BRIC by BRIC

The coiner of the BRICs acronym, Jim O’Neill, has made a point of arguing that the bloc is for now little more than a platform for political posturing, even with its expansion over the summer from 5 members to 9. (O’Neill advocates a revivification of the G20 instead.) There was certainly posturing at the most recent meeting of the group, now known in its expanded form as BRICS+. As host, Vladimir Putin did his best to use the event to rebut the idea that Western sanctions and political enmity, due to Russia’s invasion of Ukraine, mean that he is isolated. But most of the meetings and readouts were exceedingly practical, focused on currency issues and security. SIG’s view is that there is an inescapable political momentum behind de-centering the West and particularly the United States. This political trend is increasingly an economic one, as continuing US dominance of global financial institutions (IMF, World Bank) and American use of the dollar’s global indispensability for political purposes combine to alienate a large portion of world markets: the new BRICS+ dwarfs the industrialized G7 not just demographically but also in GDP terms. Even if it is not yet doing it very well, BRICS+ answers a genuine need.

The biggest BRICS+ news was the announcement by Xi and Modi that India and China had reached an agreement of sorts about their border dispute, which shredded India-China ties in 2020. Negotiations had been ongoing and will continue. It is not clear what the two leaders were really agreeing to. What was clear was that Modi and Xi wanted to use the BRICS+ venue to highlight their diplomacy and an easing of tensions. In that sense, BRICS+ proved its worth.

From the Russian perspective, the big push was for a set of policies with a single goal: freeing the global financial system from its vulnerability to US political pressure. These included alternative ways for setting grain prices, the increased use of national currencies to settle trade, and the use of digital currencies by national central banks. In the short term, as ING noted in an excellent paper, none of this is very plausible, but in the long term the use of digital means to depoliticize international transactions by de-centering the US dollar is highly likely.  

What BRICS+ showed was that such a de-centering would itself happen along political lines. The goal is not to “displace” the dollar but to escape its political hold — for political reasons. It is not a neat business. Western sanctions against Russia have led to the sinification of Russian finance. Chinese payments for Russian resources, for example, are often in Chinese currency and parked in Chinese banks, which, with state support, are using Russian events as an opportunity for an experiment in financial innovation. Even Putin does not want Russia to become a ward of China, but sanctions have made that unavoidable. China, for its part, is not about to share any control over its own accounts. “De-dollarization,” in other words, means different things to different states, but they mostly come back to wanting to preserve financial sovereignty, not to share it with some alternative entity that is not the US government.

Meanwhile, Donald Trump in his campaigning has caused near panic in Europe. His comparison of Europe to China is extraordinary. When combined with his and his team’s views on Ukraine — which amount to cutting a deal and insisting Europe do as much of the work as possible — Trump’s tariff threats begin to appear as part of a larger move to split the West. There is no indication at all that this is a deliberate choice, but it is likely to be a real effect. At that point BRICS+ will not look so eccentric.

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.

Multilateralism’s Long Goodbye?

The regiments of black SUVS and the delighted faces of shopkeepers on Madison and Park avenues in Manhattan this week contrasted sharply with what International Crisis Group’s Richard Gowan characterized as “the real sense of worry and gloom that is quite prevalent in Turtle Bay at the moment,” Turtle Bay being the Upper East Side neighborhood where the UN has its headquarters. The annual UN General Assembly meeting is the only must-do on the global diplomatic calendar, and it was supplemented this year by Climate Week. (There were said to be over 1,000 meet-and-greet events just around Climate Week, with champagne, smoked salmon and a heavy carbon footprint: a harvest of good business for NYC caterers.) The massive attendance in itself suggested a felt need for global, and even globalist, political conversations. Nonetheless, news events and the varied and numerous meetings SIG participated in during the week supported the view of Secretary-General Antonio Guterres that multilateralism in its post-1945 forms is in an accelerating crisis with no clear routes forward.

Familiar items on the UN agenda remained unchanged. Israel and the United States, Hamas and Hezbollah, and other regional actors continued to enact their policies without important reference to the United Nations, including the US-backed ceasefire proposal of June. Ukraine’s defense of its territory against Russian arms continued much as it has been, with a slow extension of the battle into Russian territory, Russian pushback, and no near prospect of victory or diplomatic resolution for either side. Guterres’s dire warnings about the climate crisis were generally thought to be hyperbolic. The desperate situation in Sudan was much discussed but there was very little sense that the available multilateral mechanisms were going to be able to advance peace.

President Biden’s farewell speech received polite but modest attention. Vladimir Putin, of course, did not attend, nor did Xi Jinping. (They sent their foreign ministers. Xi had already met with Guterres in Beijing earlier in the month.) The domestic political vulnerabilities of Keir Starmer and Emmanuel Macron tempered enthusiasm for their own speeches, which were in any case unremarkable. Such was the UNGA-week presence of the veto-wielding Permanent Five (P5) of the Security Council, the only members of the council with serious power and the generators of any successful council resolutions. France called, as it has before, for Security Council reforms to re-legitimize the council politically by broadening its membership beyond domination by the victors of World War II and modifying its rules. Any momentum for such reform remains doubtful.

What was happening beyond the Upper East Side frame of UNGA was more significant. On the weekend prior, President Biden focused on the Quad meeting — India, Australia, Japan and the US — at his home in Delaware. This type of security-driven minilateralism has only grown in importance during the Biden presidency. It is not necessarily to the administration’s taste, and in 2021 Biden had committed, as Obama had 12 years before, to a revival of multilateral engagement, including at the UN. But the significance and productivity of the four-nation grouping did form a contrast to those of the General Assembly with its 193 member states.

On the economic front, the dominant theme of the week was protectionism. It is telling that Keir Starmer positioned his announcement of Britain’s return to internationalism in terms of British “self-interest.” Donald Trump and Kamala Harris both ignored the internationalist week with calls for “a new American industrialism” (Trump on Wednesday)  followeed by Harris’s promise on Thursday of $100 billion in new government spending aimed at the same goal by different means. Meanwhile China put forward massive new government plans to stimulate production and consumption in its own economy. In such ways the retreat by major powers from open global markets continued even in this week of internationalism.

Fascinatingly, though, the odd nation out during the week was the United Arab Emirates. On one hand, the UAE has come under growing criticism for its backing of one side in the Sudanese civil war. On the other hand, the UAE’s unusual political creativity and energy made it an outsized player in the Climate Week events and in UNGA side meetings. The UAE has become, in a short time, a significant player in the ongoing refurbishment of internationalism, while hardly big enough (except in its budget and ambitions) to begin to qualify as a “middling power.” Among other things, the UAE’s talent for navigating a middle way between the US and China (part of a trend sometimes called “active non-alignment”) was on display, as was that government’s commitment to fielding senior women ministers in international fora.

