India’s “New Era”

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

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

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

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

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

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

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

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

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

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

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

Hedging the Middle Powers

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

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

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

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

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

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

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

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

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

Green Poverty?

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

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

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

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

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

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

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

Proxy Votes in Baluchistan

When Iran fired missiles across its border into Pakistan’s Baluchistan province on 16 January, it announced that its targets were bases belonging to the anti-Iran insurgent group known as Jaish al-Adl (Army of Justice). The Associated Press reported  that “a military response from cash-strapped Pakistan” was unlikely, but within 48 hours Pakistan retaliated with missiles and sent fighter jets into Iranian airspace. Pakistan claimed that it was targeting anti-Pakistani insurgents operating from Iranian territory.

As anxiety about Iran asserting power beyond its borders has increased after Hamas attacked Israel on 7 October 2023, and after Iranian proxies in Yemen responded to Israeli counter-attacks in Gaza, any cross-border Iranian actions are going to cause alarm—especially if they are conducted against Pakistan, a nuclear power with a Sunni-dominant political culture.

It is true that an argument can be made to dial down worries about the Iran-Pakistan missile exchange. Iran, Pakistan, and Afghanistan all contain large areas of territory dominated by the Baluch people. Indeed, Baluchistan is Pakistan’s largest province in land area—but also its least populated and arguably least developed. Although military-heavy, authoritarian, and ruthless governments might be assumed to have the means to protect their own borders, Iran, Pakistan, and Afghanistan have never been able to assert their sovereign power convincingly in Baluchistan. Relations between the three states being fraught, Baluchistan has for years been a reliable source of irritation for its putative overlords and a place for them to contest with each other. Trouble in Baluchistan is hardly new.

But for just that reason the current level of Pakistan-Iran conflict seems disproportionate. Jaish al Adl had killed a dozen men at a police station in Iran, a depressingly common form of Baluchi skirmishing. Lobbing missiles over a border, in retaliation for such a familiar provocation, was new, as was Pakistan’s emphatic response.

The Iranian action may be easier to understand. Most analysts believe that it was a show of strength at a time when the Iranian regime feels threatened. The killing of 84 people gathered In Kerman at the grave of the Iranian major general Qassem Soleimani—who was assassinated on 3 January 2020 in an American drone strike—was yet another outrage by Islamic State and may have been encouraged by Pakistan. There is no doubt that Islamic State had a particular interest in Soleimani, who had been the mastermind behind Iranian force projection in Iraq and Syria against Sunni extremists. He had therefore become both a source and a symbol of Iran’s use of force beyond its own borders, which was why the US decided to assassinate him. The two Islamic State suicide bombers who attacked his grave on the anniversary of his death came from Khorasan, which is, like Baluchistan to its south, a large border region that no state has been able to control.

More broadly, Iran's theocratic Shia regime has often found itself at odds with Sunni Pakistan. Shia minorities in Pakistan have faced attacks from Sunni militants for decades, with thousands killed in the past 30 years. Iran has long tried to export its Shia ideology to border countries and elsewhere in the vicinity, which is hardly appreciated by most Pakistanis. The close relationships that Pakistan maintains with Persian Gulf monarchies, especially with Saudi Arabia, also fuel Iranian hostility. The nuclear competition in the region has been driven in part by Saudi investment in Pakistani nuclear-weapons projects and by Saudi hopes of obtaining a nuclear arsenal of its own.

On the Pakistani side, these existing patterns of conflict are worsened by Iranian ties with India. The Foreign Ministry of India issued a statement that supported the Iranian attacks. Meanwhile one of the few potential bright spots in the Pakistani economy, the Chinese-built megaport at Gwadar, is within Pakistani Baluchistan and acutely vulnerable.

Proxy warfare is a sometimes underestimated factor in economic stagnation. Inward investment to Pakistan has plummeted since its 2007 high. Iran’s inward FDI peaked earlier, in 2002. Both are now at 1970 levels. But Iran is significantly wealthier in per capita terms, due mainly to oil rents—about 20% of GDP in 2020, compared to only nominal amounts in Pakistan. This seems to have the effect of making Iranian strategists more willing to spend on foreign adventures. Investors need to take current and likely patterns of proxy warfare into account. This unfortunate reality became clear to the Chinese in Gwadar and has become clear to the world as Iran’s Houthi proxies harry shipping in the Red Sea.

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.

A Fearful Asymmetry: The Rising Threat of Irregular Warfare

By Dee Smith

Beginning in November 2023, following the attack by Hamas against Israel, groups of Houthi “pirates” in the Red Sea began to step up operations against ships in this crucial waterway that leads to the Suez Canal. The Houthis are a Shia Islamist group based in northern Yemen. Such pirate attacks have been happening in the Red Sea, the Gulf of Aden and the Arabian Sea for many decades, but the agenda now is as much political as piratical. Commercial shipping has been avoiding the region, including the Suez Canal, by making the much longer and more expensive journey around Africa and the Cape of Good Hope. The US has deployed a destroyer and other vessels to counter the Houthi. but has had trouble convincing other powers to join Operation Prosperity Guardian.

Consumers and industry will pay the price for the disruption in supply chains. Last week, 13 nations signed a “final warning” to the Houthi, noting: “Nearly 15 percent of global seaborne trade passes through the Red Sea, including 8 percent of global grain trade, 12 percent of seaborne-traded oil and 8 percent of the world’s liquefied natural gas trade.” The Houthi nevertheless continued their attacks. Last week, for the first time, they used ocean-going drones to attack US Navy and commercial ships.

