The New Geography of Semiconductors

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

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

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

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

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

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

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

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

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

Trade and the US Presidential Campaign

One of the less heralded political-economic transformations of the past decade has been the shift from a bipartisan consensus for free trade to a bipartisan consensus against it. This was not due to any change in economic thinking; professors continue to teach the logic of comparative advantage. Rather, it was mainly due to a political reaction against income inequality and deindustrialization in wealthy democracies combined with fears of Chinese weaponization of international dependence on Chinese production. The current presidential campaign is being portrayed in apocalyptic terms by both sides. Yet on the critical question of how the United States interacts with the global economy there is an identifiable bipartisan center that is likely to grow.

Donald Trump’s aggressive use of tariffs as president was criticized by Democrats and most economists, but many of those tariffs were kept under President Biden. Biden’s use of industrial policy to direct federal resources at helping certain US industries do better in international competition was itself a variant of the “economic nationalism” that Trump had advocated, but one that involved spending tax dollars rather than imposing costs on imports and thereby on consumers. The Biden administration’s recent imposition of 100% tariffs on Chinese electric vehicles, while symbolic — Chinese electric-vehicle sales in the US are negligible — continues the theme of imposing costs on imports.

In his campaign, Trump has doubled down on promising to implement tariffs, even saying that he would use them to replace some types of tax as government revenue. Such proposals have alarmed Republican officials as well as Democrats. 

Kamala Harris’s position is difficult to locate. In public statements before becoming vice-president, she vigorously attacked what she called “Trump’s trade tax” which resulted in “American families spending as much as $1.4 billion more on everything from shampoo to washing machines” and “farmers in Iowa with soybeans rotting in bins, looking at bankruptcy.” At the same time, she stressed that she wanted trade deals to “protect American workers” and to address climate change. Her opposition on these grounds to NAFTA, USMCA (NAFTA’s replacement, negotiated under Trump) and the Obama-negotiated Trans-Pacific Partnership (TPP) was, taken as a whole, unusual for a Democrat of generally mainstream views aspiring to national office.

Harris did not work directly on trade issues as vice-president. The Indo-Pacific Economic Framework (IPEF) is the only Biden-era international agreement that has embodied the types of environmental initiatives that Harris has praised. She supported it in Thailand in 2022. While it is unclear how much priority would be given to it under Harris, the reality is that multilateral trade talks are popular among American allies but not Americans. The leading examples are the Asian Regional Comprehensive Economic Partnership (RCEP, led by China); the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); and the IPEF.

The CPTPP is a particularly egregious example, given that it was a US initiative until President Trump withdrew. (Hillary Clinton, in her campaign against Trump, distanced herself from the pact.) Democrats had perceived the political power of Trump’s economic nationalism and tacked in his direction. Ever since, there has been little domestic political support for re-engaging with the TPP. Yet the US-brokered past has lived on, its membership including such key US allies and trading partners as Japan (which picked up leadership when the US left), Australia, Canada and, in 2023, Britain.

Harris will at least be less likely than Biden to ignore or downplay such multilateral talks as those that are ongoing for the IPEF. But Harris needs working-class and union voters, who tend to distrust international trade, and she and Tim Walz have green commitments that are not easy to honor in trade deals. Harris is unlikely to declare new tariffs although she might continue existing ones, such as on EVs and their components. Her environmental and jobs priorities will find positive expression in continuing Biden’s industrial policies, with their strong green and strategic anti-China aspects.

Trump’s prioritization of tariffs is likely to be tempered in office. In addition, he does not have Harris’s environmentalist commitments and he was, after all, the last president to bring in a major trade deal, the USMCA.

Whoever is in the White House, that agreement will be due for a review in July 2026. Measured by the growth in US trade deficits with Mexico and Canada, the USMCA cannot be reckoned a great success. Yet the bipartisan consensus on trade and industrial policy suggests it will be celebrated anyway.

Are We Already in World War III?

By Dee Smith

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

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

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

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

Is this realistic?

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

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

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

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

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

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

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

Private Fusion Takes Off

US-led Western policies aimed at the technological and, in effect, commercial isolation of China — exacerbated by China’s ongoing cooperation with Russia despite sanctions over its invasion of Ukraine — have created a situation in which leading-edge innovation is becoming fragmented in both the private and the governmental spheres. This is inherently inefficient. Yet it is also spurring state investment at new levels, such that the overall effect, over the medium term, could well net out as positive. Nuclear fusion is a particularly interesting example that merits a closer look.

Fusion has always seemed five years away, rather as Brazil has proverbially been called “the country of the future … and it always will be.” (The unkind line is attributed to De Gaulle.) But as the US-China dynamic has become an enduring feature of geopolitics investment in fusion has increased dramatically, particularly in terms of public-private partnerships.

The main global fusion project since the 1980s has been the International Thermonuclear Experimental Reactor, known as ITER. Born from a meeting between Ronald Reagan and Mikhail Gorbachev and based in southern France, ITER has the US, China and Russia among its permanent members. Each member state contributes some particular part of the central project, a reactor based on the tokamak method. There is no practical way to excise one or another ITER participant. Sanctions against Russia for invading Ukraine have so far not dislodged Russia from ITER, although its participation has been controversial since the invasion.

ITER illustrates a type of international cooperation typical of the Reagan-Gorbachev era and now apparently a thing of the past. However, the swift decline of globalist cooperation has been matched in the fusion sector by a growth in government financing, private investment and public-private partnerships. Public funding, according to a new report from the Fusion Industry Association, went from $271 million in 2023 to $426 million in 2024 so far, or roughly half the private share of $900 million. (Funding to date is on the order of $7 billion.) The US, EU, British and Japanese governments have all shown significantly increased interest in working with private fusion companies. ITER itself is turning more toward private partnerships. Meanwhile the Chinese government continues to prioritize fusion work in government labs, universities like Tsinghua, and the (Chinese-style) private sector.

The growth of the fusion industry is a demonstration of how private-sector approaches differ from governmental ones. Tokamak is just one of several leading technologies for fusion, and companies are placing a wide variety of bets on various technologies, any one of which could prove to be the winner. The number of private fusion companies has doubled in the past six years. Some major companies, like Shine (US, $800 million in funding to date), are working to develop viable revenue streams, such as producing Lutetium for cancer treatment, while keeping an eye on the moonshot of clean, cheap energy. Others, like tiny Terra Fusion, also in the US, are startups pursuing one particular technology that they hope will be the breakthrough. Roughly half of fusion companies are in the US. Globally, most fusion companies have university and defense partners — in the US case, the national labs (managed by the Department of Energy, as their earliest priority was nuclear power) and the Department of Defense.

There is also significant US participation from ARPA, one of many echoes of the Internet  development process of the 1970s. (The earliest Internet was the ARPAnet.) Unlike in that era, geopolitical fears are now combined with climate change.  Fusion promises an end to carbon-based energy systems. However inefficient it might be to have politically structured private sectors, it could also prove to bring a technological solution to climate change sooner than would otherwise have been the case.

