The America Stack

Investing in technology got a lot harder in the past two weeks. Tech investors, particularly in AI, have traditionally assumed the best products would scale: pick the winner, and you will win big. That assumption will sometimes still prove valid, but it now seems fundamentally outdated. Technology markets are fragmenting for reasons that are not changing soon. That is making investors’ lives difficult.

The proximate cause for the drop in US tech stocks was DeepSeek’s launch of AI products that seemed to perform tasks that the company’s American competitors do at much greater cost. A Chinese company whose actual workings are opaque even by Chinese standards, DeepSeek surprised markets. The specific instance was indeed unanticipated, but the broader phenomenon, as SIGnal readers know, should not have been. The US has been tightening the screws on Chinese technology for years. The first Trump administration took technology containment to a new level and the Biden administration went further still. Neither administration explained what a realistic endgame was. But it was obvious that China and Chinese companies were not simply going to yield and give up. Every US sanction and prohibition has been met with Chinese innovation. The resulting products might not match their US analogues byte-for-byte, but they don’t have to. They just have to be good enough to enter the markets. Then they can win on price.

DeepSeek’s ability to do that burst the AI bubble, which was inflated by confidence in the US tech sector’s ability — supported by government spending and other encouragements — to prevail on the global scale. That confidence is now weakening, not just because a Chinese tech company can compete with America’s best but because the “global scale” has been shown to be a fiction. Neither of the world’s two largest economies is going to either give up on protecting and subsidizing its tech companies or open its digital markets to the other.

More profoundly, though, the extraordinarily tight relationship between the second Trump administration and US tech majors, symbolized by the prominent display of the leaders of X/SpaceX/Starlink, Meta/Facebook, and Google/Alphabet at the new president’s inauguration, signaled that the distinction between Silicon Valley and Washington is disappearing. The paradox is that this will make the US less dominant internationally, even if the opposite was the goal. The power of the Valley was rooted in its capacity for transcending American nationalism. Now that it has full White House backing, the Valley is losing that capacity.

Apart from China, one example of this phenomenon is the Eurostack. The term has an interesting past as it is derivative of the “India stack,” or the subcontinent’s attempt under Narendra Modi to develop domestic digital infrastructure based on control of data, payment systems, and citizen/consumer identity. This is commonly referred to by the acronym DPI (data, payments, identity). When a state can shape and integrate all three of these as the basis for a national digital infrastructure, it can control the nature of its own digital development. Historians of imperialism will savor the irony of the European Union, whose leading members all have imperial pasts of varying extent, looking to the land of the Raj and the Princely States for a model of how to gain control over its digital future. Europe has not often turned to India for geopolitical policy solutions. But that is what it is doing today.

There are counter-currents. For countries like Australia or Taiwan, which find themselves on the frontline of resistance to Chinese digital dominance, joining the US tech sphere of influence makes an immediate sense. The EU is much less sure, and the Trump administration’s indifference to European opinion can only increase its doubts. The US has inadvertently become a driver of digital non-alignment. Assuming India sticks to current policy — and there is every reason to think it will, even if Modi’s own power slips — then the world’s most populous nation and the world’s three largest economies are all pulling in the same direction, which is away from each other.

What of the rest? Consider the UAE. At the end of last year, the UAE’s position, arrived at after long debate and involving considerable discomfort, was to align digitally with what we might have to start calling the America Stack. The symbol of this was the deal last spring between G42, the UAE’s AI-investment flagship, and Microsoft. G42 is run by the UAE’s national security adviser and financed by the state’s sovereign wealth fund, Mubadala. Once the Trump administration’s tech direction became clear, however, G42 pivoted and announced (January 28) that it had become agnostic as to technology.

The demise of global scaling has been gradual over the past decade-plus, but as Ernest Hemingway said of bankruptcy, it can happen “gradually, then suddenly.” Investors now have to pick their way among the India Stack, the China Stack, the America Stack, and (if it happens) the Eurostack. It is unlikely that any invested company will be able to participate, much less thrive, in all four.