Thus a relatively small group of operatives —albeit with financial and logistical support from a large nation-state, namely Iran — has managed to disrupt global shipping, create enhanced media awareness for itself, and force the most powerful nation in the world to deploy forces against it at significant financial and military cost.

The reason the Houthi are able to disrupt shipping affecting the entire globe is that they are applying asymmetric warfare techniques to a key strategic location.

What is asymmetric warfare? The classic definition is conflict between forces that are vastly different in terms of military power. It is almost always “irregular” warfare in that the combatants involved on the “enemy” side (the enemy from the perspective of states under attack) are not part of regular national armed forces of nations (although it can also occur among irregular groups, as between the Islamic State and al-Qaida). The goals of asymmetric players are often more to cause shock and confusion than to cause large-scale harm. Bronwen Maddox, head of the British think tank Chatham House, recently recounted a remark that Hamas deputy leader Saleh al-Arouri, who was killed by an Israeli strike last week in Beirut, made to her in 2007: “‘Our job is to keep the Palestinians radicalized’, he said. ‘Most of them would settle in a moment for peace, some deal that will let them get on with their lives. We need to keep them angry.’” Asymmetric attacks happen at unexpected times and in unexpected places, hence the less used term asynchronous warfare and thus asymmetric and asynchronous warfare, as US military and intelligence agencies have long called it.

Asymmetric warfare has been around for centuries and encompasses not just terrorist attacks like that on 9/11 but also  insurgencies, guerrilla warfare, rebellions and so forth. The campaigns against the British that led to the birth of the United States would fall into the category of asymmetric warfare.

Asymmetric warfare has lasted because it can be effective, but two key changes, both products of advanced technology, have made it more so.

First, asymmetric players have been empowered through the increased capacities that new technologies afford to small groups in attacking large states. For example, weaponized drones can be simply repurposed civilian drones, costing at most a few thousand dollars each — while the US Navy might shoot them down with $2 million missiles. The Navy could ramp up existing directed-laser systems, which would be much less costly than missiles over time, but has been reluctant to make the large investments needed. This is an example of how asymmetric players can sometimes prevail against large opponents whose systemic complexity precludes quick and efficient action.

Cyber threats offer a textbook case of the complexity of the asymmetric environment. They can be perpetrated by small groups physically distant from their targets, but they are also used promiscuously by nation states and even sub-contracted to terrorist or criminal groups. It is a very tangled web, difficult to unravel and even more difficult to counter.

It is also well within the capabilities of some asymmetric actors to produce “dirty bombs,” conventional explosives surrounded by or laced with radioactive materials—if they can obtain the radioactive materials, which are difficult but by no means impossible to acquire.

Perhaps the most alarming asymmetric threat is bio-terror: the production and use of biological weapons that could devastate the populations of entire regions. Nation states mostly claim that they are not developing such weapons, but today the field is open to much smaller groups. CRISPR-Cas9 gene editing techniques have become so much more effective and affordable that genetic engineering to produce novel and lethal bio-agents can now, at least in theory, be conducted in a garage on a relatively small budget.

The rise of AI opens up an entirely new arsenal for asymmetric warriors. As those who study the field have noted, however, it has proved impossible to predict how technologies will be misused until they are.

The second major change is that technology has made targets softer. The highly interconnected and tightly coupled world that we have created is far more vulnerable than were simpler and more isolated systems. In other words, technology has to some extent leveled the playing field in favor of weaker asymmetrical players, just as it has made regular armed forces relatively less effective in an increasing range of circumstances. For example, an attack on 16 April 2013 that involved nothing more than AK-47 assault rifles and wire cutters used to cut fiber-optic cables managed to knock out 17 large transformers in 19 minutes, threatening the power supply to Silicon Valley. A blackout was avoided by quickly rerouting power and pulling it from other plants, but the damage was significant and the outcome could have been far worse. The perpetrators have never been found.

Our technologies of communication, such as social media, are so ubiquitous that we often fail to realize how much they have changed the equation. Asymmetric groups learn of one another’s techniques quickly, and they share goals by interacting to further them. For example, the perpetrator of the Christchurch mass shootings on 15 March 2019 said that he decided on a shooting attack specifically because of the effect it would have in the US. Those who study such “lone-wolf” attackers have noticed that they tend to find one another and band together, organizing asymmetric-warfare groups with shared aims and ideologies and becoming much more effective as they do so.

If you are reading this in your office, take a moment to look in your desk. You may have an effective asymmetric weapon at your disposal: a laser pointer of the kind used for PowerPoint presentations. If directed at someone’s eyes, it can be highly disorienting and even cause permanent damage. This is why shining lasers at or into the cockpit of commercial airliners is such a serious crime: it can endanger everyone on the plane by incapacitating the pilot’s vision. And it is a perfect example of how advanced but fairly mundane technology has empowered asymmetric players.

The proliferation of destructive technologies and the vulnerability of large technical systems to disruption have combined to make asymmetric attacks more common and more lethal. What the Houthi example shows is how the range of threats to international trade and investment has grown accordingly.

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A US Slowdown?

While most people were celebrating the holidays, economic pundits published some lengthy self-criticisms focused on why the early 2023 predictions of US recession proved exactly wrong. Understandably, they focused on the traditional recession indicators (like inverted short- and long-term yields) that had failed to indicate. But strong alternative modes of analysis were lacking, and the meek consensus that emerged over the holidays — forecasting some sort of mild slowdown for no particular reason — looked a lot like a punt. SIG’s slightly bolder forecast is for a definite and significant slowdown, based on factors that we believe have been underestimated.