Vance Notice

This post was published on Friday, 21 June, two days before President Biden renounced his candidacy for reelection.

The current high level of partisanship in the media, even the business press, has made it difficult at best to find objective analysis that favors neither party. For example, former President Donald Trump’s announcement of J.D. Vance as his running mate was generally met with a certain dismissiveness. The Economist’s midweek newsletter read: “Mr Vance will not swing many votes. A 39-year-old articulate anti-globalist, anti-big business, anti-immigration, pro-worker, MAGA enthusiast, he does little to broaden Mr Trump’s electoral appeal.” SIG’s analytical view is that Vance will indeed broaden Trump’s appeal to working-class, lower-middle-class, and non-white voters. Trump has been steadily taking these formerly core Democratic constituencies into his column since the 2016 campaign. And in a number of states they could very well make the difference between a Trump presidency and a Biden (or Harris) one.

Trump’s remarks at the convention Thursday night included an appeal to “every citizen, whether you are young or old, man or woman, Democrat, Republican, or independent, Black or White, Asian or Hispanic,” and in the previous days convention-goers had heard from a Muslim woman offering a prayer in Arabic, a black pastor, and a variety of non-white lawmakers and officials. The Republicans’ big-tent approach began in the campaign of the younger George Bush but Trump has steadily extended it. He did better in 2016 with nonwhite voters than Mitt Romney had four years before, and somewhat worse with white voters as a whole. Trump also could not have won without taking some Obama voters away from Hillary Clinton. Trump did noticeably well with working-class and less-educated voters. Those two groups, of course, contain a great many non-white voters. Given the national white majority and the realities of racial discrimination, working-class politics and non-white politics have often been treated as highly distinct and even antagonistic. Trump seemed to be following a different path.

Biden and the Democrats, meanwhile, were losing their once solid hold on the non-white vote. In 2012, Barack Obama carried the non-white working class (non-college-educated) by 67 points over Romney. In 2020, running against Trump, Biden carried the same demographic by just 48 points. By February 2024, one reputable poll was finding that Biden’s margin had slipped to 6 points: 47 percent to 41 for Trump. The same poll found that white and non-white voters without college degrees were converging in their views on the respective qualities of Biden and Trump and on the state of the economy. Indeed, non-white voters in this category were slightly less likely than their white counterparts to feel that Biden’s policies had benefitted them.

The Democratic party has long prioritized the non-white vote as such. What seems to be happening is not that Biden and the Democrats are losing non-white voters so much as losing working class-voters, among whom non-whites are disproportionately represented. (A 2024 poll found that 55 percent of non-whites identified themselves as in the lower or working classes, compared to 36 percent of non-Hispanic whites. The white-non-white ratio in the US is roughly 60-40.) At the same time, Democrats’ association with prioritizing the non-white, and particularly the black, vote might also have led some less-educated whites to back Trump. Both lines point in the same direction.

Trump’s working-class support is a principal reason why he is doing well against Biden in polls. In Virginia, for example, Biden has gone from a 10-point margin in 2020 to 3 points in recent polls, and possibly less. Trump, meanwhile has seen his margin of the Virginia working-class vote grow from 6 points in 2020 to 24. In the battleground state of Pennsylvania, Trump’s lead among likely working-class voters has doubled over the same period. Nationally, Trump carried the working-class vote by 4 points in 2020 and now is polling at a 17-point margin or above.

Trump and Republican officials know all this, and the party platform, which Trump had a decisive hand in shaping, reflected it. The platform was noticeably less strong than in the past on fiscal rectitude, more supportive of Social Security and Medicare, more emphatic about creating jobs (particularly in manufacturing) and less emphatic about abortion. These new positions are all in line with data about working-class policy preferences.

This waxing working-class and non-white Republican constituency is the large target at which J.D. Vance is aimed. His convention speech on Wednesday was preceded by an introduction from his nonwhite, Hindu wife, Usha Chilukuri Vance, a child of immigrants, who went on to take a seat next to Trump. Vance then gave a speech squarely focused on promoting Trump and the party as ardent defenders of the American working class against their enemies foreign and domestic. His biography enabled him to do this with a believable passion that Trump has not been able to reach. But more than that, Vance brought to bear the skills of a correspondent and public-affairs specialist (his position in the Marines), an undergraduate student of political science and philosophy, and a successful author (Hillbilly Elegy). (Usha Vance studied history as an undergraduate at Yale then went on to get a history MPhil from Cambridge as a Gates scholar.) Vance was able to position his working-class story within a 250-year narrative of patriotic struggle. He referred repeatedly to his family’s graves on a hillside in Kentucky, generations of poor ancestors whom he expected to join, and whom he expected his family — the Vances have two sons, Ewan and Vivek, and a daughter, Mirabel — to one day join as well.

Vance brings a distinctive and potentially quite powerful kind of patriotic narrative in support of the years-long trend of growing working-class and non-white support for Trump and his party. That trend in turn is likely to be decisive in this year’s contest. Among the many implications for investors are the solidification of industrial policy and protectionism in the world’s most important economy, government prioritization of onshoring and the preservation of the existing social safety net.

After the New Cold War

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

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

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

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

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

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

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

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

Our Age of Political Nostalgia

By Dee Smith

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

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

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

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

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

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

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

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

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

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

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

The European Union's Right-Wing Future

Elections for the European Union’s parliament more than confirmed predictions of a nationalist rise and of a decline in support for environmentalist parties. The initial reaction was nonetheless one of shock, a reaction compounded by French President Emmanuel Macron’s surprise decision to dissolve the National Assembly and force an election as a sort of referendum on French extremism. (“The rise of nationalists, of demagogues, is a danger for our nation but also for our Europe, for France’s place in Europe and in the world,” Macron declared.) News cycles being what they are, there then followed a calming line of argument that emphasized European Commission President Ursula von der Leyen’s insistence that “the center is holding.” Finally, the argument was made that the center might be holding for now but the mainstream political groupings that provide that center need to change course now, before the political support for European union really does decline.

SIG’s view is that the European parliamentary election results fundamentally reflect the victory of economic concerns over moral ones. The project of European unity has always had a moral proposition at its core: that nationalist competition within Europe leads to war, and therefore European unity is a project of peace. European unification since the 1940s has been animated by a sense that it was morally superior to all the political alternatives. For a number of reasons, that sense of moral direction is being lost.

One reason is the structural problem of democratic representation. The “democratic deficit” of the European Union and its predecessors has been a chronic complaint that has been ameliorated in various treaties but cannot be entirely resolved. National governments are more truly representative and therefore more legitimate than the delegations each member state sends to Brussels/Strasbourg.

The political response to this has been twofold. The first response is to reject the EU as unrepresentative and unaccountable and revive the nation-state as the best available alternative. Alice Weidel, of the German party Alternative für Deutschland (AfD), put it with characteristic bluntness: “We’ve done well because people have become more anti-European.” AfD recorded its best performance yet in European elections, moving into second place ahead of Germany’s current governing party.