The prospect of Persian Gulf emirates as pioneers of a future-oriented multilateralism does not seem obvious. Multilateralism since 1919, if not 1815, has been Western-based both conceptually and in operational terms. A revival of that model seemed no more likely in New York this week than it has for the past decade or more. There are several reasons for this, but fundamentally, peoples and nations of the world increasingly want to chart their own paths, and increasingly simply do not agree on philosophies, policies and actions. The operational norms governing issues from aircraft movement to satellite positioning remain, but the development of new norms has stalled.

This has a number of implications for investors. One is that UN-based multilateral initiatives in areas like climate change and artificial intelligence are not likely to shape the sociopolitical or investment landscape in the near future. Another is that the momentum for open markets will probably come as much from the middling and less-than-middling powers seeking recognition and economic advantage as it will from the greater ones, a reversal of the pattern that held into the Obama administration. With each party fundamentally pursuing its own interests, the need for multilateralism grows but the means for its achievement shrink. Finding investment opportunities then depends less on identifying global patterns than on following the more difficult strategy of betting dynamically on different horses.

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.

The New Geography of Semiconductors

The US CHIPS and Science Act just passed its two-year anniversary, and most coverage focused on the part President Biden emphasized: “America is now on track to produce nearly 30% of the global supply of leading-edge chips by 2032, up from zero only two years ago. … [M]y CHIPS and Science Act is bringing chips manufacturing back to America, strengthening global supply chains.” But strengthening global supply chains and increasing American production are two very different activities. SIG’s view is that the US is playing several distinct games at once: improving US production, isolating the Chinese technology industry, and strengthening certain alliances. The last game is the most interesting one, because it involves US industrial policy as an aspect of US foreign policy.

The US has been somewhat coy so far at naming the countries that will be part of the CHIPS Act-related International Technology and Security Innovation (ITSI) Fund, but the leading candidates are Vietnam, the Philippines, Indonesia, Costa Rica, Panama, Mexico and possibly Kenya. ITSI is administered by the State Department, and Jose Fernandez, undersecretary of state for economic growth, energy and the environment, has said there will be seven core partners without committing to a specific list. He has been promoting the effort as connected to the US wish to secure semiconductor supply chains that avoid China, a window of opportunity he said “may not be here forever.” 

One reason for the vagueness is probably that the Commerce Department has its own priorities, including the Indo-Pacific Economic Framework (IPEF) Agreement Relating to Supply Chain Resilience. IPEF includes three of the possible seven: Indonesia, the Philippines and Vietnam. Then again, Secretary of State Anthony Blinken, before the Americas Partnership for Economic Prosperity, stressed the Western Hemisphere Semiconductor Initiative, which also encompasses three ITSI countries (Mexico, Panama and Costa Rica). 

Some overseas coverage has even mentioned Puerto Rico as being on the CHIPS list, probably confusing the US territory with Costa Rica — although Puerto Rico would also be happy to get involved.

But if inter-departmental rivalry and confused ambitions have made the details a bit murky, the fundamental policy thrust is clear. The US is using the CHIPS and Science Act to both strengthen US semiconductor production and turn a difficult fact — that US domestic wages are high and US engineering talent has better options — into a strategic win. 

The seven countries that have apparently been selected are wildly different. In many ways, the most interesting is Vietnam. It has been making a very strong push to educate engineers, who then become available at a much lower wage than engineers elsewhere: Vietnamese engineers earn half the pay of their Malaysian peers and a sixth of the going rate in Taiwan. This industrial planning is occurring under a Communist government undergoing a leadership transition after 13 years of tight-fisted rule by party general secretary Nguyen Phu Trong, who recently died at age 80. His successor, To Lam, was the tough public-security chief under Trong. His first official trip in his new position will be to China, Vietnam’s largest (and growing) trading partner. Vietnam has a very long history of conflict with China, but of course it also has a shorter but intense history of conflict with the US.

From a distance, it does look odd that the US, hoping to secure its supply chain for vital semiconductor technology, would be relying in part on one Communist state to help weaken another Communist state. 

However, US relations with all seven of the countries on the CHIPS list have had their fraught moments, with the exception of Costa Rica. The technology struggle with China is forcing the US alliance structure into strange new forms. The cold reality is that traditional allies like Japan, South Korea, Australia, Taiwan and others are at demographic plateaus and are priced out of the lower reaches of semiconductor production. A new tier of alliances is being created to deal with this problem. 

The choices being made are often more economic than political — Vietnam’s economy is simply excelling at taking advantage of US-China conflict, as is Mexico’s under left-wing governments that cannot be described as pro-US. However, China was once itself a favored partner despite its ideological coloring — and then, as Xi Jinping’s power and political direction became clear, it was no longer. 

Are We Already in World War III?

By Dee Smith

The question in the title has been asked in policy forums, and often dismissed. But there are recent developments that make it important to take the possibility more seriously.

First in importance is what is being called an “Axis of Disruption”: China, Russia, Iran, North Korea. These states are arguably more coordinated today than the old Axis powers were at the beginning of World War II. They have mutually reinforcing interests. Primary among these is an interest in weakening the United States, Western allies and the so-called rules-based international order.

It is not so much that Axis of Disruption goals are shared as it is that the interests of the players are self-reinforcing. China would welcome a situation in which the military and diplomatic attention of the US is drawn into simultaneous conflicts in the Middle East, centered on an Israel-Iran confrontation, and in the North China Sea, focused on sharpened tensions between North and South Korea. The focus of the US on these two theaters of action would draw its capabilities away from other areas, particularly Taiwan. Russia likewise would prefer to have the attention of the US pulled away from Ukraine. In this analysis, China would be the sub rosa moving force behind seemingly disparate actions — all of which satisfy the interests of it and its allies.

Simultaneous major military action by members of the Axis of Disruption in the Korean Peninsula, Taiwan/South China Sea, the Middle East and Ukraine could be considered to constitute world war.

Is this realistic?

It depends to a significant extent on whether China really wants to pursue a forceful reunification with Taiwan, and if so, when. China considers Taiwan a breakaway province, and in some ways sees it as the last pillar standing of the “century of humiliation” Chinese schoolchildren are taught: “100 years of national disgrace” of China at the hands of Western powers and Japan. Chinese leader Xi Jinping has clearly stated that he sees his legacy as the reunification of Taiwan with the mainland, by force or otherwise. For several reasons, including changing demographics (an older population and the results of the one-child policy in the 20th century), his own advancing age, and the changes resulting from ever closer ties between tech sectors and defense, Xi may see his window of opportunity closing.

On the other side, the outlines of a broad counter-alliance are emerging. NATO has significantly expanded its territory along the border of Russia. A number of cooperative groups of nations who share strategic interests in various ways — the European Union, the “Five Eyes” (Australia, Canada, New Zealand, the UK and the  US, with varying collaboration with France, Israel, Singapore, South Korea and Japan), AUKUS (Australia, UK, US), the Quad (Quadrilateral Security Dialogue: Australia, India, Japan, and the US), the Abraham Accords (Bahrain, Israel, the UAE and, indirectly, Morocco and the US) — seem also to be consolidating into something like an informal alliance.