The Change is Already Here

The commentary on how Donald Trump’s presidency might transform global reality after his inauguration on Monday has been boundless. So has commentary in individual countries on what Trump might mean for them. But as commentators anticipate the Trump future they often miss how much the furniture has already been moved, before Trump’s actual ascension to office. Trump the negotiator may value his own unpredictability, but much of the reaction to his second presidency is baked in. He is not a novelty and neither, from a foreign perspective, is the America that decided to re-elect him.  

The 16 years of Obama-Trump-Biden isn’t quite a generation, but those are usually reckoned at 20-30 years, so 4 more years of Trump just about gets there. The 16 years of Bill Clinton and George W. Bush formed a fairly coherent mini-era of strong growth (ending with the 2008 collapse) and post-Cold War openness (ending with terrorist action and reaction, and the emergence of the China-US relationship as the core of geopolitics and geoeconomics). The past 16 years have been much more about the re-shaping, and relative diminution, of the West and the institutions it built and dominated; the rise of leaderless regions to economic prominence, utterly dependent on globalized markets but without the power or ambition to decisively shape them (Southeast Asia and the Gulf, in particular, but also Central/Eastern Europe, Africa and, perhaps, Latin America, as well as not-so-leaderless India); and the none too successful efforts of the US and China to assert dominance. The resulting “order” has been described as multi-polar, but there is a noticeable shortage of effective poles. 

It is this second era that was solidified by the defeat of Biden-Harris and the victory of Trump. There were once expectations (or hopes) among some that the first Trump administration was an anomaly and Biden would effect a restoration of sorts, pushing the US and the world order it dominated back toward a Clinton-Bush-Obama normalcy. Such expectations underestimated a number of deeper transformations after 2008, notably technological transformations but also changes in the US itself as well as the endurance of Xi Jinping’s version of China. Both Xi’s China and Trump’s US were often seen as exceptions to post-Cold War rules of globalization and the spread of liberal democracy and peace. That view finally expired last November. 

The speed with which businesses have adjusted to Trump reflects an acceptance of realities that predated the last election cycle.  So too do the policies of foreign actors. Many of these have been discussed in previous SIGnal posts, most recently on the Gulf. Japan is reluctantly adjusting its relationship with China. Europe is coming to accept that the sweeping and radical proposals of Enrico Letta and Mario Draghi, both commissioned by the EU, may actually have to be followed if the EU is to last. The heads of Europe’s telecommunications champions, Nokia and Ericsson, have recently pressed, along with SAP, for the Italians’ proposals to be implemented. These three tech giants do not know what Trump’s tech policies will be. They are simply acknowledging that the landscape has permanently changed.

In developed-world national politics, the dominant mode is one of turbulence (Canada, Britain, Taiwan, Germany, the Netherlands, France) sometimes veering into chaos (South Korea). Governments struggle to manage deep transformations in technology, demographics, climate, geopolitics, and geoeconomics. What they are being compelled to accept is that the United States is no longer willing or able to back even an imperfect ordering of world power along lines that will benefit all. Despite some false dawns along the way, that trend began sometime in the younger Bush’s presidency. What has changed is the sense of its permanence.

All of this has occurred before the inauguration. The new president and Congress may believe that they can control this process but the major work has already been done.

The Uses of “Overcapacity”

Since US Treasury Secretary Janet Yellen’s visit to China in April 2024, during which she focused on “China’s industrial overcapacity,” the belief has settled in that China’s protection of its own market and mercantile approach to everyone else’s markets amounts to a massive unfair trade practice based on state-sponsored hyperproduction. Yellen and the European Union both focused on green-economy sectors (solar panels, electric vehicles), conjuring a scenario in which China would underprice the Western green economy to such an extent that it would never develop, giving China a geo-economic stranglehold on the post-carbon future. At that point, economic policy began to seem actually immoral. SIG’s view is that this popular argument is partial at best and certainly misleading.