The second response has been to increase the power of the European Commission and its president, that is, to increase the power of the European executive. On the face of it, this would seem to be the opposite of democratic: the empowerment of a very indirectly elected president and of commissioners approved by her after being proposed by national governments. But the rise of the Commission was in response to a strongly felt political need, during the 2007-08 financial crisis and the euro crisis that followed, for there to be greater power in Brussels. This was not a reward for Brussels’s political successes. Rather it was a response by the European political class to the inability of national governments to solve the financial crisis on an individual basis — and to the realization that if Brussels were not strengthened Germany, because of its economic dominance, would come uncomfortably close to being master of Europe. Then-Chancellor Angela Merkel shepherded a process by which German power was both acknowledged and contained within the reforms of the 2009 Treaty of Lisbon. Since 2019, President von der Leyen, who rose to prominence as a long-serving member of Merkel’s government, has enlarged the Commission’s effective power, pushing forward policies on the environment, defense, technology, competition policy, foreign policy, agriculture, the euro, and much else. Her presidency has made the EU more effective and thereby more worth voting about. The turnout last week was the highest in 30 years. In that quite real sense, the democratic deficit is shrinking.

However, if the European Union has become more responsive to voter needs since 2019 and a more plausibly effective companion to member states’ national governments, it has also become a prosecutor of war (in Ukraine), raised the barriers to immigration, and utilized regulatory, competition and other industrial policies as weapons against, principally, the US and China, though also Russia. In short, the EU is losing that sense of peace-loving, internationalist moral distinction that differentiated it from the patriotic model of nationalism it was invented to replace. The EU is becoming a center-right power tolerant of illiberal identitarian and economic policies and engaged in war.

The consensus opinion has been that the European parliamentary elections were a struggle between a morally legitimate, internationalist center and a demagogic, nationalist right surging upward from the murk of history. What seems more likely is that the EU is becoming a political manager for a European nationalism that can be relatively at ease with the sub-European nationalisms currently thriving in Germany, the Netherlands, Austria, Italy, Belgium and France. Austria aside (and adding Luxembourg), that has been the core group of European unification since 1951. It may prove to be the core of a right-leaning Continent.

Re: Re-globalization

Two substantial articles this week argued, in different ways, that ‘de-globalization’ is an indiscriminate and misleading term. What we are truly entering is a period of ‘re-globalization’. The First Law of Punditry is to always contradict, and contradicting those who speak of de-globalization is true to pundit tradition. De-globalization has indeed been frequently used over the past few years, along with subsidiary terms such as de-linking, de-risking, friend-shoring, and near-shoring. It may well have had its season. With ‘re-globalization’, we could be witnessing the rise of a new analytical cliche from the husk of an old one. SIG’s view, however, is that de-globalization still has room to run

In Foreign Affairs, the economist and former senior Biden official Brad Setser argues, under the commanding headline ‘The Dangerous Myth of Deglobalization’, that US-China de-linking has mainly resulted in lengthier supply chains for US imports: Chinese components have to travel longer as they detour through Vietnam, Malaysia, and Mexico on their journey to American markets. As he underlines, China’s manufacturing exports in general have risen under so-called de-globalization, spectacularly so in electric vehicles and other sectors that have been the focus of Chinese industrial policy. Setser also emphasizes that corporate tax avoidance, by US multinationals in particular, has proved to be a resilient form of capital globalization despite recent regulatory initiatives. These two examples lead him to conclude that deglobalization ‘offers analysts a simple story to tell’ but ‘the reality is more complex’, a conclusion that is inevitably true: reality is always reliably more complex than any one-word descriptor.

In World Politics Review, Roland Benedikter has advocated for ‘re-globalization’ as a more accurate term that escapes the disadvantages of de-globalization. His argument has three main contentions: that the pro-globalization alliance of neoliberal capitalism and ‘leftist cosmopolitanism’ has been broken in favor of economic nationalism; that autocratic non-Western states are leading a charge against globalization that feeds on and encourages a revival of non-alignment in the global South; and that globalization depended on the military umbrella of American power. The umbrella, he maintains, is being withdrawn by American unwillingness to continue paying for it, the determination by China and others to challenge it, and the displacement of it by economic, political, technological, and military competition in space, from low-earth orbit to the moon and beyond.

Setser’s two main points and Benedikter’s three are all well made. Several will be familiar to SIGnal readers. None benefit much from being shoehorned into a debate over the proper definition of de-globalization (Setser) or the substitution of a new term like re-globalization (Benedikter), but they all have the virtue of drawing attention to how subtle and complex the ongoing reconfiguration of political and economic internationalism actually is.

SIG’s view is that de-globalization continues to be a useful shorthand term for describing that reconfiguration, but it is only a shorthand, a point of departure rather than a destination. The main factor remains the re-emergence of states as economic actors maximizing their autonomy on behalf of their respective peoples, most often ethnically and culturally defined. This phenomenon is consistent across democratic and un-democratic societies, rich and poor ones, ex-imperial states and ex-colonial ones. It can probably be dated from the Asian financial crisis of 1997, when China showed that state management of international capital flows was not a first step on the road to serfdom. The triumphal period of the US-led post-Cold War liberal international order then amounts to the six years from 1991 to 1997 — not notably long.

The principal counterforces remain the diffusion of technology and education, the cross-border movement of people (driven principally by economic inequality, at one end, and demographic stagnation or decline at the other), and the mobility of capital in terms of both investment and the securing of profits (very much including offshore). None of this is necessarily liberal or orderly. Globalization and de-globalization are twin forces in a single dynamic that does not resolve into one or the other. ‘Re-globalization’ is a valiant attempt to be neither here nor there, but the reality it confronts is both at once.

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Paying the China Price

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

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

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

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

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

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

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

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

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

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Latin Risks Rising

Five years ago, the head of a major think-tank in the US could credibly say that “there are no geopolitics in Latin America.” But that not-for-attribution remark has become steadily less true ever since. Latin American economic prospects are now shaped by both regional inter-state tensions and broader geopolitical currents, not least the U.S.-China rivalry (see SIGnal, “Green Protectionism,” 25 April 2024). For now at least, investors have to accept that non-market considerations will have deep effects in some major Latin American economies.

The 2015 discovery of significant offshore petroleum reserves in territorial waters claimed by Guiana and Venezuela reignited a disagreement more than a century old. The Esequibo region, which holds around 15 percent of Guiana’s population but makes up more than two-thirds of its territory, has been in dispute since before 1899: the Paris Arbitral Award then designated it part of Guiana, but Venezuela never agreed. Late last year Venezuela held a referendum that designated Esequibo its 24th state. Venezuela’s move could well lead to armed conflict.

Meanwhile, more than 8 million Venezuelans have left the country in the past decade due to dire economic and political conditions. Many have fled to neighboring Colombia, whose citizens resent expenditures on refugees by the Colombian government even though many refugees are Colombians who fled to Venezuela during Colombia’s decades of insurgency and civil conflict.

