The World Health Organisation says it needs urgent safe passage to send supplies as people are ‘dying unnecessarily from a lack of water and medical care’.
President Biden and other world leaders have called on Egypt to open the border known as the Rafah crossing as tonnes of aid piles up.
Sam Fenwick discusses this and more business news from around the world with Tony Nash, chief economist at Complete Intelligence, in Texas, and Rachel Cartland, author, writer and expert on Hong Kong.
With CI Markets Free, our goal is to democratize financial insights. We believe that everyone should have access to powerful forecasting tools, enabling them to make informed decisions that align with their financial goals.
Ask our guests today who join us from Hong Kong and Houston, Texas. Good evening to Tony Nash, CEO of Complete Intelligence. It’s an AI forecasting firm, so you should be quite well-placed to talk to us about chips and AI.
Absolutely, yes. Thank you for having me.
It’s always good to have you on the show, Tony. Thank you for joining us. I want to just come to Tony Nash on this. As we say, Joe Biden arriving in the region on Wednesday had planned meetings with Jordanian which have now been canceled, also had a meeting with President Abbas of the Palestinian Authority and President CC of Egypt, all of which have been postponed according to the White House. What do you think Mr. Biden will want to achieve from this visit now?
I think the biggest thing that Biden wants to achieve is the release of American hostages. And if that’s all that can be coordinated, then that’s a major win. It looks very good for the domestic population in the US, and it brings American citizens free and clear from this conflict. I really think that that’s the main priority for Biden’s visit at this moment.
Okay, thank you, Tony Nash. Let’s bring in Tony Nash. He’s the CEO of Complete Intelligence, and it’s an AI forecasting firm. He’s based in Houston in Texas. As we said, this policy has been in place 12 months. Do you think it has done anything more than just annoy chip makers in the United States?
NVIDIA says that they comply with the laws that are in place, and they’ve already said that any announcement they made today really won’t have a meaningful hit on their business.
Although their shares nose-dived, and lots of other chip companies did the same.
Yeah, they did. There was an estimate that it would hit about $100 billion for their business. It’s really unclear, but they’re a regulated company, they have to comply with what are called ITAR regulations, which is International Technology Regulations that the US government puts out. The real issue here is, will NVIDIA chips be used for Chinese military applications? That’s really what the US government is worried about. And so there are a thousand ways to circumvent the regulation, ship into a third country, all these sorts of things. So it’s not as if the chips won’t get into China. There have been ways to circumvent these regulations for hundreds of years. So they’ll find a way to get them. The real question is, will they get them at the scale that they want them?
We talked about this time, 12 months ago, we were having the conversations about why this policy had been brought in. And it seemed to be, prior to this, it had been about keeping China and the technology 20 years behind the advancements of the US. And now the policy had changed and they wanted to stop all advancements completely, just cut them off. It doesn’t sound like it’s working from what you’ve said.
I don’t think anybody expects China’s advancements to stop completely, but I think having the state-of-the-art technology shipped into China to be placed in Chinese military equipment when China has been threatening Taiwan, they’ve been making other threats, the US has been threatening China, these sorts of things, of course, you want to hamper your adversary as much as you can. I think this is just normal technology regulation, export controls. Whoever has the leading edge technology wants to control the leading edge technology. Will China continue to develop its chips? Yeah, absolutely. Are they behind what NVIDIA is producing? Yes, they are. Will it take them a few years to catch up? Yeah, it’ll take them 5-10 years to catch up. But I think over time, China will definitely catch up with where the US is. It’s just going to take some time.
Now, apparently, NVIDIA was selling an A-800 and an H-800 type of chip, and they were able to do that because it went around the original ban, and then now those have been banned. Will it be that these chip companies will just make a chip that isn’t covered by the ban, and then the government will change the goalpost again?
Well, that’s the way it works, right? That’s how regulatory arbitrage works. So NVIDIA will look to the letter of the law and conform a chip to match the letter of the law. And then if the trade regulators in the US want them to change, they’ll change. These types of regulations change pretty regularly, and technology companies have to adjust their output according to what the regulators say. This sounds extreme. It’s actually not extreme because there are ITAR regulations, technology export control regulations in most countries. It’s just because it applies to AI-specific chips that it’s really getting this level of attention.
Let’s talk to Tony Nash first. What do you make of this plan? Do you think it could rival the Panama Canal?