Strictly speaking, “overcapacity” means having a production capacity in excess of demand. It is measured by the capacity-utilization rate. In an efficient, market-based economy capacity utilization should be around 80 percent. In China’s electric-vehicle industry, the capacity utilization rate is much higher than that, which means that the sector has the opposite of overcapacity. There is enough demand, domestic and international, for China’s biggest electric-vehicle maker (and largest private employer), BYD, to operate at close to 100% capacity. It is true that capacity-utilization rates  in China’s solar-panel industry are much lower, but that tends to depress prices (in order to stimulate demand). Affordable Chinese solar panels have been the key to the spread of solar-panel usage across the globe, speeding the green transition and stimulating the growth of panel-installation and maintenance industries. With cheap panels available, the cost of solar energy in the US dropped 40 percent over the past decade, and solar’s share of electrical power generation has gone from 0.1 percent in 2010 to 6 percent.

The current narrative on Chinese overcapacity also overemphasizes the China part. The three leading electric-vehicle exporters in China are BYD, SAIC, and  … Tesla. BYD’s largest shareholder for years has been Berkshire Hathaway. Pension-fund favorite BlackRock has also been a major and long-time shareholder. BYD certainly did receive government incentives for EV development and production but the benefits of its ensuing success did not only accrue to China or the Chinese.

The case of state-owned SAIC might seem simpler. However, SAIC and its state-owned competitor FAW have both been leaders in joining with Western automakers. There are FAW-Toyota and FAW-Volkswagen, along with SAIC-GM-Wuling, SAIC-GM, and SAIC-Volkswagen. These ventures, many begun in the 1990s, were created to bring Japanese, German, and American internal-combustion-engine manufacturing technology and expertise into Chinese industry, and to get Chinese-market access for the Western partners. FAW-Volkswagen was second to BYD in 2023 car sales in China. Other similar joint ventures (SAIC-Volkswagen, GAC-Toyota, SAIC-GM, FAW-Toyota) were in the top 10.

These corporate relationships have changed over time. Non-Chinese venture partners today learn at least as much as their Chinese counterparts do from working together. That process occurs with green companies as well. SAIC-GM-Wuling is third in the 2023 ranking of Chinese sales of new-energy vehicles (NEVs, which includes battery electric vehicles and plug-in hybrids), after Tesla and market leader BYD.

In short, Western and Japanese multinationals and investors have been part of, and have benefitted from, the growth of Chinese production and consumption that is behind the charge of overcapacity.

That is not so true of these sectors in countries like India, Brazil, or Turkey. They have perhaps piggy-backed on the overcapacity narrative, joining “the chorus of naysayers voicing concerns over China’s overcapacity conundrum,” as Bloomberg put it. The number of investigations brought by China’s trading partners against it more than doubled from 2023 to 2024 (from 69 to 160). Among the 28 trading partners involved, developing countries played an unusually large role. The major sources of complaint in 2024 were, in order of importance, India, the EU, Brazil, and the US, rather drawing into question BRICS solidarity, but Thailand, Peru, and Chinese ally Pakistan were also active. A strikingly high number of cases were brought after Yellen’s China visit and the related publicity given to overcapacity.

What is going on? States are using tariffs, non-tariff trade barriers, dumping complaints, and so on partly because of genuine concerns about unfair trade practices, partly in response to political pressure from domestic sources, and partly to force Chinese companies (including those with Western and Japanese investors or partners) to relocate manufacturing from China to their own territories, transfer technology to their own industries, and create jobs for their own citizens. The charge of overcapacity, especially in green industries like electric-vehicle production, gives a moral sheen to the unedifying process of using consumers as hostages to force in-country location of production. It is a hard pill for China to swallow. China has ample unemployment problems of its own. But the successes of Chinese manufacturing lead competing countries to desperate measures, particularly as US-China decoupling and US industrial policy force Chinese companies into less lucrative markets.

Ultimately this could have the effect of diffusing green-economy production and technology, notably in poorer manufacturing countries. That ought to be good for the planet. It can at least be good for investors as it creates opportunities that are not subject to the increasingly capricious US-China conflict.

Feeling Better and Feeling Worse, Part 5

by Dee Smith

The severe economic crisis of 2008 led to the crumbling of another pillar of American and Western power. The so-called wizards of Wall Street had not anticipated the crisis and were only able to contain it, partially, with enormous collateral damage and repercussions felt to this day.