Ecuador was until quite recently a safe country for residents and visitors alike. But in the last few years, suppression of drug smuggling through Colombia resulted in the opening of a route across northern Ecuador to the Pacific, and from there to the US and Europe. This has plunged the entire country into a violent spiral, and Ecuador is now one of the most dangerous countries in the world — due entirely to exogenous, transnational factors.

As social guardrails have been eroded across the region by the decline of religion and social institutions, the movement of populations into large cities, and by the resulting splintering and estrangement of family structures, the social prohibitions against violence and crime have also eroded.

The weakening of Latin American institutions has sometimes been worsened by democratization. The PRI (Institutional Revolutionary Party) held power in Mexico for 71 years, until 2000. The PRI had an informal deal with drug cartels formed in the 1970s to satisfy increasing illegal drug demand from the US. If the cartels did not let their violence leak into Mexican society, the government would leave them alone. As cynical as it was, the arrangement kept something of a lid on social violence in Mexico.

When Mexico became fully democratic with the election of the PAN (National Action Party) in 2000, the deal collapsed. This was in part because the PRI apparatus that had managed it was gone. Mexico had no independent civil service; most everyone in government was part of the PRI. When the “PRIistas” left, the arrangements and relationships that had controlled violence left with them. Elaborate anti-gang campaigns and the militarization of Mexican policing have had little positive effect. The number of gangs has increased, as has their violence. In Brazil, by contrast, gang consolidation and “professionalization” seem to have contributed to a reduction in violence.

Many of the conflicts in the region are attracting players like China, Russia and Iran — a major arms supplier to Venezuela. These countries have an interest in the oil markets, whether as consumers (China) or fellow producers (Iran and Russia). Chinese technology firms, increasingly frozen out of Western markets and facing strong competition in Asian ones, value Latin America. Chinese consumers depend on Latin America for foodstuffs from soybeans to cherries, fish and beef, the great majority coming from Brazil, Mexico, Chile, Peru and Colombia. As the foreign policies of China, Russia, Iran and others consolidate and harden around a core narrative of anti-Americanism, the United States, obsessed by migration, has been steadily losing political power in the region.

Yet the natural resources of Latin America are becoming more and more vital to the US, in an era of the weaponization of strategic resources like critical minerals (e.g. lithium), of nearshoring, and of decoupling from China and Russia, in particular.

Latin America’s strategic importance is likely to grow, but the US has not sufficiently cultivated the relationships that would allow “win-wins” with countries in the region. The US should change course on this while there is still time.

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Trump 2024: What's in it for Modi?

In September 2019, more than 50,000 Indian Americans traveled to NRG Stadium in Houston to attend a rally in support of two of the world’s most prominent nationalist politicians: Prime Minister Narendra Modi and then-President Donald Trump. Modi modified his own 2014 campaign slogan for the occasion, proclaiming “Abki baar, Trump sarkar!” In other words, “This time, a Trump government!”

It seemed a natural political marriage between two bombastic campaigners who had overturned the political establishments of their respective countries largely through an innovative combination of aggressive social media campaigns, ethno-nationalist rhetoric, and thinly veiled antipathy to Islam. The event’s potential to benefit Trump’s cause was clear: in the offing was a possible infusion of support for his candidacy among a growing population of Indian Americans. Modi’s interest in joining the controversial and capricious Trump onstage was less obvious. He chose to associate himself very publicly with an American president whose popularity has never overwhelmed the Indian electorate, whose policies never favored India, and whose victory in the 2020 elections was by no means assured. It was far out of character for an Indian PM not only to take a public position on the domestic politics of another country, but to insert himself into a foreign election in support of a particular candidate. The move earned him tepid praise from Indian political commentators and, although one hears little else than acclaim for Modi’s India from Washington today, could not possibly have earned him any favor with the Biden administration.

Biden and Modi are aware that the geopolitical and macroeconomic logic pulling India and the US into a strategic embrace is inexorable. The embrace has thus far manifested in several cooperative initiatives between the two states since Biden took office in January 2021. The most notable has been the initiative on Critical and Emerging Technology (iCET), which aims to promote bilateral cooperation in areas from defense technology innovation to semiconductor supply and higher education. As Americans prepare to vote in another presidential election in November, investors in Indian industry would do well to consider what might become of the burgeoning partnership between the two countries if Trump were reelected.

The price of Modi’s endorsement appears to have been Trump’s tacit approval for the Citizenship Amendment Act of 2019, which made eligible for Indian citizenship all Hindus, Sikhs, Buddhists, Jains, Parsis, and Christians who fled to India from persecution in Afghanistan, Bangladesh, and Pakistan before December 2014, with the notable exception of Muslims. The Act was part of a series of legislative measuresdesigned to threaten the citizenship of Muslims in India who, like much of the native-born population of India, have little or no legal documentation of their citizenship. In keeping with Trump’s transactional style of diplomacy, the quid pro quo between the two leaders does not seem to have extended any further than this simple exchange. Both men are committed to protectionist trade policies that discourage foreign competition in many sectors of their respective economies. Under Trump, a skilled-worker visa program that had long allowed foreign workers (roughly 75% of whom were Indian) to live and work in “specialty occupations” in the US was suspended in April 2020 by presidential decree. The suspension was allowed by President Biden to expire in April 2021. The Republican-sponsored CAATSA (Countering America’s Adversaries Through Sanctions Act) began in mid-2019 to impose heavy sanctions on companies and countries that continued to import oil from Iran. India, as Iran’s then-second largest buyer of oil, was no exception, despite Modi’s personal and ideological alignment with Trump. Political amity was similarly insufficient to allow their administrations to agree the terms of a promised US-India trade deal, or even the “mini-deal” that was promoted in its place when it became clear that a comprehensive deal could not be hammered out. Despite Modi’s talk of taking the US-India relationship “to new heights” with Trump, evidence suggests that Trump’s two immediate predecessors did far more to advance that relationship, and that his successor has gone to still greater lengths to embrace India. A shared contempt for Islam and liberal hegemony is not, it would seem, an adequate substitute for sustained diplomatic efforts made in earnest pursuit of mutually beneficial cooperation.

Trump has been uncharacteristically consistent in his willingness to treat US commitments abroad as political hostages, holding aid, security commitments, climate agreements, and arms control treaties over the heads of US allies and adversaries alike in an effort to appeal to his isolationist base. If reelected, he might well hold hostage the fruits of Biden’s efforts to build a lasting structure for American cooperation with India. He might decide to treat India’s increasing access to American capital, technology, and manufacturing contracts under Biden as a privilege to be revoked at his pleasure, with few domestic consequences for his administration and many for Modi’s. The iCET is not part of Trump’s personal legacy and might well be considered disposable. India’s position as a regional counterweight to China makes it indispensable to American strategy in the Indo-Pacific, but even as President, Trump never confined his role to the pursuit of US interests abroad. Indeed, he often acted against them. In the announcement of his plan to impose a universal 10% tariff on all imports to the US, and in Modi’s ever-louder emphasis on Indian self-reliance, we can see that the indiscriminate protectionism that left a US-India trade deal dead in the water is alive and well.