The US has just entered into an expanded defense agreement with Japan. And Israeli Prime Minister Benjamin Netanyahu’s speech before the US Congress on 24 July could almost be read as a statement of intent to go to war with Iran.

The situation is unlike the Cold War, in which there were more clearly delineated sides. There are many countries sitting on the fence with regard to their alliances. The new non-aligned movement is expanding, with significant “middle powers” like Turkey exploring options outside its long-standing associations with the West. It is no longer outlandish to ask if Turkey might leave NATO. The BRICS (Brazil, Russia, India, China, South Africa) group of nations is expanding, with countries like Egypt joining, and is seeking to introduce its own currency.

India is both a member of the US-oriented Quad and of the BRICS group, and the UAE of BRICS and the Abraham Accords. Which way would they fall if the proverbial push comes to shove?

Adding further instability, the US dollar — the world’s reserve currency — is under mounting pressure due to continuing US government budget deficits and the US debt load of over $35 trillion. A number of nations, China among them, have been dumping dollars and buying gold (this includes Chinese households). The US may eventually find it difficult to finance its debt.

When a world war begins is often a matter of hindsight. It still seems unimaginable to many, and it is to be fervently hoped it never happens. “Recency bias” is the belief that the near future will be like the recent past. Most people cannot believe things outside their experience can happen. But they can . . . and do.

After the New Cold War

To what extent will the U.S.-China struggle take the rest of the world along with it? Recent developments in the technology sector suggest that containment of China has a long way yet to run, regardless of who becomes the next U.S. president. At the same time, China is showing no signs of abandoning its core strategy of using state policy to control citizens at home, build Chinese companies that can crush competition abroad, and exert maximal autarkic control of its domestic market. However, the great success of globalization has been the creation of a global middle class with incomes, educations and expectations all on an unprecedented scale. There is now a generation or two in adulthood that has grown up watching the West destroy itself and slowly abandon the freedom of movement of capital, goods, services and people that was the premise of globalization. This generation, outside the West and (perhaps) China, does not think it is helpless. SIG’s view is that the global generation in its late 20s and early 30s is already pivoting away from attachment to the world of their parents and the disastrous end-game that appears to be their parents’ legacy.

U.S. policy for the technological isolation of China has been steady and focused since about halfway through the first Trump administration. It has expanded in breadth and sophistication under the Biden administration. Technology companies have integrated this into their strategies, giving what began in the government sector strong private momentum. Consider a project with the very Bondian acronym HEIST. It is a private-public-academic partnership now backed by NATO. Its goal is to create ways for Internet traffic to be switched from undersea cables to networked outer-space satellites in the event an ocean cable is disrupted. (Students of Internet history will recall that the Internet itself was developed out of private-public-academic programs for ensuring continuity of communications in the event that land-based systems were disrupted.) HEIST is just one example of how the private and academic sectors are factoring in a long-term tech conflict between the U.S. and China. Another is OpenAI’s decision to clamp down on use by Chinese developers of ChatGPT. China was never on OpenAI’s list of “supported countries and territories,” but the move is nonetheless significant.

Of course, moves like this all call forward responses from China and Chinese companies. China’s GPS alternative, BeiDou, has had this problem set firmly in view for over 20 years. Coverage of the OpenAI decision has emphasized how quickly — measured in days if not hours — Chinese tech companies offered “moving packages” to OpenAI customers on the mainland whose VPN and other outward connections to OpenAI would no longer work. Huawei has retooled itself to deal with the expanding bans on its use overseas. It is too much to say that U.S. tech containment of China has been a good thing for Chinese businesses but it has been a spur, if of a peculiar kind.

The Trump policies on China that Biden kept and developed were guided by people such as Robert Lighthizer (Trump’s trade representative) and Matt Pottinger (Trump’s deputy national security advisor), who are expected to be part of any second Trump administration. There is every reason to anticipate policy consistency, in this particular field, regardless of the victor in November. The same is true in China.

In a real Cold War, this bifurcation between two hostile major powers would extend itself to the rest of the world. There is an element of that today. Germany, for example, after years of U.S. pressure, has decided to take Chinese technology (from Huawei and state-owned ZTE) out of its 5G networks. However, most states and national economies with any choice in the matter have opted either to blend U.S. and Chinese systems or, better yet, to develop their own.

To opt out of a forced choice between major-power antagonists while opting in to the cross-border platforms that are being shaped by that antagonism is a characteristic move for the generation that is now starting its first companies and reaching the lower rungs of government. Chinese autarky and U.S. industrial policy alike have made it clear to the rest of the world that its interests are not of lasting concern to the major powers. At the same time, the spread of middle-class wealth, education and expectations has empowered people around the world to feel they have options. Their politics is shaped by the possibilities for identifying and exercising those options. Ironically, perhaps, for a generation formed by borderless globalization, the chosen venue for exercising those options is not a transnational one but the nation and national or regional economies.

This should not be surprising. Neither the U.S. nor the EU is in any mood to guarantee the sanctity of the global public sphere. China, despite its protestations, is even less globally minded. The fact that addressing global climate change, the signature challenge of the coming generation, is being hobbled by electric-vehicle and solar-panel legislation is truly telling. The major powers that are alone in a position to see through global solutions to global problems are now the very powers making them impossible.

In such a situation, for the world outside the West and China (plus Russia), nationalism and regionalism are the least-worst solutions. The coming generation will be elderly by the time COP75 rolls around and the U.S., EU, Russia and China all bury their many hatchets and rediscover globalism. Meanwhile, away from the current agon, a busy world is identifying problems and designing solutions with no expectation of rising to the universal plane. Globalization has lost its teleology.  But it has created a world in which ambitious people can remain anchored and protected in national economies while also staying closely connected to the world outside, steering their diverse courses with as little reference as possible to great-power conflict.

Our Age of Political Nostalgia

By Dee Smith

If homo sapiens has been around for about 300,000 years, then we have lived all but 3 percent of that in circumstances almost entirely different from the present day. To put it another way: even with a generous allowance of 10,000 years or so for settled life in something like cities (which is what “civil”-ization means), for 97 percent of our existence we lived in very small groups and, except for wide-ranging nomads, with very little change over vast periods of time (centuries or even millennia). And even the nomads could usually count on migration routes leading them to familiar places, over and over again.

We are now thrust into a world where we are clustered into groups of a size unimaginable to our ancestors. They would seldom encounter anyone outside their little bands; now we all meet people every day whom we don’t know and who are different from us, and we need to co-exist with them. We are required to deal with levels of novelty, complexity and social regulation for which we are not adapted.

This goes a long way, I think, towards explaining what is happening politically and socially around the world today. Our lives are full of what scientists call “baseline resets” — we have to recalibrate our understandings and expectations over and over. We hardly become accustomed to a certain configuration of things, and then it changes. And it changes yet again. Some people embrace this. The “move fast and break things” entrepreneurs claim to do so. For most of us, however, it is highly disorienting, uncomfortable and emotionally distressing.