Central to the 2008 crisis was the creation of complex new financial products known as derivatives and including collateralized debt obligations (CDOs). These were based on highly sophisticated mathematical models, had astonishing levels of risk, were poorly understood even by those who used them, and were placed in a market characterized by a boom mentality, with hyper-intense competition animated by a fear of missing out (FOMO). CDOs and the like grouped together what had been illiquid assets, particularly US home mortgages, and “derived” (hence the term derivatives) from them liquid—that is, tradable—securities. These were heavily exchanged. The entire edifice collapsed, with dire repercussions reaching from sovereign states to investment banks to individuals.

 At that point, the post-Cold War global Washington Consensus (that economic development and political activity should follow the US model) was mortally wounded. It was seen to be deficient, even deceptive, in its assumptions. And it became clear to Americans themselves that their own faith in the system seemed unwarranted.

Blame has accrued to the investor class of asset owners and asset managers. But is this really a fair assessment? Isn’t almost everyone in effect an asset owner? Doesn’t everyone want more money, all the time? Doesn’t every retiree want more, even when this exceeds what can readily (or even realistically) be produced from returns on the assets underlying their pensions and 401ks? If you are going to blame greed, then blame has to be apportioned very widely. The fund managers have essentially been working for all of us. We are all to blame.

A long decade later, the COVID-19 pandemic resulted in a feeding frenzy of misinformation and disinformation, largely deployed for political preservation. The idea that COVID originated from wild animals rather than from a lab leak is still wielded politically by the Chinese government (while they refuse to release information that could demonstrate it one way or the other). And misinformation came from sources that were supposed to be trustworthy. For example, the World Health Organization said at the beginning of the pandemic that Covid was NOT transmitted through the air (they capitalized “not”), and early efforts focused on sanitizing surfaces when, in fact, the vast majority of transmissions are airborne. It took 2 years and far too many deaths to correct this misinformation.

The central point is that all of this has coalesced into a disdain for expertise: financial, political, medical, scientific, even religious.

People see that, over and over, experts and leaders make pronouncements that soon prove to be inaccurate at best, or outright lies at worst. Increasingly, people deduce from this that they should not trust or believe experts and leaders at all.

The problem is not that science is unsure and proceeds by creating hypotheses and testing them to try to falsify or verify them. That is the only way it could function. Science is by its nature a work in progress. It is the best method we have for producing valid and effective information.

The problem is that leaders and experts make overstated or even false claims to establish and buttress their own authority, and then try to stake a claim to protect their individual and collective territory — while framing alternative ideas as threats. The fundamental issue with the early WHO’s response to COVID was not just that it presented inaccurate information. It was that it did not admit that it really did not know and that the information was tentative. This entire phenomenon of overstated pronouncements is made even worse by experts trying to hide the fact that they have changed their minds when they are forced by events to do so.

Academia these days provides severe examples of all these tendencies. Over the course of working with and leading advisory boards for academic institutions, I have experienced situations where certain things were not permitted to be said or to happen because they were seen to be against the way the wind was blowing at a given place and time. I was actually in one situation where the director of a program was insisting on preventing a qualified speaker from presenting because of that speaker’s background. He finally told me: “Listen, I have children and a family to support, and I cannot put my job at risk even though I agree in principle he should speak.” Could I ask him to endanger his family? Needless to say, that speaker did not deliver his talk. This occurs on both the left and the right, which is why the term “woke” is at best incomplete.

I mention this to adduce a key reason why this kind of situation so often occurs. It is not necessarily personal adherence to an ideology. It is fear of retribution from one’s colleagues and administrative superiors, masquerading as fealty to one set of ideas or another. The noisy minorities expressing grievances to advance their interests (at both ends of the political spectrum) not only yell louder than the silent majority, but they threaten the spirit of free inquiry on which Western academic life has for centuries been based. If it lasts, this is a sea-change.