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The Dystopia Fund

The pessimistic worldview reached a new stage this week as the Economist declared that “the liberal international order is falling apart.” SIGnal readers will already be familiar with this idea, but for the Economist to adopt it might reasonably be taken as a sign of the Apocalypse. Meanwhile, the distinguished demographer Nicholas Eberstadt showed at length in Foreign Affairs what a profound demographic crisis East Asia is facing — another SIGnal theme, underlined this week at a desperate press conference given by South Korea’s President Yoon Suk Yeol in which he announced the formation of a Ministry of Low Birth Rate Counter-planning. It was a bad week for optimists, but perhaps the right time to think about a Dystopia Fund.

Macro short-selling is usually done on a national basis, by betting on (or against) currencies. A Dystopia Fund would look to sectors and sub-sectors that would be likely to benefit from long-term negative trends. Humans, even investors, tend to be optimistic, but reality is not. This creates a sort of information disparity that can be exploited.

Last week’s post looked at artificial intelligence in this context. AI, potentially, provides a way for problems of demographic decline to be compensated for by increased productivity within a given national market. The national is important: states large and small have registered that while technology-enabled globalization did indeed bring many tens of millions of people up from poverty, it was driven not by charity but by the extraordinary profits and monopolies that accrued to the companies, overwhelmingly Western, that produced the technology. Now that incomes have grown and capital has accumulated in countries from Saudi Arabia to Singapore, states want to harness technology to grow their own economies and keep wealth in domestic markets. AI promises to do that in that it can increase productivity despite declining populations and, perhaps, poor local education systems.

Other Dystopia Fund targets could be in travel and entertainment for the very old, a growing demographic. Various forms of nostalgia would be investable. Great sums of money in recent decades have gone into market research on people in prime consumer age ranges. Not so much money has gone into understanding elderly consumers. The market-research firm that embraces demographic decline would be worth backing.

An aging population puts transport innovations like self-driving cars into a different light. Most transport systems are only friendly to people who can walk and drive. Companies designing systems for the elderly will find their consumer market steadily increasing. By the same token, tele-medicine, home drug delivery, home medical-testing, and other services for the home-bound will also find growing markets. Working from home, despite its many disadvantages, will provide a way to keep older people active in the job market as the (traditional) working-age population shrinks.

Parag Khanna has led the way in identifying regions that will do relatively well out of climate change — a perfect Dystopia Fund sector. Khanna sees climate-driven emigration as something to be optimized for rather than bemoaned, for the simple reason that it is inevitable. Technologies that can extend the habitability of currently populated areas would be another way to approach the challenges of real estate in a changing climate.

One frequently cited reason to regret the demise of the liberal international order is that challenges like demographic shrinkage and climate change are on such a scale that they would benefit from international coordination. While that is certainly true, liberal internationalism’s vitality has been rooted in optimism, whereas what might be needed now is investment strategies based on a pessimism that accepts the profundity of climate and demographic change and their effects on the status quo. 

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AI Family Values

Theories of economic growth do not deal well with demographic decline. How can an economy with ever fewer consumers and producers still grow? Artificial intelligence, looked at a certain way, is an attempt to answer that question. Worries about AI taking jobs are somewhat misplaced. The opposite would probably be worse: shrinking, ageing societies unable to replace lost labor.

AI anxiety usually flourishes in wealthier, industrialized societies. So, for a change, consider Saudi Arabia. It intends to invest $40 billion in AI, which would make it a world leader. Amazon has announced $5.3 billion in AI and data center investments in the Kingdom. Nearby, Microsoft is putting $1.5 billion into a joint venture with Abu Dhabi firm G42, which would also involve the use of Microsoft’s Azure data-center platform. Why such levels of investment?

Yes, there is a geopolitical aspect. Chinese companies dominated the mobile-infrastructure wave of investment in the region in the early part of this century. China’s security-related firms, often banned by the U.S., thrived in the Middle East. Chinese firms used these ties to move into data-center construction. When, sometime late in the Obama administration, the U.S. realized that a great deal of digital real estate was being settled by a hostile power — and that a great deal of American tech capacity was being exiled along globalization’s supply chains — a reaction set in. But even that, by itself, was not enough to get U.S. tech giants investing in the pokey market of data centers in less-developed countries. AI is what made the difference, because AI, in its current configurations, depends on massive, non-latent computing power. The Internet temporarily freed data from physical constraints. AI is helping bring it back to Earth. This happens to coincide with governments’ unquenchable desire to control citizens’ information, in every sense.

But more important is what may be called the gender aspect. To an often underappreciated degree, women are driving technological change. While female workforce-participation rates vary greatly among countries, they have generally been going up for decades, while fertility has gone down. Birth-control technology has been absolutely critical to this change, but its availability and use are social phenomena, driven by choices. The Gulf Arab countries have seen steadily declining fertility rates for years now, along with an easing of prohibitions on the education of women and their participation in the workplace.

In many countries, female workforce participation — greatly enabled by birth control as well as home labor-saving technologies — made productivity and consumer-demand gains possible when male workforce numbers stagnated. In Western countries in particular, there was a sort of internal labor migration from the home to the wage-based workplace. The economic benefits can top out, however — and waged productivity’s gain is fertility’s loss.

Internet-enabled globalization made a second renewal of growth possible. Much like the movement of women into the workforce, globalization put developed-world capital in a position to increase productivity by bringing new labor into the workforce, especially Chinese labor. But this was done at a distance, with laborers outside the home markets of the highly developed economies. Globalization had enormous benefits for even the poorest rich-world consumers, but it did not necessarily make the poor more productive.

AI has the potential to restore bounded, domestic productivity. That makes it intensely attractive to a wide variety of societies, all of which are facing demographic slowdowns or  reverses but have the domestic capital to invest in technological solutions to what is, in the end, a question of power and social cohesion. This is emphatically not about human capital. The Gulf Arab states, despite their wealth, do not have high levels of citizen education such as you find in East Asia or Europe. Saudi Arabia imports human capital, whether laborers or surgeons. About 40% of its population is foreign. Saudi Arabia is a de facto nation of immigrants, but it is not understood as such because it does not expect that 40% of its population to become Saudis. The Saudi state is certainly not worried about AI taking jobs from Saudis. What the Saudi state aims at is achieving the domestic productivity mix that will make it possible for Saudi Arabia to be Saudi, in whatever way the Saudis themselves might define it. Globalization was not especially good for that. Female workforce participation is, as long as it doesn’t undermine “being Saudi.” AI might be even better: in effect, a set of tools for enhancing the productivity of domestic human capital and thereby providing growth without undermining the Saudiness of Saudi, the Japaneseness of Japan, or the Chineseness of China.

AI, then, can be seen as compatible with de-globalization, or more precisely with a decentralization of capital productivity, very much including human capital. It could, in short, enable an increase in domestic production despite a decrease in reproduction.