If we could just go back to the way things were! Vast numbers of people, of all socio-economic groups, pine for a world in their past — often a world that never existed in the way that they believe it did.

In the US, for example, so-called “liberals” — Democrats and their ilk — bemoan the loss of a US-led Liberal International Order, a rules-based international system that many analysts believe never actually existed in the way that it is remembered. This brand of nostalgics sees the post-WWII era, and particularly the “long decade” between the fall of the Berlin Wall and the 9/11 attacks, as a golden age of international cooperation, when in fact it was a short period of unipolar U.S. dominance following the collapse of the Soviet Union, a period in which there was a great deal of conflict. Of course, it seems like a golden age to those who found themselves briefly its masters! But they fear an approaching age when the “progressive” system and message no longer resonate or hold, and overt authoritarians, operating from positions that they abhor and see as threatening, are ascendant.

On the other side, in the US, many Republicans and members of right-wing movements harken back to a lost age of white social dominance. To some extent, this did exist, but it was not the halcyon period they that think they remember. Firstly, most of them were not actually alive at the time. It was a period filled with hatred and civil violence. Furthermore, the definition of who and what is “white” has never been clear. For example, Italians in the US were not, and then they were. Some Hispanics would be considered, or consider themselves, white; others would not. Besides, return to a lost white world is no longer even a possibility. The US has become “minority-majority.” White nostalgics fear an age when what are remembered as traditional white values, if not white people, become sidelined.

Similarly, the term “conservative” has been warped beyond recognition. What is it, exactly, that conservatives wish to conserve? The fact that “move fast and break things” tech leaders call themselves conservative and support conservative politicians is an oxymoron in the most literal sense.

The situation is similar in many other places around the world, whether the past is Soviet Russia, Maoist China, or various strongman dictatorships or ephemeral democratic Camelots. For much of the last couple of centuries, the Enlightenment doctrine of progress imagined the golden era in the future. As human life seemed to improve (or was said to be improving) through new systems of governance and technology, life would generally become better and better. We have now reverted to what has been the norm for most of our history, an assumption that golden ages lay in a mythic past.

The political and social status quo is increasingly seen as having failed to deliver. Life is not better than it was—and it is not getting better—for most people. They do not believe that the lives of their children will be better than their own. In fact, they increasingly just “don’t believe” in the current system, wherever they live and whatever the system is. When I presented the television series A World on the Brink in 2017, I found that there was one phrase with which everyone agreed, regardless of where they lived: “what we have is not working.” That was already 7 years ago! Since then, the needs and concerns of most peoples have really not been addressed.

The bottom line is this: conditions have changed radically; whatever happens next, they are going to change even more. The answers are unlikely to be found in any of the dominant political systems of the past few centuries. We need to think again and we need to think quickly. We need to come up with new approaches that are relevant and adaptive to the very different age we are living in and the even more different ages that are emerging. I say “approaches” because need to give up on universalism — there can be no universal system that will fit the bill, or so it seems. There may well be, and will probably be, many different and divergent systems in different places and for different people.

But they won’t be like it is now, or like it was. And that is hard.

Paying the China Price

In his recent meetings with France’s President Emmanuel Macron and EU Council President Ursula von der Leyen, Xi Jinping mocked the concept of “dual-use” equipment such as semi-conductors, saying that by European definitions rice would be dual-use because soldiers have been known to eat it before battle. (Dual-use is commonly applied to products or technologies that have military as well as non-military uses. The proximate cause for the discussion was Chinese exports to Russia, which help Russia sustain its war in Ukraine in the face of Western sanctions.) Xi also rejected the concept of Chinese industrial “over-capacity” in reaction to charges, emphasized in the meeting by von der Leyen, that state subsidies have enabled Chinese steel and car manufacturers to dominate European markets with underpriced goods.

Of particular concern to von der Leyen’s home state of Germany is China’s dominance of electric-vehicle production. Macron urged Germany’s Chancellor Olaf Scholz to attend the talks with Xi, but Macron is less keen than Scholz on protecting Europe’s EV manufacturers from Chinese competition. This difference was a principal reason why Europe’s largest economy was absent from talks that pivoted on Europe-China economic relations. From an investor perspective, Europe’s current geo-economics offer little more than chronic unpredictability. Xi Jinping’s strategy is to divide the European powers from each other and from the US, a strategy that should be harder to do than it is.

The disturbing reality is that Xi is not wrong. The concept of dual-use is infinitely expandable. If its deployment were simply an artifact of political opportunism — for example, a means to foster non-Chinese semiconductor production — the problem presented would not be so difficult. But most advanced technologies, and the innovation systems that underlie them, really are dual-use, and in the end so is rice.

What Xi is really pointing to is the impossibility of neutrality. It was impolite of him to do so and probably bad politics, which could explain why the CCP’s Internet-scrubbing mechanisms were tasked with removing references to dual-use at the time of the Paris meetings. But for Xi it must be hard to resist pointing out to Europeans how dependent they are on Chinese tech inputs, not just for their own industries but for there to be much chance for European companies to compete with American ones. European states cannot be neutral profiteers trading with both sides in the US-China conflict. At the same time, Biden’s industrial policies (particularly for electric-vehicle production), US dominance of the West’s Ukraine policy, and the prospect of a second Trump administration all combine to gravely weaken trans-Atlantic solidarity when it is most needed. This is a key CCP strategic goal.

“Over-production” is also incoherent. The European argument is that Chinese production is state-subsidized and in excess of domestic Chinese demand for electric vehicles. The second charge is the weakest. Like Germany, China produces cars in excess of domestic demand because it wants to sell EVs on the world market. That’s what exporting is. It makes no sense to insist that Germany be able to continue manufacturing Mercedes or Volkswagens in excess of German consumer demand but China should not be able to do the same.

The state-subsidy charge is stronger but still not massively convincing. German subsidies to German consumers (4500 euros, sometimes more, per purchase) incentivized the buying of 2.1 million EVs in Germany from 2016 to the end of last year. Part of the goal of this policy was, through subsidized pricing, to artificially boost German consumer demand for electric vehicles and thereby subsidize German car manufacturers’ transition to EV production. When the German government rather abruptly cancelled its EV subsidy to address a budget shortfall, German manufacturers like Mercedes and Volkswagen undertook to pay it themselves for existing orders.

That policy is not intended to last, however. At some near date, Germany and other European states with auto industries will have to choose between protecting their own car industries until they are able to compete with Chinese competitors (a very distant prospect), leaving their markets open to Chinese EV imports (already accounting for 37% of European EV imports in 2023), or somehow managing the China trade at the EU supra-national level. The last option is the one the EU is aiming at, but it will meet strong resistance from individual European states who do not want to lose their auto industries to European competitors (mainly Germany) and from European consumers, who will be stuck with higher prices. Those high prices will in turn delay Europe’s transition to greener transport. This is the fate that US protection of EV manufacturing (and much else) is intended to avoid for Americans — but at the cost of hobbling European EV exports into the US market, further impairing the geo-economics of trans-Atlantic solidarity.