The first and most important is consumer credit-card debt. One widely cited reason for the unexpected resilience of the US economy in 2023 was strong consumer demand. The thought had been that consumers shocked by significant inflation would respond by spending less. Instead, they responded by taking on debt. The average balance per consumer reached a ten-year high. (Canada also experienced a large consumer-credit increase in 2023.) This will have seemed reasonable enough even to poorer consumers because jobs were plentiful and wages rising. Consumer debt had plummeted during Covid, with household balance sheets improving due to thrift, fear, and government stimulus payments that often went into personal savings or to pay off household debt. Besides, inflation expectations can lead poorer consumers to buy now while they have a chance. US consumer inflation expectations were noticeably high — with growing numbers of Democrats adopting Republicans’ gloomy expectations — over 2023 even as their borrowing also grew. At the least, this all points to weakened consumer demand in 2024, removing a key buttress of 2023’s prosperity.

The second underestimated factor is the creation of blocs for foreign direct investment. Along with cross-border mergers and acquisitions, FDI again slowed in many parts of the world. Most famously, China’s inward FDI went negative in the third quarter. Somewhat less famously, inward FDI growth slowed way down in Southeast Asia and India. The reasons are many and vary greatly by country, but the weakening of the Chinese economy is certainly one. Chinese imports from ASEAN countries have been stagnant for years, while its intermediate-goods exports into ASEAN are endangered by the ongoing American-led effort to lessen the dependence of global supply chains on Chinese inputs. Southeast Asian and Indian investment, as well as Chinese, is in each case becoming more inward-focused. Meanwhile, the North American economy is itself becoming more regionalized in production terms as three of the four top inward FDI destinations in the first half of 2023 were Canada, the US and Mexico. (The fourth, at number two, was Brazil.) One reason for this is that US onshoring, near-shoring and friend-shoring — fueled by Biden-administration spending on high-tech and green industrial policy, as well as US defense contractors meeting Ukrainian demand as shaped by US domestic-provider policies and practices — are creating an Americas production bloc that structures a large portion of global FDI. In many ways, this is a tribute to the strength and flexibility of the US economy. But, in the short term at least, the regionalization of investment, given that it is less efficient than globalized investment and production, means higher goods prices. It also means increased competition for US multinationals and exporters at ever higher points in the supply chain. With very high US government and US consumer debt and stable or rising wages alongside low unemployment, the regionalization of direct investment will fuel a US slowdown. US CEOs’ consistent expectations of low capital expenditure in 2024 both support and help ensure such an outcome.

As was proved last year, predictions are a dangerous business. Still, SIG’s argument for investors is that the US’s unexpected performance as a safe haven in 2023 will not be repeated in the new year. 

Preparing for a Dangerous Year

When we began SIG’s blog in June of this year, our goal was to provide original and timely analysis of trends that the mainstream consensus was missing. Clients told us they had much more information about global markets and political trends than they could possibly process. What they were missing was actionable and fresh information that was not merely canned trend-spotting followed by a company recommendation or two. They wanted to go beyond the obvious.

To address that need, we spent a lot of time on Asia this year — traditionally a strong region for SIG and one of enduring interest for our clients. The nature of Southeast Asia’s growing centrality, and the shifting strategic approaches of Japan and South Korea, kept our attention and helped us not get too stuck in the US-China struggle, crucial as it is.

In 2024, we expect both of these focuses to continue, both because US policy on China is unlikely to change much in an election year and because Chinese policy toward Chinese tech multinationals won’t change much either. American and Chinese experiments with varieties of economic nationalism will continue. They are in turn the main drivers of what we have described as Southeast Asian non-alignment, especially digital non-alignment, and of Korean-Japanese rapprochement.

China’s increasing nationalism is notable, although in the last half of 2024 its opposition to the U.S. was modulated by the dire economic conditions it was facing. Xi Jinping’s opposition to the U.S. eased. Nevertheless, China’s long-term goals and strategic opposition to the US in East Asia have not changed, nor have Xi’s designs on Taiwan. He has stated that reunifying China will be his legacy.

We have also looked closely this year at India. Narendra Modi’s extraordinary consolidation of policy power — combining a market orientation with strong state policies and a cultural nationalism of alarming strength — continued in 2023. Modi’s popular support remained very strong, and state elections earlier this month confirmed his BJP party as the political anchor of the 600-million-person Indian electorate. Most importantly, per capita GDP growth has stayed vigorous as the BJP has made massive transfers to low-income groups and steadily empowered the lower Hindu castes. The BJP has apparently succeeded in generating increased demand domestically by strengthening the lower classes through policy. How sustainable this progress is remains to be seen, but the BJP certainly is in pole position going into national elections next April.

In regional terms, our final major focus since June has been the Middle East. The set of initiatives known as the Abraham Accords, alongside a surge in successful Chinese diplomacy in the region, led many to think the Middle East would be stabilizing after the years of violence that followed the rise of Daesh/Islamic State and the suppression of the Arab Spring. Hamas had something else in mind, and mainstream commentary on the Middle East has swung from mildly optimistic to apocalyptic. But the strong drivers of normalization between Israel and key Arab states will not necessarily weaken in 2024 and might well grow stronger. The relatively subdued reaction of these states to Israel’s reaction to the Hamas attack continues to remain notable. Both the OIC/Arab League solidarity on Gaza and the petrostates’ reluctant acceptance at COP28 of a fossil-fuel phaseout suggest a relative political steadiness in Muslim interstate relations and even some sense of common purpose.