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Green Protectionism

Geopolitical competition seems to be leading away from the greening of global production. Major players like China, the European Union, and the United States are all trying to spur green industries like electric-vehicle production in their own territories and with their own companies. Taken as a whole, this has the effect of stimulating production and innovation, which should be beneficial for the planet. But it also raises prices by directing capital to redundant production, and it establishes a kind of green protectionism that seems certain to have unforeseen consequences. Successful investing in an industry whose major players include several antagonistic and powerful state entities is difficult at best.

The most interesting recent development has been the US decision to pressure Mexico not to welcome Chinese investment in electric-vehicle production. Mexico has, of course, benefitted from US-China competition in that companies like Tesla, Samsung, and Nissan have shifted production away from China to Mexico as part of global de-risking. Note that Samsung and Nissan are not US companies. The great appeal of Mexico apart from its workforce is proximity to US consumer demand. By pressuring Mexico to keep Chinese EV companies like BYD, Chery, and SAIC at arm’s length, the US is using the size of its consumer market as a political weapon in foreign policy. The policy goal is to deprive Chinese companies, private or not, of markets. (BYD is private, Chery and SAIC state-owned.)

The European Union has been doing something similar, having become alarmed last year at the growth of European demand for Chinese EVs and the barriers erected by the Biden administration to European companies prospering in the US market. Europe’s car manufacturers don’t want to lose their future domestic market to Chinese competitors. Biden moves to protect US domestic EV production deprived the Europeans of a crucial export market at the same time that Chinese manufacturers were selling high-quality EVs to European drivers at a 30% discount to European prices. These political-economic factors have combined on the Continent with a growing distrust of Chinese tech companies and China — rather, the Chinese Communist Party — more generally. The EU raid this week on Nuctech, a Poland-based Chinese scanner manufacturer long held in suspicion by Western China analysts, was made on economic grounds but has a strong security aspect as well.

Many Chinese argue that the root of these EV conflicts is that Chinese companies are simply better. Europeans and Americans counter that Chinese EV companies are state-backed, which is certainly true, such that the competition is unfair. None of this is wrong exactly but it misses the macro point: the major Western economies embraced extended global manufacturing supply chains and China did not, with the result that China now has innovative vertically integrated large-scale manufacturing companies that can compete globally. Because so many of those supply chains ran through China, the US and the EU are playing catch-up, and they are weaponizing their own consumer populations as well as alliances (as with Mexico) to do so.

One result is likely to be chronic high prices for North American and European electric vehicles, which means (in the absence of Chinese imports) a slowdown in EV adoption — which is already occurring. That in turn means a slowdown in carbon reduction. China’s aggressive, state-led pursuit of green industries was driven, to a great extent, by a desire to innovate out of a global climate crisis that has hit China quite hard. China’s pre-eminence in solar panels was initiallya responseto German rules on energy efficiency that could not be addressed with European products. But US-China competition has now transformed an environmental policy into something that has anti-environmental results. One can hope that all this duplicative effort will result, over the long term, in electric-vehicle and other green industries that will be able to expand around the globe and save the planet. But picking winners in such a roiling political environment is very hard, as Tesla’s investors will have been reflecting this week.

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Networks of Confrontation

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

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

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

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

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

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

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

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Dealing with Corruption: Part Four of Four

By Dee Smith

In the first 3 parts of this post, I discussed the nature and history of corruption in non-Western cultures and in the modern West.

Whatever we in the West tell ourselves about the “objectivity” of our institutions, a great deal of life still operates in terms of familial and friendship connections, affinity with like persons, membership in groups (from criminal gangs to professional and religious organizations), and reciprocal obligations. This is the result of human evolution. As we evolved in small societies of like individuals based on trust, outsiders were seen as untrustworthy at best and often presumed to be enemies unless proven otherwise. In many cultures, they still are. Group belonging and identity in all its forms is one of the constants across cultures and time.

There have been many concerted efforts to change these embedded practices. For example, “legacy” admissions of students at universities in the US have recently come under attack as being unfair (which they are). Sweeping efforts are being made to eliminate them, but it is likely they will change only in form, not in substance.

Corruption in Africa, the Middle East, South and East Asia, and Latin America has been profoundly influenced by European conquest and colonization. As an example (and to vastly oversimplify): Latin America was mostly colonized by the imperial powers of Spain and Portugal, and their fundamental goal was to extract wealth and send it back to the regent. The British colonization of India, in contrast, was for centuries managed by a private enterprise, the East India Company, and the goal was to enrich shareholders back in the homeland.

Enriching shareholders in the homeland was also sometimes the goal in North America, for example with the Hudson Bay Company. In many cases, however, North America was settled by individuals and small groups (who were not state-sanctioned), often from the lower rungs of society, fleeing religious and other persecution, and seeking to create a new life in a “new world”—essentially by seizing it from its inhabitants. The goal of these colonists was to produce material prosperity for themselves, in their new homes, not to send it back to the motherland. The legacy of those very different goals informs social realities in Latin America and North America, respectively, to the present day.

Corruption, as we have seen, is a complex issue, and trying to understand it is a monumental task. Generally, it is over-simplified to the point that the descriptions correspond little with the actuality. And all too often, it is simply a blame game where “I’m right and you are wrong.”

From a practical standpoint, what is a Western businessperson to do when confronted with corruption in Africa, Latin America, or anywhere? Lecturing people from other cultures about “their” corruption is very bad form and therefore often bad for business. Furthermore, as we have seen, corruption is equally present in the West—it just works in a different direction—and much of the pronounced culture of corruption that exists in such countries is a legacy of the colonial and commercial goals of the Western powers that colonized these countries and extracted their wealth.

On a practical basis, for many reasons—legal, ethical, moral, or financial—a businessperson from the U.S., the U.K., or many other Western countries simply cannot engage in activities that their own jurisdiction defines as illegal corruption, however endemic it may be in a country in which they are working.

My advice is threefold: first, do your homework and make sure before you initiate talks with a potential partner that they do not represent an individual, family, company, or other party known for egregious corruption. Stay away from those.

Second, be very well informed in advance of what specifically is defined as corruption in the laws of your country, of the country where you are operating, and of the countries in which your investors or other partners are based. All are crucially important.

Third, if and when you are confronted by corruption, the best procedure is legalistic. Something like the following is a good approach: “I simply cannot do that or anything associated with it. It is against the law in my country. If I did it, it would threaten my ability to continue to do business, and quite possibly threaten my personal freedom.”

In that way, you are not “calling out” anyone, you are not making a value judgement of right or wrong, and you are not on a high horse criticizing anybody’s culture. You are simply drawing a bright-line around what you can and cannot do—a bright-line required by the legal regime of your country.

And then, if you have to, you need to be willing simply to walk away.