Efforts to reorient manufacturing to address climate change keep running into the wall of geopolitical competition. Meanwhile, the Chinese government has economic and environmental challenges of its own and will continue to try to punch its way out of them by subsidizing domestic production and controlling domestic consumption to favor Chinese goods.  Each side in this drama will correctly accuse the others of “over-capacity” and unfair state subsidization.

China has the advantage of an unblushing commitment to state capitalism and an immense captive domestic market. It also has an ideological advantage of sorts in that it frames its own economic growth in a long narrative — “changes not seen in a century”, in Xi’s phrase — of anti-imperialism. Ultimately, the Chinese contention is that Western-led modernization was itself “unfair trade” on a very grand scale, achieved at gunpoint and cementing first-mover advantages that Chinese state policy is dedicated to undoing. Of course, Chinese growth is fueled much more by a Chinese nationalist will to power than by any notional anti-colonialism. It is a Sinicized version of the German imperial push for a “place in the sun” alongside the other imperial economies of the 1890s, including Japan. The increasing brutality of the CCP regime both domestically and in its foreign policy is an index of where its commitments lie. It came to praise globalization but in all likelihood will end by burying it.

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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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Networks of Confrontation

When political scientists and policy wonks wrestled with the prospect of a world war that was not, in any conventional sense, winnable — that is, a nuclear war of comprehensive destructiveness — they turned hopefully to “escalation dynamics.” They tried to find a set of reversible steps between chronic conflict and mutual obliteration. It was a way to imagine how to manage the unmanageable. Today, with widespread access to drones and ubiquitous access to the Internet, it is difficult even to define “escalation.” The means for crossing borders, whether in the air or online, have proliferated to such a degree that actors engaged in conflict seem to lose sight of the de-escalation part of the old “escalation ladder.” Having escalated online, they can next escalate with drones, or by activating proxies of one kind or another, or by directing industrial policies toward harming the enemy at one remove. The jumpy, somewhat hysterical, mode of constant irritation of the status quo — constant escalation — was once the signature style of North Korea alone. Now it is worryingly common. 

 There is an argument that the United States was the first mover in this trend toward border-jumping provocation. The U.S., having done far more than any other state to advance the Internet, did tend to treat it as a network for espionage overseas, if not often for conflict. Having pioneered drone technology, which was greatly telecommunications technology, the U.S. made frequent use of it in others’ sovereign territories. With an economy uniquely globalized because of the nearly universal use of the dollar as an exchange currency, the U.S. had another planetary network it could use against its enemies, for example through financial sanctions. And having driven a globalized trading and manufacturing economy, to its own great benefit, the U.S. is now exploiting the resulting global network dependencies by weaponizing industrial and trade policies.

In each of these networks of confrontation, all of which have developed immensely since the end of the Cold War, the U.S. has moved first.

Now so many others are in the game of what the Oxford scholar Lucas Kello, optimistically limiting himself to cyberspace, once labeled “unpeace.” There is so much signaling of malign intent, expressed over cross-border networks, that the foreign-affairs signaling becomes more like noise. Russia’s appetite for information operations directed at undermining U.S. power around the world seems possibly insatiable. One reliable analyst sees Russia’s government as behind a recent infrastructure attack — all executed remotely — on Texas water systems. China increasingly looks to its diaspora as a population physically outside its own borders that is nonetheless expected to show loyalty to the mainland government. Overseas Chinese are monitored and influenced both physically (through embassy and consular staffs) and online. Iran launches an enormous drone attack against Israel and now awaits retaliation, confident that it will not be in the old, pre-1990 form of actual war but in some new “escalatory” move. But escalation without some logic to it is just random warfare. It is unpeace. A lot of aggressive noise without much clear signaling.

For investors, and for everyone else, the challenge is to identify sources and patterns of stability as well as to identify threats. It is not easy. China and Russia are trying to stabilize themselves through a striking combination of patriotism and ethnicity, rallying the tribe of consumers and producers to defend against the external enemy — a method of stabilization that runs quickly into each country’s dependence on external markets for survival. Autarky only feels stable.

The U.S. has the advantage of corporate and entrepreneurial cultures, as well as multinationals, that accept government direction only when they must. Of course the U.S. has many other advantages, and its lack of supervisory power over business has not always been a good thing. But in the present circumstances, when globalized and globalizing networks are both necessary for growth and increasingly dangerous and unpredictable as platforms for political confrontation, the U.S.’s, or perhaps more accurately North America’s, ability as an economy to resist government direction seems to be a distinctive strength. It creates a resilience in unpeace that, one hopes, can survive changes in government. An economy that can thrive under Obama, Trump, and Biden alike is a resilient economy.

Headlines for the IMF annual meeting this week emphasized American economic strength, with growth far outstripping that in the other Group of 7 members. At the same time, the U.S. was at bottom in a poll looking at G7 public confidence in institutions like the military and courts. Politics must dwell on the latter and strive for improvement. But stability comes mainly from the economic side.

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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.

In Southeast Asia, Non-Alignment Is Development Policy

India may have been the pioneer of political non-alignment in the 1960s — proposing that countries should align themselves neither with the West nor the Communist bloc — but 21st century non-alignment is more economic than political and its homeland is Southeast Asia.

Over the summer, Singapore decided to split its decision on who would build the next tranche of data centers on the island: Chinese companies got two contracts (with an assist from Australia’s AirTrunk) and US companies got two. While the US has been trying, with some success, to corral countries into a kind of digital alliance that keeps China out, states in the global economy’s fastest-growing region are refusing to choose. This will prove to be the non-aligned movement that matters for the near future.

Compared to other of the world’s regions, Southeast Asia has had far more experience of both China and the US in the role of major powers: the US since its defeat of Spain in 1898 and especially since 1942, when it entered World War II; China over two millennia, most recently following a policy of Maoist subversion in the 1950s-1970s and commercial expansion and influence from the 1990s to today. Southeast Asia has also had a unique experience of consistent inward investment from other highly developed economies with labor shortages such as Japan, Korea and Taiwan. Indian capital began to look more seriously at the region a few years ago, as has some European and Middle Eastern capital. The gradual redirection of US capital away from the Chinese mainland after 2016 and the slowing of China’s economy strengthened pre-existing trends favoring Southeast Asian growth.

One result is a regional political culture with a deep tradition of not taking sides. The elevation of Chinese-American strategic and economic competition into the digital realm — begun under Trump and greatly extended under Biden — has been met in Southeast Asia by a determination to maintain digital non-alignment. The term itself has been toyed with by Russia and has been more substantively explored by India since its initial banning of Chinese apps in 2020. But Russia has neither tradition nor credibility as a disinterested actor outside its borders and its declining IT sector is increasingly hostage to China, while India’s mini-hegemonic aspirations and hostility toward Islam hinder its acceptance by others as a leader. Southeast Asia walks the walk as well as talking the talk.