Common purpose is what we have looked for in Europe, without great success. True, hostility toward poorer immigrants has become one source of greater solidarity; so has opposition to Russian aggression in Ukraine. Yet both also contain seeds of disunion as political forces in individual states gain power by sharpening themselves against the European consensus. Given general European declines in both productivity and population, the relative power of Poland and other Central European countries has been expanding as they grow more quickly than the Western states. Germany has begun to imagine what a long-term estrangement of oil-rich Russia might mean for the European solidarity on which Germany bases its positioning of itself in the world. At the same time, Germany and, especially, France are trying to adjust to the continued rise in autarkic industrial policies in both the US (EV subsidies, semiconductor chips) and China. About half of the EU’s population is older than 45. In parts of Western and Northern Europe the median age is above 50. All of this puts European productivity under greater pressure and will increase tension between demographically older and younger parts of the continent. Age will be no guarantee of stability. It also creates a tension around immigration from Africa and the Middle East — the only means for many European countries to have an increased number of younger workers.

Since we launched in June, we have put great emphasis on various technology sectors because the peacetime capacity of economies to innovate in technology has become so wrapped up in major-state calculations about war and military competition. Borders are being erected across the Internet in a displaced strategic competition that is lacking in historical analogies to guide us (and that was predicted years ago by SIG’s Scott Malcomson in his book Splinternet). The level of popular and state-level anxiety about technologies that hardly exist yet is extraordinary. US policy now aims squarely at perpetual superiority to China in any technology that might prove to have strategic significance; Chinese policy aims just as squarely at achieving whatever advances it can on the basis of a military-technological-industrial complex bent to establishing breakneck progress if not primacy. The logic has become well established. In 2024 we will stay focused on identifying its effects.

Which brings us to the Americas. An elected right-wing leader had plunged Argentina into political chaos while an elected left-wing leader in Brazil is pushing through long-needed reforms of investment regulation. Mexico will have elections in 2024 and Canada might too, as large majorities of Canadians say Trudeau should move aside. The American superpower will definitely have an election, this time with a desperately low level of predictability. For almost a decade, mainstream analysis has consistently underestimated both Donald Trump and the level of popular alienation from the Democratic Party consensus. The results in November are impossible to predict with accuracy, but it seems certain that the road to get there will be very rocky indeed. Social unrest and violence in the U.S. cannot be ruled out.

There are national elections in 40 countries in 2024, representing more than 40 percent of the population of the world, many in countries where people have lost faith in institutions and incumbent leaders, resulting in a wide tendency to reject them and their parties, further increasing volatility. 

It has been said that 2023 was the year in which business accepted that politics could not be safely ignored, especially the multi-player geopolitics that we have focused on in our blog and our work. The liberal rules-based order sometimes continued in the letter in 2023 but the spirit was gone and won’t soon—if ever—be back. This leaves the world in a kind of systems vacuum, resulting in movement back toward a balance-of-power, sphere-of-influence geopolitics. The unstable and fracturing conditions within and among nations are still not really priced in to markets, as can be seen by how quickly they continue to bounce back from shocks that in the past would have had significantly more long-lasting negative effects, such as the Israel-Hamas war.

2024 will be a pivotal, perhaps decisive year. We look forward to helping our readers and our clients navigate ways to prosper in a very treacherous time. We will take a break next week and look forward to re-engaging with you in the New Year. 

Faith-based geopolitics: A Russian Example

Modern interstate relations are generally thought to have begun with the 17th-century treaties of Prague and Westphalia, which sought to remove religion from among the causes of interstate conflict: cuius regio, eius religio (“whose land, his religion”) was the legal principle, associating state sovereignty with a single dominant faith, and putting an end, however imperfectly, to wars of religion. Modern international relations were built on this segregation of religion from the struggles of states with each other. The resurgence of religion since the demise of aggressive Communist atheism in the 1980s has often been seen as anti-modern, or as a revival of the pre-modern — certainly as far as international relations are concerned. However that may be, religion cannot be ignored by international investors. Shariah compliance and acceptance of Hindutva priorities are two examples. Less obvious is the type of strategic calculation that has led the unlikely figure of Vladimir Putin to embrace Islam as part of his geopolitical practice.

Putin has been viewed as having a significant connection to the Russian Orthodox church since at least 2000, just after he assumed power, when he referred to Orthodoxy as having “largely determined the character of Russian civilization.” He expected the traditional church to speed “the spiritual and moral rebirth of the Fatherland.” After more than two decades in power, Putin has continued to partner with Russian Orthodoxy in his attempts to solidify Russian cultural nationalism, not least in anti-LGBTQ laws (framed as part of Putin’s struggle with a spiritually degraded West) and in his justifications for the invasion of Ukraine, which has been strongly backed by the Orthodox church. Cuius regio, eius religio.

Yet at the same time Putin has sought to leverage the fact that Russia has the largest Muslim population of any European country, assuming Turkey is not seen as European. On the strength of that fact, Russia acquired observer status at the Organization of the Islamic Conference (OIC) in 2005 and is still the only major non-Muslim-majority country to do so. (India was invited but declined.) As a petroleum exporter, Russia is also in constant communication with Middle East petrostates and shares strategic interests with them. These connections make it slightly less peculiar that Orthodox Russia has embarked this year on a two-year experiment with Islamic banking in four Muslim-majority regions: Bashkortostan, Chechnya, Daghestan and Tatarstan. The experiment is being managed by the Russian Central Bank.