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Dealing With Corruption: Part Three of Four

By Dee Smith, CEO

The 18th century European Enlightenment made the West quite distinct in terms of intellectual, social, economic forms, even WEIRD:  Western, Educated, Industrialized, Rich, and Democratic, as the phrase goes.  In parts one and two of this series, I looked at how corruption in many non-Western societies has been structured by “social pyramids” that link the high and low of a specific social group in mutual obligations, including cooperation in securing political power in order to succeed economically. This structure I contrasted to that of the post-Enlightenment West, where corruption uses money to get political power. I then argued that Western rules-based social orders, which made it possible to separate corruption from the social pyramids, are breaking down. One way to look at the rise of identity politics in the West is as the re-emergence of kinship- and identity-based structures similar to those of societies structured by social pyramids. The implications of this for society and for the evolution of corruption will be substantial.

Nineteenth-century European and North American societies, as they industrialized and previously rural people were forced to compete for survival in fast-growing cities, came to depend on science, technology, and eventually modern education. These societies developed distinctive hierarchies to manage their growing complexity, increase productivity, and compete with rival societies. Complex hierarchical structures were very different from the old social-pyramid hierarchies, although the two long existed side-by-side and in some ways still do. One difference was that they required social mobility and the possibility of advancement by merit. Dynamic merit-based hierarchies gradually replaced the social-pyramid hierarchies and developed merit-based elites.

“Merit” was and is a social relation, changing over time according to social demand. Imperial China’s merit-based examination system for civil servants rewarded expertise in classics of Chinese literature, rather as Britain’s elite educations emphasized classical Greek and Latin. When social demand for very different kinds of merit strengthened, these systems had to adapt or die, particularly as societies like Japan and the newly unified Germany quickened their pace of industrialization, militarization and social engineering.

Merit-based modern societies create a particular kind of private anxiety in that the creation of open opportunities for personal advancement puts the burden of failure, as well as success, on the individual. The protectiveness  of social pyramids, as well as of mass participation in collective religious rituals and a shared spiritual life, could not survive the rise of merit-based hierarchical societies. The old social pyramids had cared for the people within their structures through a sense and practice of reciprocal responsibility. Modern societies deracinated this—each person is on his or her own. Official, bureaucratic systems now “care” for those who, because of nature, nurture, or accident, cannot care for themselves. Everyone else is homo economicus.

“Economic man” and societies based on competition and maximal efficiency dominated the 20th century to such a degree that almost everything was seen to operate in terms of economic “laws.” Yet markets are human constructs, and we forget that at our peril. The disruptions and anger we see in societies today may be connected to this in more ways than one.

Market-based maximal efficiency undermines social structures in part because it directs capital to technologies that themselves lead, unpredictably, to social transformation. More than 80 percent of unemployment in manufacturing in the US in the last 2 decades is due to automation, not to offshoring (whatever politicians may say). With the rise of generative AI, we face a tsunami of unemployment, coming now for white-collar employees. As Yuval Noah Hariri has noted, we are living for the first time in history without any real idea at all of what jobs will look like in 10 years! What’s a young person—or anyone—to do? People feel profound uncertainty about change that does not seem to have an identifiable logic or purpose but is nonetheless pushed forward relentlessly by developments in technology, from dependence on cyber systems and their vulnerabilities, to bio-error and bio-terror, to generative AI and the possibilities of Artificial General Intelligence.

In such an environment, people long for connection to something meaningful and concrete. They long for stability.  “I don’t even recognize my own country any more” is a phrase I have heard all over the world, in societies very distinct from one another. People thus seek kinship, identity, and affinity with others who share their culture, concerns, maladies, and even bloodlines. And if they do not have a community offline they will find one online, with results that, over the past decade, seem to have been more negative than positive.

It is possible that these changes represent not partial revolutions, as in 1848, nor even the kinds of anti-capitalist revolutions seen in the first half of the 20th century, which were also built around homo economicus. The changes to come may represent a more profound transmutation, into a system (or systems—the outcomes may be very different from place to place) whose nature we cannot, at present, see. If large numbers of people decide their future looks worse than their present—which many perceive as already worse than their past—they may decide that the systems and rule sets and leaders they have been living under are no longer serving their needs. That they are no longer fit for purpose.

And then what? Will we see the rise of a revised form of social pyramids with internal obligations, because people do not feel they can rely on government promises and systems, and do not like the isolation and radical uncertainty that modern life forces upon them? Will the nature of corruption in the West begin (again) to resemble that of the non-Western world? Or will we see something entirely new?

The New Anti-Imperialism

Through Western eyes, anti-imperialism might appear to be an anachronism. Didn’t the empires pack up and go home half a century ago? If so, then what is anti-imperialism against? There is an increasingly stark divide between those who think the post-imperial era is well along and those who think it is just beginning. Whichever side of this divide one is on, the political salience of anti-imperialism in West Africa and the Sahel, from Senegal’s Atlantic coast to Niger’s eastern border with Chad, cannot be denied. Niger decided days ago to eject the United States, having done the same with France late last year. Senegal meanwhile elected on Monday a young former tax inspector whose populist party has built its politics around distancing the country from France, the former colonial power. Imperialism may be dead, but anti-imperialism is thriving.

This is a political reality, and in politics there is always ample room for cynicism. The military governments in Mali, Burkina Faso and Niger are not led by angels. (Chad and Sudan are under military government as well, as is Guinea.) Expectations for sound governance, fiscal prudence, gains in health care and education, or democratic accountability should be kept very low. Nonetheless, these governments are not unpopular. They are seen as an appropriately tough response to an extremely difficult security situation as killings and kidnappings, usually by Islamist groups, have continued. French and American counter-insurgency aid was initially welcomed by many but was not the solution hoped for. The price paid in sovereignty (and military autonomy and accountability) was too high. Western military assistance came to be seen as neo-imperial.

Sovereignty, and something quite intangible having to do with respect, are the keys. All three countries, after all, have at the same time ejected France and the U.S. while seeking to pool their sovereignty, as they choose, in a tripartite security alliance against insurgent groups and while welcoming military aid from Russia, in particular. It is very hard to think of Russia as respectful of sovereignty, at least when it comes to neighbors. So all three nations are demonstrably willing to compromise their sovereign room for maneuver if it is necessary to get them closer to their security goals. They just won’t compromise it for powers perceived as imperial or neo-imperial.

Russia, along with China and even Iran — Niger’s willingness to sell uranium to Iran was a major source of friction with the U.S. — is successfully building its soft-power brand as anti-imperialist. This would seem like madness to a Ukrainian, a Pole or a Taiwanese, or indeed to those in larger states who have been the object of Russian, Chinese and Iranian extra-territorial cyber-attacks and information operations. Yet it is a political reality. Russia backs up its talk with hard power, China with investment — and some hard power as well. They are increasingly the anti-West, and that clearly has appeal.

Happily, this week’s presidential election in Senegal was a victory for democracy against authoritarian moves by the now departing incumbent. Yet much of the new government’s appeal comes from its anti-imperial politics, including agitation against “economic enslavement” by resource-extractive multinationals. The new president’s party made a point of advocating the adoption of a national currency and exit from the CFA currency area, seen as a relic of French colonialism. The CFA franc is pegged to the euro and backed by the French treasury. Replacing it has long been an anti-imperialist touchstone in the region.