Yeah, absolutely. I think it’s a great plan. I live in Texas, which is on the US border with Mexico. I think this railway plan is fantastic. There is already a lot of electronics manufacturing moving from Asia to Mexico to service the US. I think three years ago is the first year in 20 years that the US imported more televisions from Mexico than from China. So televisions are pretty straightforward to assemble now. And so more and more sophisticated electronics is moving to Mexico. What your guest said about obviously transiting things across Mexico, but also manufacturing things in Mexico, I think that’s very much on the table, especially as we see more trade regionalization and manufacturing regionalization.
Is that because of what we’re calling nearshoring, this thing that occurred during the pandemic?
That’s right. Exactly. Similar. So the risks of having a majority of your manufacturing concentrated, I think Northeast Asia makes 35, 40 % of the world’s manufacturing goods. And so during the pandemic, we saw all the supply chains lengthened because they were bottlenecks. Whereas if we had had those, whether they’re in, say, Eastern Europe or for Europe or Mexico for the US or something like that, I think it reduces a lot of that transit risk for a lot of people. And I think East Asia is probably facing some reinvestment over the next, say, 10 years because that nearshoring or regionalization is a real… It’s definitely on the horizon.
What was interesting, Tony, is that Benjamin there was talking about investors from the US being interested in building that original rail line a century ago.
Yes, and obviously, the US was very instrumental in building the Panama Canal as well. The US is very interested in developing Mexico and developing Central America. It doesn’t surprise me that that was the case 120 years ago. It doesn’t surprise me that that’s the case today.
Tony, there were concerns or have been concerns about what’s known as debt trap diplomacy, that if you borrow money off China, then they will somehow have you over a barrel. Has that come… That still a worry for the US, do you think?
For the US? Not necessarily, but certainly for African countries. I remember speaking with African representatives probably six or seven years ago, talking to me about how can they restructure their debt for the Belt and Road. The really strange part about the Belt and Road is it’s fully financed in US dollars. We have a time right now where the US dollar is appreciating. Not only is that debt at a relatively high rate, I wouldn’t say it’s sky high, but a relatively high rate, but you have it in a currency that’s appreciating against most emerging market currencies. It’s very difficult for companies to pay back or countries to pay back. I think one of the things about Belt and Road that really isn’t covered that much is the Belt and Road peaked in 2017 and 2018. The funding that you have going into the Belt and Road today is about a fifth of what you had in 2017 and 2018. Construction projects like the transport construction projects that you highlighted, those things all happened in 2013 through 2018, really. The largest portion of investment coming out of Belt and Road right now today in 2023 is for mining. It’s not construction, it’s investment.
When you look at what’s tabulated as Belt and Road investment, it’s really Chinese money going into mining worldwide.
Just gives us time at the end of the show to ask our two guests who’ve joined us today, Rachel Cartland and Tony Nash. What are your side hustles? Rachel, you tell me what you’re earning money from.
What’s your side hustle? I’m retired. My husband is constantly reminding me that I’m busy all the time, but with nothing that brings in a dollar, although I have endless voluntary commitments, which are great things to do. I think it’s what they call a portfolio, isn’t it? -bits and pieces of things –
-rather than a side hustle.
-it sounds very satisfying. Tony Nash, do you have time for a side hustle when you’re doing your AI forecasting?
I make time, Sam. I have to make time. So I run an AI company during the day. On the weekends, I have my own coffee roastery called Nerve Roaster, and I sell coffee as my side hustle because it’s what I love.
You love drinking coffee?
You love drinking coffee?
I love roasting coffee, so I sell roasted beans.
Fantastic. I had no idea, Tony. You are a man of many talents. Thank you very much for joining us on Business Matters. And thank you also to Rachel Cartland, author, writer, and expert on Hong Kong. That was Business Matters. Thank you so much for listening. My name was Sam Fenwick. The producer today was Hannah Malane. I’ll be back the same time tomorrow. Don’t join me if you can.
Ukrainian media outlet Obozrevatel on Saturday published an article arguing China is “not happy with” Russia-led troops arriving in Kazakhstan and has been “hiding its irritation.” Despite how astonishing such rhetoric is, the article went on to say China has a strong tool to make Russians leave Kazakhstan – refusing Russian athletes to participate in the upcoming Winter Olympic Games.
The argument echoes some US analysts, such as Tony Nash, CEO of Houston-based AI platform Complete Intelligence, who on Friday tweeted, “I wonder if Kazakhstan could be where Russia and China start to part ways.”
The argument is inconceivable. Kazakhstan has been maintaining good ties with both China and Russia, and a stable situation there is something both Beijing and Moscow are happy to see.