Russia has multiple reasons to position itself as friendly to Islam. Russia’s hinterland from the Caucasus to Mongolia is majority-Muslim and its post-Soviet economy has depended on Muslim migrant labor to compensate for domestic demographic decline. In the Middle East, the Kremlin seeks to establish itself as a significant player in the Arab-Muslim world amid the Washington-Beijing confrontation and the Persian Gulf countries’ pursuit of an augmented role on the international stage. In this context, Russia’s stance on the Israeli-Palestinian conflict and its support for Palestinian refugees, many of whom resettled in the North Caucasus under a humanitarian program instituted by Russian authorities, contribute to bolstering Moscow’s image in the Middle East.

Putin frames the ongoing Palestine conflict as a manifestation of US diplomatic failure and proffers Russia as a potential mediator, leveraging its amicable relationships with both Israel and the Palestinians. Putin’s official visits to the United Arab Emirates and Saudi Arabia last week aimed to weaken the Western narrative of Russian isolation over Ukraine. The Islamic-banking initiative is similarly seen as in part a response to Ukraine-related financial sanctions. The visits themselves had ultimately to do with money as much as politics: the UAE and Saudi Arabia can withstand a drop in oil prices, but Putin faces a pressing need for revenue, given the costs of the Ukraine war and their impact on his domestic support.

Since the inception of the Ukraine conflict, the Kremlin has increased its efforts to strengthen relations with the Arab-Muslim world, orchestrating various events within the territorial confines of the Russian Federation, particularly in regions with significant Muslim populations. The Kazan Forum 2023 was a prominent event featuring Moscow’s ties to Arab-Muslim countries, particularly Gulf Cooperation Council members. The focus was on accentuating Russia's role in ensuring a harmonious, multi-confessional, and multicultural society. Moscow is likely to intensify its relations and collaborative initiatives with the Gulf Cooperation Council members in energy, defense and logistics.

The lesson for investors is that 21st century religious revivalism is both powerful and not simple. For many centuries, Russian Orthodoxy was animated by the dream of retaking Istanbul (Constantinople) from the infidel Muslim usurpers Much of the tsar’s 19th century imperial gains were at the cost of Central Asian Muslim rulers, and after the Bolshevik revolution Islamic culture was often suppressed. Yet now the Orthodox paragon Putin is strengthening Russia’s Muslim ties on multiple fronts, domestic as well as international, and at least some Muslim states are responding in kind.

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 Horse

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.

An Unexpected Unity at Riyadh Summit

An Unexpected Unity at Riyadh Summit

On Saturday, 57 Arab and Muslim nations called for a halt to military operations in Gaza, dismissing Israel's self-defense rationale for its actions against Palestinians. In an extraordinary joint summit in Riyadh, the 22-member Arab League and the 57-member Organization of the Islamic Conference (to which all Arab League members belong) unanimously called for the International Criminal Court to probe “war crimes and crimes against humanity” being perpetrated by Israel in the Palestinian territories. The summit also urged an arms embargo against Israel and the establishment of an Arab-Islamic committee to supervise diplomatic efforts aimed at securing a ceasefire in Gaza. The summit called for the immediate entry of humanitarian aid convoys to bring food, medicine and fuel into the Gaza Strip. Leaders including Iranian President Ebrahim Raisi, Turkish President Tayyip Erdogan, and Qatar's Emir Sheikh Tamim bin Hamad Al Thani attended: the Sunni and Shia worlds alike, and the newly welcomed-back Syrian President Bashar al-Assad. Raisi’s trip to Saudi Arabia is the first by an Iranian head of state in more than a decade. Saudi Arabia’s Muhammad bin Salman presented himself as leader of the Arab-Muslim world, inviting both allies and foes.

Led by Algeria, certain Arab nations advocated for a total severance of diplomatic ties with Israel. However, other Arab countries that have established diplomatic relations with Israel resisted this stance, emphasizing the importance of maintaining open channels with the government of Prime Minister Netanyahu. Just as interesting was the abrupt resurgence of the Palestinian cause in the awareness of Arab and Muslim nations. Deep divisions continue to impede the formulation of a shared vision to conclude the ongoing conflict and establish a diplomatic framework for what lies ahead. But what led to the merging of the Arab League and OIC conferences was precisely disagreement. The lack of unity created political pressure, and MBS and others responded with a move to show unity. The surprising thing is not that there are still sharp regional divisions but that the joint summit occurred at all.

Hamas’s action on 7 October, grotesque as it was, did have a rationale: To upset the emerging consensus, as the Abraham Accords continued to bring Israel and various Muslim states into a new and less hostile configuration, that the fate of Palestinians could safely be ignored. That message was sent not just to Israel but also, perhaps primarily, to Arab states like Saudi Arabia. The illusion that the Palestinians could be ignored indefinitely as the Abraham Accords process expanded has now been dispelled.

The global community is confronted with a radical Israeli government uninterested in compromise, an ineffectual Palestinian leadership further weakened by recent events, and a U.S. administration preoccupied with impending presidential elections. The conditions for a political initiative are unfavorable.Therapidly diminishing window for peace and regional integration signals a heightened risk for Israel of regression to the conditions of 1948. The swift reversal of the United States' role as a security provider has invited comparison in the region to the speed with which France in West Africa went from the center to near the margins of the regional security balance. What was really striking, then, about the Arab League-OIC joint summit was that it showed the regional players, large and small, willing to get together with some urgency and compromise on reaching a modest common platform. What that might mean for Palestinians is unclear but it does suggest a certain reflex for peaceful discussion and a minimal unity that have not been features of regional politics before.