Ultimately the US and China have little choice but to go along, because in the digital realm their strategic positions are decisively shaped by their respective private sectors. The politically driven “techlashes” in both the US and China over the past five years were driven by state and popular (in the US) fears of overweening private-tech power, but the tech sector can only be reined in up to a point or it starts to lose its vitality, as may be happening already to some degree in China — and that leads to the sort of strategic weakening that is precisely what the American and Chinese states are most hoping to avoid. For the good of the state, they need their tech sectors to thrive in private markets. The most important of those, for a great many reasons, is Southeast Asia, which is why the 21st century’s distinctive form of non-alignment is being born there.

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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.

Beyond the US-China Thaw, a Deeper Game

Beyond the US-China Thaw, a Deeper GamE

The idea of a thaw in US-China relations has begun to take hold in recent weeks as administration officials and now a group of senators have visited China. Chinese media portray these visits quite differently — as embassies from a major foreign power that is slowly being brought to reason. SIG’s view is that the thaw is not likely to amount to much because the two sides are talking past each other.

Senator Schumer is hopeful about Chinese cooperation in suppressing the production and export of fentanyl. He also suggests that the delegation influenced the Chinese to stiffen their language in criticizing Hamas. And yet these topics barely registered in the Chinese media or official announcements, which are now much the same thing. Instead, they described the senators being instructed that US-China relations should be based on objectivity, accurate perceptions of China, rational management of differences, and an acceptance that China is following its own distinct model of development. Put differently, the Chinese media and official statements about the talks not only stressed that American policy has been unobjective, inaccurate, and irrational, but also claimed that American ideas of economic development are irrelevant. China welcomed future exchanges on this basis. (See the invaluable trackingpeoplesdaily substack for more.)

The senators’ visit coincided with the release of a Chinese government white paper on the 10th anniversary of the Belt and Road Initiative (BRI), President Xi Jinping’s global project to repurpose excess manufacturing capacity, particularly in state-owned smokestack industries, and to undermine Western power in the capitals of less affluent countries by offering affordable infrastructure development projects. The results in cities such as Addis Ababa and Nairobi have been remarkable. As the BRI grew, however, the Chinese economy weakened, the average age rose, and the workforce peaked. BRI borrowing led some foreign governments into debt traps, although the real problem from a Chinese perspective was the government wasting money overseas. The off-loading of excess capacity at BRI prices became steadily less economical. At the same time, overseas Chinese workers crowded out local workers, which in turn undermined China’s diplomatic goal. The BRI turned out to be not much of a win-win.

These developments help to explain why the white paper so glaringly contradicts itself. On one hand, we are told that “many developing countries have benefited little from economic globalization and even lost their capacity for independent development, making it hard for them to access the track of modernization.” A few paragraphs later, we read that “China has not only benefited from economic globalization but also contributed to it” and that “China has been a firm advocate and defender of economic globalization.” It isn’t much of a defense of globalization to argue that it has exacerbated poverty in developing countries.

In a heavily ideological culture like that of the CCP, this kind of clear contradiction is a sign of real political stress. China undoubtedly benefitted from old-school globalization and its prosperity today is unimaginable without it. But that process also created vulnerabilities to shifts in foreign demand and supply. Xi’s Made in China 2025 policy was a companion and counterbalance to BRI, replacing foreign demand and supply with Chinese demand and supply. It was an openly, although not explicitly, anti-globalization policy: a massive hedge against the potential failure of Chinese industrial internationalization.

So now China, like the US, is seeking a way out of its political stress by trying to reshape globalization to suit its new needs. China’s rhetoric has changed and it now insists that countries have unique developmental paths. This sounds welcoming and inclusive and is meant to as China maneuvers to present an alternative to Western leadership in the development sphere. The problem is that it is all too true of China itself, whose own development model would be impossible for anyone else to follow except perhaps India. China arguably benefitted more from the old globalization than any other country, but there were a thousand reasons why. As Chinese officials constantly insist in other contexts, China is unique. The successes of the Asian Tigers were replicable; China’s is not. The emphasis on multiple paths to success in international markets is really another indication that China is increasingly on its own in the global economy. Policies in the US, Europe, Japan, and elsewhere have increased this isolation but are not the basis for it. The basis is in the Party’s desperate need to increase economic growth and maintain tight social control.

Globalization is being transformed as global supply chains heal themselves by working around China. The process will feed the protective isolation that China’s government wants but cannot afford. It might not be a bad thing for developing and mid-level countries, however. They will miss Chinese demand and in some cases Chinese investment, but they can also aspire to take market share from Chinese manufacturing in a way that they cannot from Western economies. Although China did break the spell of the Washington Consensus, the benefits will increasingly be reaped at China’s expense. With the next APEC summit only a month away, these are some of the dynamics that we may want to keep in mind.

Great Industrial Power Rivalry: Jake Sullivan’s Security Dilemma (I&W)

Great Industrial Power Rivalry: Jake Sullivan’s Security Dilemma

When scholars analyze the relative power of states, they tend to look first at military and economic power, especially industrial power, and perhaps adding resource endowments, demographics, and features such as warm-water ports at a later stage. The non-military aspects tend to be subordinated to the military ones: industrial production of warplanes is more important than production of toys; resources such as oil and iron are more important than timber now that warships are not made from wood; warm-water ports are important not for winter fishing but for the projection of naval power. This analytical tilt toward military power makes a rough sense. When great powers clash, the hard-power victory will come first, before the soft-power one.

But the US-China rivalry is upending the typical modern ways of understanding major-power conflict that emerged after 1800. The definition of “strategic” industry is expanding daily. In just a few years, it has come to include pretty much anything having to do with micro-electronics and digital communication. The crucial change has been that states no longer worry just about industries or technologies that have clear military applications. They now worry about industries that might possibly be relevant to military power and therefore to national security. The classic “security dilemma” taught at universities — that actions taken by a state to increase its own security cause reactions from other states, which in turn lead to a decrease rather than an increase in the original state’s security — is now being applied, in practical terms, to a growing share of certain national economies. More and more resources, from human capital to video apps to venture capital, are becoming “strategic.”

This is a new world, one that multinational businesses have begun to notice but are hardly ready to face.

If one wanted to ascribe this gradual “securitization” or “militarization” of major economies to the actions of individuals, two come to mind. The most obvious and the most important is the President of China, Xi Jinping. However, the National Security Advisor of the United States, Jake Sullivan, has also played a key role in shaping this fundamental change. 

Xi Jinping’s “Made in China 2025” program, which was launched in 2016, was and is an attempt to make China as self-sufficient as possible. The alliance-building of the “Belt and Road” Initiative, the weaponization of Chinese ethnicity outside China, the opportunistic use of non-Chinese intellectual property and foreign investment, the “nine-dash line” drawn to encompass resource-rich seas, and much else all point toward the same goal: a China self-sufficient enough that it can say no to the rest of the world if it likes, especially to the United States. Chinese autarky makes little sense in terms of the social science of economics, but then mainstream economics since Adam Smith has never known quite what to make of security-driven economies, except to say that they are inefficient and probably lead to war. Furthermore, China is run by Marxists, for whom mainstream economics is seen as at most a useful tool-kit for struggle rather than a gospel of human development.