Chinese State Councilor and Foreign Minister Wang Yi made clear the stance of the Chinese side during a call with Kazakhstan’s Foreign Minister Mukhtar Tileuberdi on Monday. Wang said that recent turmoil in Kazakhstan shows the situation in Central Asia is still facing severe challenges, and once again proves that some external forces do not want peace and tranquility in the region. Wang went on to say that China was willing to jointly oppose interference and infiltration of any external forces.
Chinese Foreign Ministry spokesperson Wang Wenbin expressed a similar attitude last week, “China supports all efforts that will help the Kazakh authorities to restore calm as soon as possible and firmly opposes the acts by external forces to deliberately create social instability and instigate violence in Kazakhstan.”
Given Ukraine’s past contradictions with Russia, some Ukrainians are taking advantage of the chaos in Kazakhstan, trying to play China and Russia off against each other. Westerners are even more eager to see China and Russia “part ways.”
But in terms of the situation in Kazakhstan, and the larger region – Central Asia, the common interests between China and Russia surely outweigh their divergences.
For Russia, Kazakhstan is not only a member of the Commonwealth of Independent States, but also a member of the Eurasian Economic Union and the Collective Security Treaty Organization. For China, Kazakhstan is not only a member of the Shanghai Cooperation Organization, but also a crucial part of the China-proposed Belt and Road Initiative (BRI). Be it promoting regional economic and trade cooperation, preventing Western forces from infiltrating or stopping the “three evils,” namely terrorism, separatism and extremism, China and Russia have a large range of common interests and consensus in the region.
The US has been establishing or funding tens of thousands of nongovernmental organizations (NGOs) in Kazakhstan. An important reason is that Kazakhstan is located between China and Russia, the two main US competitors. As Kazakhstan is a relatively newly independent country, the US believes its forces can help develop US influence quickly there.
Kazakhstan’s recent unrest is unanticipated. It was a very stable country. The reasons behind the turbulence are complicated, and domestic contradictions are likely to be the main reason. However, we can notice the role of Western NGOs as well.
When Western media outlets cover the situation, they like to hype that Russia is consolidating its so-called sphere of influence and they accuse Russia of sending troops into Kazakhstan.
However, the Russian military was deployed together with the CSTO Collective Peacekeeping Forces, following the principles of the CSTO and the request of Kazakh President Kassym-Jomart Tokayev. There is nothing wrong with Russia’s act.
The Western accusations don’t hold any legal ground.
Kazakhstan will trend toward stability in the future. In addition to regional security issues, anti-terrorism and stopping the “three evils,” both China and Russia can play a large and positive role in Kazakhstan’s reconstruction after this turbulence.
The security of neighboring countries, especially the security along the BRI routes, is a part of China’s overall security. This is also the case for Russia.
In terms of the Ukraine issue, the dispute between Russia and NATO has already been fierce. Likewise, the tension in the Taiwan Straits has never eased. There is still a lot of room for China and Russia to continue to meet regional security challenges cooperatively.
In this second part, Mike Green explains what will happen to Europe if China invades Taiwan. Will the region be a mere audience? Will it be affected or not, and if so, how? How about the Euro — will it rise or fall with the invasion? Also, what will happen to China’s labor in that case, and will Chinese companies continue to go public in the West?
This QuickHit episode was recorded on December 2, 2021.
The views and opinions expressed in this What happens to markets if China invades Taiwan? Part 2 Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
TN: So we have a lot of risk in, say, Northeast Asian markets. We have a lot of risk to the electronics supply chain. I know that this may seem like a secondary consideration. Maybe it’s not.
What about Europe? Does Europe just kind of stand by and watch this happen, or are they any less, say, risky than any place else? Are they insulated? Somehow?
I want to thank everyone for joining us. And please, when you have a minute, please follow us on YouTube. We need those follows so that we can get to the right number to reach more people.
MG: No, Europe exists, I would argue, as basically two separate components. You have a massive export engine in the form of Germany, whose core business is dealing with China and to a lesser extent, the rest of the world. And then you have the rest of Europe, which effectively runs a massive trade deficit with Germany. I’m sorry. Germany is uniquely vulnerable in the same way that the corporate sector is vulnerable in the United States. That supply chain disruption basically means things go away.
They are also very vulnerable because of the Russian dynamic, as we discussed. In many ways, if I look at what’s happened to Germany over the past decade, their actions on climate change and moving away from nuclear, away from coal into solar, et cetera, has left them extraordinarily dependent upon Russian natural gas supplies. It’s shocking to me that they’ve allowed themselves to get into that place. Right.
So my guess is that their reaction is largely going to be determined by what happens with Russia rather than what happens with China. Right. In the same way that Jamie Diamond can’t say bad things about China. Germany very much understands that they can’t say bad things about China.
