country and support the villages where the pineapple was grown. It was then refrigerated and flown to London, where it was finally displayed on the shelves of Waitrose. It was a “win-win” equation: the consumer got especially delicious pineapple, and the producing communities got a fair deal.

At the time, the “carbon footprint” of the pineapple would have been only an afterthought, and only for a few people. Today, the question should be front and center.

The ongoing revision of global supply chains could have some positive effects in terms of carbon reduction. Long, globalized supply chains are being deconstructed and revised, in part because long supply chains mean high energy costs for transport. This accelerated during the pandemic, although it has larger causes, including global geopolitical splintering and concerns for national security. Reshoring, near-shoring, and supply-chain simplification to emphasize robustness over efficiency are the focus today. But when carbon is part of this, it is mostly as an afterthought.

The dichotomy between economic development and climate issues is becoming more widely recognized.  As Martin Wolf observed recently in the Financial Times:

The question of development assistance links with the challenge of climate. As everyone in developing countries knows, the reason the climate problem is now urgent is the historic emissions of high-income countries. The latter were able to use the atmosphere as a sink, while today’s developing countries cannot. So, today we tell them they must embark on a very different development path from our own. Needless to say, this is quite infuriating. Nevertheless, emissions must now be sharply reduced. This requires a global effort, including in many emerging and developing countries. Have we made progress on this task, in reality rather than rhetorically? The answer is “no.” Emissions have not fallen at all.

Wolf goes on to say that emissions must decline rapidly “while emerging and developing countries still deliver the prosperity that their populations demand,” and he reminds us that this will require a huge flow of resources towards them. “Countries with above average emissions per head [should] compensate those with below average ones,” and “high-income democracies are failing to offer adequate help in this, just as they did over Covid.”

This is factually accurate and morally valid. But is it realistic?

Even within democracies, the better-off seldom want, en masse, to help the worse-off, unless and until it becomes a matter of specific self-interest or even self-preservation and government policy leaves them no choice. By now, only the foolish or willfully ignorant would dismiss the possibility that high-income countries may themselves in the future need to survive with fewer resources—possibly with far fewer—across all socio-economic levels. So there may overall be less to spread around. Whatever lifestyle improvements and development that populations expect or demand in rich and in not-so-rich countries, it may simply not be possible to fulfill this. Many well-informed and intelligent individuals seem to have a strange blind spot about even admitting this as a possibility. It may be too emotionally painful to come to terms with a future that looks so much bleaker than the present or the recent past. Yet the abundance that globalization made possible, whether in delicious pineapple and other foods or in affordable apparel and electronics, cannot easily be squared with either decarbonization or reshoring.

Moreover, the extant systems that have been developed for global or even national redistribution of material assets—which is what Wolf is talking about—are far too inefficient and far too prone to corruption on both the transferring and receiving sides of the equation. Astonishing inefficiency occurs every day, even when redistribution is not being attempted: in the US we waste 30 to 40 percent of our food, for example, while 800 million people go to bed hungry around the world every night. Those on the deficit end of this imbalance are aware of the problem, and of course it is the source of enormous anger. As climate change makes agriculture less predictable, with dramatic effects for those least able to withstand food shortages, that anger will get worse.

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