Going Global Goes South

Going Global Goes South

Recently Joseph Nye, a venerable and influential Harvard professor and former government official, and the Financial Times’s senior trade writer, Alan Beattie, have taken against the popular political term Global South. They attack it as inaccurate, misleading, and “deeply unhelpful” (Beattie). They are not exactly wrong, but getting rid of the term will not make any difference. Another will replace it, because, like “less developed countries” and “developing countries” and “emerging markets” and “frontier markets” and the Third World, it serves a genuine need. Unlike globalization 1.0 (1830-1914), which concerned a world divided into imperial powers and colonies, globalization 2.0 (1960 -?) has taken place in a world of relatively stable sovereign states among poor as well as rich, and with much higher rates of capital mobility, common education, and intellectual-property transfer. Very crudely put, the colonized of the 19th century have enough power and shared experience in the 21st century to constitute a kind of collective. Banning the use of Global South won’t change that, and ignoring the realities that generated the term and its many ancestors will lead to bad analysis.

Nye and Beattie rightly point out that much of the Global South is in the North. China and the U.S. are at about the same latitude. China, India and most of Africa are above the Equator, as is most of the world, while prosperous countries like Australia, New Zealand and Chile are south of it. (Nye’s article is here. Beattie’s Trade Secrets columns are behind a paywall but appeared on 14 September and 5 October.) If you were to mark out the Global South on a map the result would be interesting but also a bit silly. On political-economic grounds, the attack on the Global South is less compelling. The inclusion of Russia, because Jim Neill put it in the BRICS in 2001 and Vladimir Putin has sought to exploit this position to harry his wealthy enemies, is scarcely credible, even to Russians. More plausibly, Nye and Beattie underline that the Global South’s aspiring champions, India and China, are at odds with each other and opportunistic in their support for other Southerners. China, indeed, is not looking very Southern any more along its prosperous eastern seaboard, where its world-beating high-technology companies gather. And its Belt and Road Initiative, useful as it was for off-loading excess heavy-industrial capacity a decade ago, no longer looks much like disinterested solidarity.

All this may be granted. However, Global South and its terminological ancestors did not come into being for geographical reasons or to satisfy the ambitions of the largest players. The Global South would still be a thing under whatever name even if China were to move on, which it well might as it pursues autarkic policies of self-sufficiency (zili gengsheng, a revived Maoist term) under Xi Jinping. Global South exists primarily because Global North exists. The U.S. under Trump and now Biden has been moving toward its own zili gengsheng, what Trump called “economic nationalism”, for seven years. One of the core reasons for the European Union was to create a common market that could rival the North American one is achieving economies of scale, growth through the refinement of internal comparative advantages, and efficiencies of regulation and distribution.  Intensification of anti-immigrant policies in Italy, Britain, Germany and Austria — the Netherlands might join in after 22 November elections — only increases the sense that the non-South wants to take its winnings and leave the table. Given the size and centrality of Northern markets, capital, and technology, their clear desire to withdraw inside themselves will only increase the importance of the Global South concept if not its current name.

But there is a twist. The Global South is not just about staring forlornly at a border wall or dying on a raft near Lampedusa. As Beattie acknowledges, in analyzing possible changes in voting shares at the International Monetary Fund, the Global South has a large and growing share of global production. He cites this as more evidence of its misleading nature. But the idea of the West didn’t weaken as its wealth increased. Neither, interestingly, has the idea of Asia. (See Parag Khanna’s The Future Is Asian.) Nor, in a global context of both splintering and forms of consolidation like large-market self-sufficiency, will the idea of a Global South. It should be able to generate its own credibility for some time to come.

https://nltimes.nl/2023/09/21/omtzigt-calls-firm-cap-many-forms-immigration-50000-people-per-year 

https://www.project-syndicate.org/commentary/global-south-is-a-misleading-term-by-joseph-s-nye-2023-11

The Pulling Apart

The Pulling Apart

By Dee Smith

We live in a singular moment in history: the world has been knitted together by technology and commerce, but it has become in the process an extraordinarily unhappy human family. And that brings a huge, largely unrecognized, problem.

From the 1940s onward, there was an assumption, particularly in the West, that trade and consumerism would bring convergence. The universal desire for washing machines and the like and the triumph of American popular culture would make life in Jakarta very similar to life in Miami.

After the fall of the Soviet Union in 1991, the true age of globalization arrived and with it the American unipolar moment. The US was the only superpower, militarily, economically and culturally. American-style market economics were ascendant. Production could be located where costs were lowest; products could be sold where prices were high. To make global markets work smoothly, rules were required and readily accepted as necessary for participation in global prosperity. Economic self-interest reigned and everyone would play nice because it was in their economic interest to do so. “People who trade don’t fight” became an article of faith. This was The End of History and the world was flat.

But a series of signal events—the dot-com bust, the 9-11 attacks, the global economic crash of 2007 and 2008, and the arrival of widespread social media—were harbingers of a sea change. For many sophisticated observers, such events had to be seen as anomalies, so strong was their faith in the economics-based and rules-based global system, and so convinced were they of its inevitability. Why was it thought to be inevitable? Because we believed that we had finally discovered and mastered the true drivers of human activity: economic need and desire. So, when trouble arrived, the tendency was to double down and keep going. The systems had to be right; they just needed to be tweaked. In the intelligence world, this is called confirmation bias. It is a failure of imagination.

But there is more than one kind of self-interest and more than one driver of meaning and purpose. Some are more compelling than economic self-interest. Perhaps the most important is the need for identity. The desire to gather into groups based on similar beliefs and passions (the latter often to redress past or current wrongs) can be more powerful as a driver of human action than the supposedly cooler forces of economic self-interest. Even some economists are now saying this.

