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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