Wicked Problems and North Carolina

By Dee Smith

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

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

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

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

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

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

Sound familiar?

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

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

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

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

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

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

How the Green Economy Grows

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

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

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

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

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

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

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

Multilateralism’s Long Goodbye?

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

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

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

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

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

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

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

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

The Energy-Transition Paradox

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

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

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

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

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

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

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

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

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

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

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

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

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