The networking technologies that have become globally ubiquitous over the past 25 years — first visual telecommunications, then social media — have had the opposite of the effect they were meant to have. They have led people to compare, and then to celebrate and intensify their differences rather than their similarities. They have increased attachments to identity, rather than decreasing them. And they have provided just enough evidence to falsify the claims of politicians without providing the facts and discipline to counter and improve on them. Social media provide people with enough evidence to conclude they are being betrayed but no means to do anything about it except to create grievance communities. This has led to an immediacy of visual and visceral information about attacks, wars, political disturbances, and so forth, self-selected by adherents to these new groups to reinforce the beliefs they share. Such effects can and do have triggering and multiplying effects across the planet, literally in seconds.

We do not all believe in the same rules. We never did, actually, but now we are no longer prepared to pretend that we do, even for the sake of almighty trade.

How is it possible to have a rules-based order — international or domestic — when we can’t even agree on the rules under which we are to live and by which we are to be governed?

Simply put, it isn’t.

So where will this lead? It is hard to see how it leads to anything other than much more pronounced splintering and fragmentation, both within societies and between nations. Groups within countries may separate into smaller societies that internally share beliefs and rules. As with the USSR at the end of the past century, some nation-states and political units — even large ones — may collapse due to internal stresses. Resource depletion, especially of food and water, and climate change — addressing either of which would require global rules-based agreements — as well as vastly increased numbers of displaced and migrating people, plus a nostalgia for the old world and politicians who exploit this emotion by making impossible promises about restoring it, are adding to the feedback loops driving a political and social pulling apart. Because the problem is global as well as internal and often intensely local, it is hard to discern what possible countervailing forces there might be. We are moving from a largely centrifugal world to a largely centripetal world.

To survive this with an intact civilizational system of some kind — or at least without ubiquitous and utterly devastating conflict — will require us all to think far outside the proverbial box. The solutions to these problems have not yet been found. They are probably not to be found in the structures of the past.

Rising India and a Murder in Canada

Rising India and a Murder in Canada

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

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

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

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

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

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

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

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

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

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

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

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

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.

The Ukraine War and EU “Strategic Autonomy”

The Ukraine War and EU “Strategic Autonomy”

The European Union has not yet been a significant actor in the Ukraine crisis. The EU’s hard-power defense capacity is exceedingly weak and focused mainly on defense-industrial policy. To the degree that “European defense” has a strong operational meaning, it is due to NATO, which is dominated by a non-European power (the US) and has several militarily significant non-EU members (the US again, Canada, and Turkey). Understandably, the consensus view has been that the EU is close to being a non-actor in the defense of Europe. However, various developments — the waning of American support for Ukraine, the chaos of British foreign policy, the political desperation of Emmanuel Macron, the sacrifice of Nagorno-Karabakh’s Armenians — may contribute, however unwittingly, to a strengthening of the EU’s security purpose, if only because they render the status quo less and less tenable.

Not long ago, the key question for the EU was whether it was evolving into a “two-speed” configuration, with “core Europe” leading or ignoring its periphery as it saw fit. The core-Europe idea, not surprisingly, had been associated principally with Germany — as Kernereuropa — since the end of the Cold War. Kernereuropa was a concept for fiscal rectitude, rather than centralized defense, and was revived in response to the eurozone crisis of 2009 and 2010. But the Brexit referendum of 2016, which removed Europe’s first- or second-ranked military from the EU table — a quick comparison of the British and French militaries is here — notably weakened Europe’s defenses in the absence of NATO. This brought further rounds of EU defense-policy rethinking amid an increase in German interest stimulated by the Russian annexation of Crimea in 2014. German interest inevitably brings French interest. French interest inevitably brings a conceptual framework of resistance to American power — at least, it has since De Gaulle, if not Clemenceau. After Emmanuel Macron was elected in 2017 and faced the neo-isolationism and unreliability of Donald Trump, he began to speak of European “strategic autonomy.” This meant autonomy from the US, which also meant autonomy from NATO. By 2019, Macron was speaking of “the brain-death of NATO.” Given Trump’s open questioning of the alliance, this was understandable. However, Germany and others still preferred to wait on events, even if Angela Merkel once spoke of Europe taking its fate “into our own hands.”

The accession to power of Joe Biden made the questioning of NATO less urgent for a French president. Biden promised a policy of friendliness toward allies, and toward democracies in particular. Strategic autonomy begin to lead a quieter life, with the focus shifting somewhat to cyber autonomy. In this comparatively mild environment, Macron was even able, after Russia invaded Ukraine at the end of February 2022, to attempt the role of mediator, insisting that Russia had its own perspective and Putin might be reasoned with. The US, Germany, and Britain ignored him.

By December 2022, Macron was shifting to the opposite view. By May 2023, he had fully transitioned, signing off on weapons transfers to Ukraine. Faced with a European policy on Ukraine that was being dominated by the US, Germany, and Britain, France presumably wanted a place among the actual decision-makers. Under Russian pressure, NATO itself was undergoing a strategic revival less than three years after being declared brain-dead. By the autumn, the French military and intelligence services were being humiliated by revolts in the Sahel and by the French, and European, inability to oppose the Azerbaijani offensive against the Armenians in Nagorno-Karabakh.

The cliché has been that Europe requires crises to move forward. Another way to put it is that the EU only learns from failures. As it is certainly experiencing an abundance of failures now, will they herald a period of learning and change? The growing American reluctance to spend on Ukrainian defense might well help force some strategic unity on aKernereuropathat has long resisted it. In a peculiarly European dynamic, the need for greater unity is being expressed, in part, by moves toward EU enlargement, which Germany’s defense minister has called “a necessary geopolitical consequence of Russia’s war.” Macron has also switched from opposing enlargement to backing it. When the Nobel Peace Prize committee gave the 2012 prize to the EU, it emphasized the union’s enlargement policy as a strategy for peace. It appears now to be part of a strategy for fighting a war, and a conflict on the periphery might give core Europe a security purpose it has always lacked.