China’s weaponization of its own economy under Xi Jinping has made the security dilemma economy-first rather than military-first. That choice has caused a security reaction from the United States, one that certainly does seem to be causing a decrease rather than an increase in the original state’s security.

The US reaction is where Jake Sullivan comes in. It is true that the hardening of US economic policy toward China began during the Trump years, mainly because of the Trump administration’s focus on national economic greatness. The theory of great-power conflict, rescued from history books by Trump’s security team as a framework to constrain an inexperienced and mercurial Commander in Chief, also preceded Biden’s presidency. But the Biden administration has developed its own theoretical framework for foreign policy that reconfigures, refines, and solidifies the tendencies first seen in the Trump years.

Jake Sullivan was the young and well-liked Director of Policy Planning at the State Department under Hillary Clinton and President Obama. In the Trump years he was head of a program at the Carnegie Endowment for International Peace that aimed at developing a “foreign policy for the middle class.”  

American political culture — for good reasons and with great success — has tended to see anything that benefits the middle class as positive. The nurturing of a middle class has been among the greatest achievements of American democracy. Nonetheless, the deliberate rooting of national security policy in the fortunes of a particular social and economic class is something rather new for a non-Marxist and non-aristocratic society.

The reasons for this shift are many. Probably the most important has been the perception that liberal or neoliberal policies, grounded in a theory of market fundamentalism and globalization, led to a hollowing out of the American middle class accompanied by the expansion of a global middle class, mainly in Asia. This in turn has led to an erosion in working-class and middle-class support for the Democratic Party, something that the Biden administration naturally hoped to reverse. A foreign policy for the middle class is part of that effort.

The results have been onshoring and friend-shoring and the leveraging of US market access and security guarantees in the service of creating a US-centered global economy that serves US interests first, but without the traditional prop of free trade. It is “Make America Great Again” in a Democratic key.

This is the context in which electric-vehicle manufacture, to mention just one example, with all the supply chains that feed into it, has become a national-security policy priority.

Whether this choice will, in the emerging logic of our 21st-century economic security dilemma, ultimately make the United States less secure is not an easy question to answer. What is clear is that multinational enterprises, or any enterprises dependent on globalized supply chains and open markets, need to look not only at policy manifestations — the Inflation Reduction Act or the Chips and Science Act — but also at the deeper political logic that drives them.

You Choose, You Lose? (I&W)

You Choose, You Lose?

The idea that the world’s states need to choose between the U.S. and China has been an article of faith in the U.S. intelligence community for some time. It broke the surface this week in a Foreign Affairs piece by Richard Fontaine, CEO of the influential think tank the Center for New American Security (CNAS), entitled “The Myth of Neutrality: Countries Will Have to Choose between America and China.” While Fontaine’s article is, as is usually the case, more modulated than the headline, he nonetheless concludes that the “time for choosing has arrived,” focusing in particular on “the effort to separate and safeguard technological supply chains.” SIG questions whether this is really the case.

The first problem with this argument is that technological supply chains are in private hands. The ability of any state, even China, to control its private-sector tech supply chains is uneven at best. This is true not just in present terms — the extent and nature of supply chains are not easy to measure, and measurement and enforcement can use government resources that might be better applied elsewhere — but also in prospective terms: supply-chain inputs and their providers change constantly. Moreover, Chinese and U.S. tech companies alike have multiple subsidiaries, JVs, equity investments, strategic partnerships, and so on outside their home markets, and those entities in turn have their own relationships. SIG’s experience in investigating Chinese and U.S. corporate ownership and part-ownership structures like these across the globe strongly suggests that arranging tech supply chains to conform with the political map will be difficult indeed.

The second problem with the choice argument is that it misses the non-equivalency of the U.S. and China in terms of tech sectors. At least since the expulsion of Google more than a decade ago, China has built its tech sector on the basis of a protected domestic market. As companies like Huawei, Alibaba, Didi Chuxing, and Tencent established themselves and grew, they enjoyed many advantages in having a gigantic captive market. However, that growth model had a dependency built into it, and when the Communist Party decided that Chinese tech companies were gaining too much social power it was easily able to clip their wings. The Party did not blink at liquidating tens of billions in equity value. Chinese tech companies are being obliged to subordinate themselves to state policy priorities, a process that shows no signs of easing. While the Party also works hard to build Chinese self-reliance in terms of supply chains and much else, supply-chain inputs really are the least of it, because the state has so much leverage in the C-suite already. The problem of Chinese tech companies is not guarding the home country’s supply chains but getting into other countries’ supply chains — and China’s autarkic policies, because they amount to a kind of nationalization, only make that problem worse.

The situation in the U.S. is nearly the opposite. The U.S. is an open market. It sources supply-chain inputs, capital, and talent from all over the planet. The most onerous government tech regulations prevent some (not many) U.S. companies from selling into the China market, but in this the U.S. has a willing assistant in Chinese state policy. Corporate espionage and IP theft aside, the Chinese state does not want U.S. companies supplying Chinese markets, except in those instances where Chinese companies still can’t match non-Chinese producers.

There really isn’t much of a choice to be made. China is a non-market economy with a security obsession and it sources supply-chain inputs for those things it can’t locate domestically. The U.S. is a market economy that sources supply-chain inputs from wherever they currently are cheapest. Yes, there are constraints for U.S. companies on sourcing from China, but that leaves all of the rest of the world for U.S. companies to work with.

That points to a third major problem with the choice argument as regards tech supply chains. Companies in the rest of the world can also make things and sell them into their domestic markets and into the 193 national markets that are not the U.S. or China. To the degree that the U.S. or China try to force a choice, the most attractive choice will usually be “both” while reserving the option of “neither.” If these choices are rendered impossible, most countries will choose the U.S., not because of its values but because its open economy has greater possibilities for them. From the supply point of view, as Fontaine notes, China competes well on price — ZTE will build a 5G network for less than Nokia would charge — but as non-Chinese, non-U.S. suppliers increasingly come online, how long can a country with rising wages and government debt, a shrinking workforce, and a non-convertible currency compete on price?

The security question is a separate one: It will not be (and never has been) easy to be an ally of both the U.S. and China, or to be neutral. But in terms of tech supply chains, the choice between the U.S. and China, in most sectors and for most countries, is a false one.

Saudi-Iranian Rapprochement (I&W)

Saudi-Iranian Rapprochement

The rapprochement between Saudi Arabia and Iran, engineered by China in March, received a mostly favorable reception, with analysts suggesting that the process of normalization could alleviate regional tensions and pave the way for a tangible reduction of hostilities between Riyadh and Teheran. Some possibilities that have been aired include a cessation of Iran's interventions in Bahrain, Saudi capital infusions into Iran, and the promotion of nuclear non-proliferation.