Europe, to me, is exceptionally vulnerable, potentially as vulnerable as it has ever been in its history. I agree. It has extraordinary… Terrible way to say it. I don’t know any other way to say it, but Europe basically has unresolved civil wars from 1810, the Napoleonic dynamics all the way through to today, right. And everybody keeps intervening, and it keeps getting shoved back down into a false equilibrium in which everyone pretends to get along, even as you don’t have the migratory patterns across language and physical geographic barriers that would actually lead to the type of integration that you have with the United States, right.
Now ironically, the United States are starting to see those dynamics dramatically reduce geographic mobility, particularly within the center of the country. People are becoming more and more set in their physical geographies, et cetera. Similar to the dynamics that you see in Europe, which has literally 100,000 more years worth of Western settlement and physical location, than does the United States. But they’ve never resolved these wars. Right.
And so the integration of Europe has happened at a political level, but not at a cultural level in any way, shape or form. That leaves them very vulnerable. Their demographics leaves them extraordinarily vulnerable, the rapid aging of the populations, the extraordinarily high cost of having children, even though they don’t bear the same characteristics of the United States, but effectively the lack of land space, et cetera, that has raised housing costs on an ownership basis, et cetera. Makes it very difficult for the Europeans, and they have nowhere else to go now. Right. So the great thing that Europe had was effectively an escape valve to the United States, to a lesser extent, Canada, Australia, et cetera, for give or take 200 or 300 years, and that’s largely going away. Right.
We are becoming so culturally distinct and so culturally unacceptable to many Europeans that with the exception of the cosmopolitan environments of New York City and potentially Los Angeles, nobody wants to move here anymore. Certainly not from a place like Europe. I think they’re extraordinarily vulnerable.
I also think, though, that they’ve lost sight of that because they’re so deeply enjoying the schadenfreude of seeing the unquestioned hegemony of the United States being challenged. Right. It’s fun to watch your overbearing neighbor be brought down a notch. Right. You tend not to focus on how that’s actually adversely affecting your property values in the process.
TN: Sure. Absolutely. So just staying on Europe, what does that do to the importance of the Euro as an international currency? Does the status of the Euro because of Germany’s trade status stay relatively consistent, or do we see the CNY chip away at the Euros, say, second place status?
MG: Well, I would broadly argue that the irony is that the Euro has already peaked and fallen. Right. So if I go back to 2005 2006, you could make a coherent argument that there was a legitimate challenge to the dollar right.
Over the past 15 years, you’ve seen continual degradation of the Euro’s role in international commerce, if I were to correctly calculate it, treating Europe as effectively these United States in the same manner that we have with the US, there’s really no international demand for the Euro. It’s all settlement between Germany, France, Italy, et cetera.
If I go a step further and say the same thing about the Chinese Yuan or the Hong Kong dollar, right. They really don’t exist in international transactions. To any meaningful degree. The dollar has resumed its historical gains on that front. Now that actually does open up a Contra trade.
And I would suggest that in just the past couple of days, we’ve seen an example of this where weirdly, if the status quo is maintained, the dollar is showing elements of becoming a risk on currency as the rest of the world basically says some aspect of we’re much less concerned about the liquidity components of the dollar, and we’re much more interested in the opportunity to invest in a place that at least pretends to have growth left. Right. Because Europe does not have it. Japan does not have it. China, I would argue, does not have it. And the rest of the world, as Erdogan and others are beginning to show us, is becoming increasingly dysfunctional as a destination for capital. Right.
Brazil, perennially the story for the next 20 years and always will be right. Africa, almost no question anymore that it is not going to become a bastion for economic development going forward. And we’re broadly seeing emerging markets around the world begin to deteriorate sharply because the conflict between the United States and China creates conditions under which bad actors can be rewarded. Right.
If I sell out my people, we just saw this in the Congo, for example, if I sell out my people for political influence, I can suddenly put tons of money into a bank account somewhere. Right. China writing a check for $20 million. It’s an awful lot of money if I’m using it in Africa.
TN: For that specific example, and for many other things, the interesting part is China is writing a check for $20 million. Yeah, they’re writing a check for €20 million. They’re not writing a check for 20 million CNY. It’s $20 million. All the Belt and Road Initiative activities are nominated in dollars.
So I think there’s a very strange situation with China’s attempt to rise, although they have economic influence, they don’t have a currency that can match that influence. And I’m not aware, and you’re such a great historian. I’m not aware of an economic power that’s come up that hasn’t really had its own currency on an international basis. I’m sure there are. I just can’t think of many.