And yet: incoming president Bassirou Diomaye Faye has already downplayed the CFA pledge and is most likely to continue backing replacement of the CFA by a regional currency (the Eco) shared by the 15-member Economic Community of West African States (ECOWAS) and scheduled to be launched in 2027. Something similar will probably get in the way of a plan mooted by Niger’s ruling general last month to create a post-CFA currency for Niger, Mali and Burkina Faso as “a first step toward breaking free from the legacy of colonization.”

In short, anti-imperialist sovereignty may be absolute but real sovereignty is relative. As in the 1960s and ‘70s, pan-Africanism, in doses small or large, is seen as the means for successfully blending sovereignty, dignity and survival – even prosperity.

The Networks Trap II: Disrupting a U.S.-led System

What could destabilize the emerging geoeconomic framework based on tech networks and alliances? An earlier post (“The Networks Trap,” 6 March 2024) examined how, as one result of the U.S.-China contest, the international system is dividing into two separate and distinct spheres for tech innovation, telecommunications, and military technology. In both the Chinese and American spheres these three sectors are being protected so that American technology will not be in Chinese networks and vice versa. Security alliances in particular, but also political alliances, are increasingly shaped by an emerging type of technological exclusivity. Most of the world would rather not have to choose between one tech ecosystem and another, but the viability of tech non-alignment seems to be weakening. “The Networks Trap” considered this in terms of Southeast and South Asia, where there are flourishing economies, strong domestic tech ecosystems, long-standing wariness of Chinese and American power, and a tradition of non-alignment. The post concluded that tech non-alignment will not be easy to maintain in the region and that the U.S.-led tech ecosystem was likely to prevail in competition with China’s own, even in China’s backyard.

What could disrupt this solidifying geoeconomic pattern?

One potential disruptor is India, which has pursued a technology-development path that avoids dependence on China or the U.S. India learned many lessons from China’s experience building an indigenous tech sector, including that if you welcome foreign venture capital it will come, but once foreign money and expertise have helped you build domestic capacity it might be best to unwelcome foreign capital except under conditions determined by the domestic private sector and the state. (It is perhaps an irony that much of the capital India welcomed and then unwelcomed was from China itself.) India learned from Europe that simply burdening foreign (American) technology with regulations gave no guarantee that domestic entrepreneurs would seize their opportunities. Like most countries, India has neither China’s technocratic relentlessness nor Europe’s high-end purchasing power. After decades of poor results, non-alignment is finally paying off for India. In principle, it could serve as a third-way model to others, such as Nigeria, Indonesia, and Brazil, and this could undermine the U.S.-China-driven tech-telecoms-security alignment currently under way.

However, India’s security worry is not the United States. It is China and its ally Pakistan. India’s security relationship with the U.S. keeps getting tighter, despite very considerable wariness on both sides. What India covets, as the U.S. well knows, is defense technology sharing and joint R&D — as distinct from arms sales. This gives the U.S. leverage to bring India into its networks and even its tech-innovation ecosystem. China’s comparative ability to do this is very weak. India will continue to seek non-alignment but the trend will nonetheless be toward stronger ties to the U.S.

A second potential disruptor of U.S.-China tech bipolarity is South Korean and Japanese dependence on tech exports. South Korea, Japan, and the United States are growing closer in terms of the tech innovation, telecommunications, and security triad. (The Center for a New American Security will release a report on this next week.) The difficulty is that South Korea and Japan, as aging and immigration-resistant societies with thin resource bases, rely on technology exports for growth at just the time when the U.S. is attempting to locate or relocate as much high-tech production to home as it can. This dynamic occurs with European tech powers and Taiwan as well. One partial solution is for these tech economies to relocate production into the U.S., satisfying the U.S. security requirement for production within American sovereign territory while retaining the earnings — in effect, an internationalization of U.S. production that also makes it possible for Japan, South Korea, and the rest to sell into the U.S. market without difficulty. But U.S. preference will still go to U.S. companies, as the extraordinary subsidization of Intel ($8.5 billion in grants and potentially even more in loans) shows. Powers like South Korea, Taiwan, Japan, and Germany cannot hope to be non-aligned in the way India aspires to be, but all these relationships will need to be sensitively managed on all sides, especially the American side. The economic fruits of a U.S.-led tech alliance cannot go disproportionately to the U.S. or its companies.

There are other potential disruptors. China and Chinese tech companies could extend their established practice of selling into markets too unremunerative (much of Africa and Latin America and parts of Asia) or ethically too dodgy (MENA) or both (Central Asia) to appeal to American, Korean, and Japanese tech companies. That would give China a significant advantage. Another possibility is that cybersecurity will become too difficult to maintain across a large number of semi-allied American partners, resulting in resentment of the core — say, the Five Eyes plus Japan, Taiwan, South Korea and some Europeans — by the periphery and political weakness throughout the network.

But the greatest threat is probably an American inability to share either power or wealth. The U.S. is currently engaged in developing defense-production partnerships around the world. The immediate spur has been the Ukraine war: even the Europeans and the Americans together have struggled to keep production at the necessary levels to meet official commitments to Ukraine. Their defense industrial capacity has barely been up to it. The reason is not a lack of military manufacturing capacity per se. Rather it has to do with the downsides involved in the allocation of that capacity to military purposes, which economists generally understand as among the least productive of economic activities: If you manufacture an automobile, it will be used by its purchaser for a variety of purposes that will themselves be economically significant; if you make a tank, its one purpose will be to destroy value, if it is ever used at all. Defense contractors are therefore peculiar animals, protected by states, and enjoying preferential relationships and long-term contracts, in exchange for the preservation and refinement of industrial capacity to provide the arms a state might need to ensure its survival. But in most cases they are a drag on overall productivity, which is why states are often quite happy to buy arms rather than divert resources to producing them.

So for economic as well as political reasons the U.S. does not want to be sole supplier to Ukraine or others. Instead, the U.S. hopes to broaden defense supply chains, seizing what Assistant Secretary of State for Political-Military Affairs Jessica Lewis called “a once-in-a-generation opportunity to transition countries off Russian-origin equipment, improve NATO interoperability, promote transparency and accountability in security sectors, and strengthen our defense industrial capacity.” (Lewis’s Bureau of Political-Military Affairs handles approval of foreign weapons sales.) By “our” Lewis meant European allies, although she went on, in this December 2023 speech, to identify a similar dynamic in Asia. But is it politically or economically possible to internationalize U.S.-allied defense production? Can such an expansion be secure, in cyber and other terms? Will U.S. defense companies be willing to share the risks and profits of production with overseas partners? Will Congress, which determines the contours of defense spending, be willing to let them?

As the international system divides into two separate and distinct spheres for tech innovation, telecommunications, and military technology, one dominated by the U.S. and the other by China, the process has many potential disruptors. The greatest is that the U.S. will be unable to manage this new and untried variety of internationalism.