But Saudi-Iranian relations are governed solely by self-interest and driven by the intricacies of geopolitics in the region and the emergence of a multipolar global paradigm. Both Saudi Arabia and Iran still aspire to be regional powerhouses and principal actors in this evolving multipolar order. China’s role in bringing them together is itself principally geopolitical. It is intended to improve China’s position in its long struggle with the United States. Whatever peace effects it might have are all to the good, but they were not the point. Neither Iran nor Saudi is especially weary of conflict. The rapprochement is part of a complex power struggle, not an embrace of peace.

It is up to Saudi and Iran to demonstrate that there is any substance to the agreement.  A crucial aspect that has yet to be adequately addressed is the establishment of some foundation of trust between the two nations. Considering their enduring rivalry and a historical backdrop riddled with mutual mistrust, Saudi Arabia and Iran both need to demonstrate some dedication to resolving their differences and participating in productive discourse together. Such efforts have not yet materialized, and until they do, the prevailing geopolitical landscape in the Middle East will persist unchanged, despite the purported reconciliation.

While there may be a convergence of interests in defying the United States, Saudi Arabia and Iran have very different objectives in the region. Crown Prince Mohammed bin Salman (MBS) harbors a grand vision of reshaping not only the face of Saudi Arabia within the Middle East but also its standing on the global stage. MBS's decrees are  unquestionable in the kingdom;  Saudi foreign policy is inextricable from his ambitions. MBS has shown no intention of relinquishing power or engaging in conflict de-escalation. Foremost on his agenda is elevating Saudi Arabia to the status of a preeminent power in the Middle East, employing any means necessary to achieve this objective.

The pursuit of hosting the World Cup in 2030 stands as a prominent testament to Saudi Arabia's endeavor to foster international engagement. This initiative, alongside notable undertakings such as the Neom project and the establishment of a desert-based ski resort, exemplifies Saudi Arabia's transformative policy trajectory. But the global battles over Saudi Arabia’s alternative golf league show that much of the world is unwilling to do much more than humor Saudi episodes of over-spending.

Iran’s attachment to the deal is costless. Its gradual movement toward Russia and China is propelled by many factors but peace is not one of them. Iran has chosen this paper peace as a way to position itself better in its struggle with its enemies.

‘’The new era’’ hailed by diplomats of both states is as thin as a straw, for it is sustained by temporary interests and untested alliances in a changing geopolitical landscape that cannot be predicted by anyone, and certainly cannot be controlled by two relatively minor players.

Elections and Earthquakes (I&W)

Elections and Earthquakes

The first round of the Turkish presidential election on 14 May was a disappointment for almost everyone. There was no winner. The opposition was convinced that years of economic mismanagement, along with a devastating earthquake exacerbated by the notorious corruption of the Turkish construction industry, would drive Recep Tayyip Erdoğan from office. His supporters believed that the great man would crush his enemies once again. But as neither side secured more than 50% of the vote, a second ballot needed to be held. When it was, Erdoğan was clearly the winner.

In North America and most of Europe, the result has generally been described as unwelcome and perhaps even disastrous. But is it?

There is little doubt that Erdoğan’s success was due to policies that became ruthless and vindictive following protests against his plans to build a mosque at Istanbul’s Gezi Park in 2013 and a coup attempt against him in 2016. The only two politicians who might have led a credible challenge to his authority both faced criminal prosecution and imprisonment. The press and television stations had been placed in the hands of AKP and its supporters by an obliging judiciary and voices opposed to Erdoğan were rarely heard during the campaign. The result was an election that has been seen as “free but not fair”, although it was not really either. While some degree of irregularity appears undeniable – Turkish nationalist candidates received an astonishing number of votes in Kurdish areas of the country, for example – no one seems to doubt that Erdoğan really won the election. He is therefore in a stronger position than he was before. His reign and his policies will endure for another five years, at least if his health remains robust. 

His undoubted appeal lies in an ability to display a patriarchal authority as well as an unwavering devotion to traditional values that half the country finds inspiring and reassuring. The other half, of course, disagrees. Nevertheless, after more than two decades of AKP government, Erdoğan continues to represent hope for the new middle classes in Turkey that a more affluent way of life will continue even though levels of personal debt have become almost insupportable. Whatever the risks, millions of Turks thought them less alarming than those posed by a rival candidate who had never held a position of greater responsibility than leader of the opposition and who never appeared to be tough enough for the job.

This may be worth remembering, especially in Europe. In the hope of winning the second ballot if he could attract support from the far right, Kemal Kılıçdaroğlu promised to expel “more than 10 million” refugees from Turkish territory. Would he have made a serious attempt to do it? Who really knows, but the consequences would have been appalling. Even the risk that he might try would have been profoundly alarming in most of Europe, especially given a war in Ukraine and rising tension in the Balkans. European politicians have years of experience in negotiating with Erdoğan when refugees are used as political weapons, and a known quantity is undoubtedly preferable at a time of rising uncertainty.

Erdoğan also wants something. His position requires the appearance of power as well as the reality of it. Sophisticated American weaponry is fundamental to both, especially as Russian equipment has been seen to be no more effective in Ukraine than Russian tactics. Erdoğan has been allowed by Washington to purchase much of what he wants from the United States, but not yet everything that he wants, including the most advanced versions of the F16. At the same time, he has the ability to grant favors that are of great importance to American strategists, including an agreement that Sweden will have the unanimous support it needs to enter NATO just as Finland has done. There is clearly an opportunity for both sides in the conversation.

Erdoğan’s attitude to NATO is undoubtedly ambivalent. Although a man of considerable intelligence and a politician of extraordinary ability, he has little formal education and no real knowledge of English or other foreign languages. He is therefore suspicious of a world that he sees as alien, even if his attitude tends to be pragmatic and transactional. His ambitions also extend beyond Europe and into Africa and Asia.

While Turkey was certainly involved in the rivalries of the Cold War, it played little more than a supporting role. The alternative at the time, the Non-Aligned Movement or NAM, was in large part a reaction to the bellicosity of the Great Powers, but a new unwillingness to choose sides, often known as NAM 2.0, reflects growing unease or alarm at the implications of a globalized economy dominated by the United States and its rivalry with China and Russia. In countries such as India and Turkey, it is not surprising that a vision of a new international order has also been accompanied by enthusiastic or aggressive forms of ethnic and religious nationalism.

So what will Erdoğan choose? He would naturally prefer Turkish prominence within the enduring structures of earlier decades as well as a leading role in a new NAM 2.0. Can he have both? His country has extended its reach throughout the world by relying on the soft power of its media as well as the harder forms of power displayed in its successful aerial drones. Turkish military technology is highly attractive to foreign investors as well as foreign customers, and it is only one in a series of lucrative possibilities that include property development in Istanbul or along the Mediterranean coast and the growing markets offered by Turkish consumers. For the rest of the world, therefore, Turkey remains tantalizing. In that sense, Erdoğan’s victory has changed little. The claims that it represents a defeat for either American or European interests and that Kılıçdaroğlu would have been a more effective or at least a more amenable president seem excitable as well as condescending.