Deliberate Speed: Morocco’s Earthquake Response

Deliberate Speed: Morocco’s Earthquake Response

Shortly after 11.00 pm on 8 September, a massive earthquake struck the High Atlas of Morocco, some 45 miles southwest of Marrakech. Its tremors were felt far to the north, in cities such as Fès and Taza, where people fled into the streets. In Marrakech, close to the epicenter, the impact was terrifying. In the villages of the High Atlas, however, it was devastating. Within ten days, official estimates were suggesting almost 3,000 dead and more than 5,500 injured.

Accusations and recriminations appeared almost immediately in the international press. The scale of death and suffering was due, it was claimed, to King Mohammed VI waiting at his residence in Paris before returning to his people, to his failure to issue an immediate statement, to the hesitation of the prime minister Aziz Akhannouch to respond without delay because protocol forbade him to act before the king had spoken, to a reluctance to accept international aid – especially from France – without hesitation, and to the inability of government rescue teams to reach mountain villages with the necessary speed.

But did the allegations acknowledge the fundamental problem? The period for saving the lives of anyone buried after buildings collapse during an earthquake is very short. Early reports from rescuers stated that many residents had extricated themselves or been rescued by their families or neighbours. At least where possible, the injured had been taken to seek medical assistance, but roads were often blocked, transport unavailable, and hospitals or clinics distant and soon overwhelmed. Remaining in a village without shelter could itself prove fatal. Nights in the High Atlas were already cold.

While the earthquake itself was a disaster, it occurred in a region that was not only remote but also impoverished and marginalized. Most of the inhabitants are not Arab but Amazigh, the indigenous “free people” who were pushed into the Rif and the Atlas by the arrival of Arab armies at the end of the seventh century. They were often known as “Berber,” because their speech was unintelligible to the conquerors, and they still possess a distinct culture, language, and alphabet. Although Mohammed VI has made a concerted attempt to reduce differences in status among the peoples of Morocco, and Tamazight is now widely seen alongside Arabic and French in official documents and public notices, life in regions such as the Rif or the Atlas remains difficult. The villages of the High Atlas have been described as “another Morocco” of which most foreign visitors and even many Moroccans have little knowledge.

News cycles are very short. Two days after the earthquake, massive floods in Libya provided an even more compelling version of a theme that many journalists find irresistible: desperate suffering in Africa where a state was failing to address a crisis and victims were in need of urgent help from the West to have any hope of surviving. Morocco is quite different from Libya, however. The state might have been slower than its critics might have liked, but it did exist and it did act.

It also had its own concerns. The government was clearly thinking of the political implications of accepting international aid. While the influence of France remains ubiquitous more than fifty years after independence in what was French North Africa and French West Africa, it is increasingly seen in the region as intrusive, arrogant, and not always effective. Official announcements from Rabat were clear about the sources from which assistance would be welcome. The countries that were chosen – Spain, the United Kingdom, Qatar, and the United Arab Emirates – have all favored Moroccan views about the status of the former Spanish colony in the Western Sahara and their involvement is not seen as compromising Moroccan sovereignty on this or other issues. Statements in the French press in particular suggest that Moroccan suspicion is not exaggerated.

Beyond the immediate concerns of the government itself, Moroccan society is still remarkably robust. Even before the machinery of state applied itself to the crisis, citizens and community organizations throughout the country were collecting food, medical supplies, clothing, and money and delivering them to the affected region. The scale of public involvement continues to be impressive. While foreign assistance will undoubtedly be important, Moroccans were in a very real sense saving themselves.

But will anyone be able to save the Amazigh villages of the High Atlas? Some villages have been completely destroyed, the cost of rebuilding is almost certain to exceed even the large amounts of money that are being promised, and younger Amazigh men in particular had already begun to leave the village in the hope of finding work in cities. A rich and distinctive culture is at risk of being lost.

This is not a problem unique to the High Atlas, of course, or to Morocco. Distinctive rural cultures with ancient ways of life are vanishing just as urban elites become more aware of the importance of preserving them. This “other Morocco” is far removed from the gleaming world of high-speed rail projects, international airports, digital technology, and renewable energy. Its value may be more difficult to calculate in purely economic terms, but its marginalization has meant that much of Morocco has never seen it and has not yet begun to consider its significance for the life of the nation. It has been suggested that Moroccan authorities might have moved slowly at first because the High Atlas seems so different from Morocco’s new identity as a bridge between Europe, Africa, and the Middle East.

The real task will therefore lie not so much in rebuilding but in ensuring a way of life that can be viable without compromising the traditions of local communities. If the people of the High Atlas leave their villages, what of importance will remain to be saved?

For corporations and investors, the attraction of Morocco remains undiminished by the earthquake. The resilience and ingenuity of the people and the diplomatic acumen of its leaders should be reassuring. The deliberation in selecting the countries from which Morocco would receive international aid can be seen as evidence of a sophisticated and measured approach to questions of sovereignty and international relations. In a part of Africa where military coups in the Sahel, the withdrawal of the French military, and the arrival of Russian mercenaries are unsettling, such careful calculation is not just impressive but essential.

Japan's Power Play

Japan’s Power Plays

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

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

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

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

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

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

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

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.