A View from the Gulf - Part 3 of 3

As noted in the previous post in this series, the UAE has reoriented itself away from the Global North and toward the Global South, in particular Africa. There is a military aspect to this: the emirates have been active in the Yemen conflict, dwelt in the murk of post-Qaddafi Libya, and picked a side in the renewal of Sudan’s civil war. None of these adventures have gone well and enthusiasm for them among UAE officials is distinctly muted. The UAE is “much more geoeconomics than geopolitics,” according to Dr. Narayanappa Janardhan, director of research and analysis at the Anwar Gargash Diplomatic Academy in Abu Dhabi. Economic engagement is viewed as strategic. Janardhan saw the US and China as having wanted to keep the focus on geoeconomics but being unable to sustain it, slipping back instead into geopolitics. The UAE, by contrast, aims at both strategic autonomy and strategic ambiguity, a process without an end: “We are not looking at conflict resolution anymore,” Janardhan said, “but at conflict management.”

Because the Global North has somewhat withdrawn from geoeconomics in favor of security-led geopolitics — and with nearly all the northern economies, including across East Asia, at or near demographic stagnation — the UAE’s turn to the Global South is a strategic one. The exception to it is the US, which the UAE continues to see as useful for security reasons but which it mainly values as a prosperous economy uniquely able to develop new technologies. The US’s position is not altogether solid, however: there is strong resentment in the UAE at the questioning by the Committee on Foreign Investment in the US (CFIUS) of the UAE-controlled tech investor G42’s proposed stake in US-based AI chip developer Cerebras. (The UAE is obsessed with AI, mainly for demographic and post-carbon reasons.) CFIUS’s move was quintessentially geopolitical. The fear is that Cerebras technology would leak to China via the G42 channel. This is just the sort of geopolitical blockage of UAE growth and development that the emirates is struggling to avoid.

The Global South seems simpler. The UAE puts India in a privileged role. Janardhan stressed the importance of the India-Middle East-Europe Economic Corridor (IMEC), which reaches from Piraeus across Israel, Saudi Arabia and the UAE to Mumbai, and I2U2 (launched 2022), which links Israel and India with the US and the UAE. India is not far behind China as a UAE trading partner, and is followed by Africa. India anchors the UAE in shifting the center of economic gravity from the G7 (US, Japan, UK, France, Germany, Italy, and Canada) to the E7 (China, India, Indonesia, Brazil, Russia, Mexico, and Turkey), the latter having already surpassed the former in economic size. 

The India-dominated non-alignment of the 1950s and 1960s centered on not taking sides in economic ideology, political philosophy, or the nuclear strategic balance, with the main goal being peace. The non-alignment being pursued by the UAE and India today is centered on not allowing economic growth to be hampered by … economic ideology, political philosophy, or the nuclear strategic balance. The goal is not so much peace as prosperity. In conversations around the dramatic changes in Syria, one even heard it said that “instability is good for us.” That is perhaps too cynical. What is clear is that the UAE sees itself as a stable node at the midpoint of several networks and corridors of trade that it is determined to strengthen: between the Chinese Belt and Road and Africa, between India and Africa, between India and the EU, linking the Gulf and Iraq with Turkey and the EU and building ties between the UAE, Iran, and Russia. The UAE’s power and prosperity lie precisely in its ability to privilege trade over politics. As point 3 in Sheikh Mohammed bin Rashid Al Maktoum’s 8 principles of Dubai reads, “Dubai does not invest or involve itself in politics, and does not rely on politics to ensure its competitiveness.” But it can also only have so big a domestic market with just 10 million people who already have the region’s highest per capita food consumption rates. India is the missing piece. It signed the first of the UAE’s Comprehensive Economic Partnership Agreements (CEPAs) in 2022. There have been more than 20 since then, at various stages of ratification. All in the context of what is called the retreat from globalization.

It can be difficult to see from the US or Europe, but there is a genuine re-alignment of global trade and investment flows in favor of the Global South. For many decades, development of the Global South has been framed by a discourse of imperialism followed by uneven development and a morally urgent redistribution. But the Global South revival being led by the UAE and India (among others) has almost no moral inflection at all as it is occurring between and among former colonies. The point is growth, without further attempts to settle imperialist accounts. Western investors can definitely benefit from understanding this and finding opportunity in it: thus the soaring attendance at Abu Dhabi Finance Week, and the genuine plausibility of labelling “the capital of capital” what was a quiet and isolated emirate just a generation or two ago.