MG: Well, no. I mean, the quick answer is no. You cannot project power internationally unless effectively the tax receipts of your local population are accepted around the world. Right? Broadly speaking, I would just highlight that the way I think of currency is effectively the equity in a country right now. It’s not a perfect analog, but it’s a reasonable analog. And so, what you’re actually saying is the US remains a safe haven. It remains a place where people want to invest. It remains a place where people believe that the rule of law is largely in place. And as a result, anyone who trades with the United States is willing in one form or another to say, okay, you know what? I can actually exchange this with somebody who really needs it at some point in the future.
I think one of the reasons that we tend to think about the dollar as having fallen relative to the Euro or the CNY is we have a very false impression of what the dollar used to be. Right. So we tend to think about the dollar was the world’s reserve currency following World War Two and everything happened in dollars. Right.
People forget that half the world, certainly by population, never had access to dollars, never saw dollars. There was a dollar block. And then because of their refusal to participate in Bretton Woods, there was a Soviet ruble block and then ultimately far less impactful things like a Chinese Yuan, et cetera. But the Soviets, for a period of time, had that type of influence. They could actually offer raw materials. They could actually offer technology. They could offer things that had the equivalent of monetary value to places like Cuba, to places like Africa, to places like South America, et cetera. China right.\
That characterized the world from 1945 until 1990. Right. I mean, the real change that occurred and really in 1980 was that Russia basically ran out of things to sell to the rest of the world, particularly in the relative commodity abundance that emerged in the 1980s after the 70s, their influence around the globe collapsed.
And I think the interesting question for me is China setting up for something very similar. Right. It feels like we’re looking at a last gasp like Brisbanev going into Afghanistan, right. And oh, my gosh, they’re moving out and they’re taking over. Well, that was the end. They make a move on Taiwan. And I think a lot of people correctly point to this. It’s probably the end of China, not the beginning of China.
I just don’t know that China knows that it has an alternative because it’s probably the end of China, regardless.
TN: Sitting in Beijing, if you bring up any analogues to the Soviet Union to China in current history, they’ll do everything to avoid that conversation. They don’t want to be compared. Is Xi Jinping, Brezhnev or Andropov or. That’s a very interesting conversation to have outside of Beijing. But I think what you bring up is really interesting. And what does China bring to the world? Well, they bring labor, right. They’re a labor arbitrage vehicle. And so where the Soviet Union brought natural resources, China’s brought labor.
So with things like automation and other, say, technologies and resources that are coming to market, can that main resource that China supplied the world with for the last 30 years continue to be the base of their economic power? I don’t know. I don’t know how quickly that stuff will come to market. I have some ideas, but I think what you’re saying is if they do make a play for Taiwan, it will force people to question what China brings to the world. And with an abundance of or, let’s say, a growing influence of things like automation technologies, robotics, that sort of thing, it may force the growth of those things. Potentially. Is that fair to say?
MG: I think it’s totally fair. And I would use the tired adage from commodities. Right. The cure for high prices is high prices. If China withdraws its labor or is forced to withdraw its labor from the rest of the world, there’s two separate impacts to it.
One is that China’s role as the largest consumer of many goods and services in things like raw materials, et cetera. That has largely passed. Right. And so as we look at things like electrification, sure, you can create a bid for copper. But at the same time, you’re not seeing any building of the Three Gorges again. Right. You’re not seeing a reelectrification of China. You may see components of it in India. And I would look to areas like India as potential beneficiaries of this type of dynamic. But we’re a long way away from a world that looks like the 20th century. And you’ve heard me draw this analogy. Right. So people think about inflation.
The 20th century was somewhat uniquely inflationary in world history. The reason I think that happened is because of a massive explosion of global population. Right. So we started the 20th century with give or take a billion people in the global population. We finished the 20th century with give or take 7 billion people. So roughly seven X in terms of the total population. The labor force rose by about five and a half X.
If I look at the next 100 years, we’re actually approaching peak population very quickly. And if I use revised demographic numbers following the COVID dynamics, we could hit peak global population in the 2030s 2040s. Right. That’s an astonishing event that we haven’t seen basically since the 14th century, a decline in global population. And it tends to be hugely deflationary for things like raw materials. Right. People who aren’t there don’t need copper, people who aren’t there don’t need houses, people who aren’t there don’t need air conditioners, et cetera.
I think the scale of what’s transpiring in China continues to elude people. I would just highlight that we’ve all seen examples of this. Right. So go to any Nebraska town where the local farming community has been eviscerated with corporatization of farms, and the population has fallen from 3000 people to 1000 people. What’s happened to local home prices? What’s happened to the local schooling system? What’s happened to deaths of despair, et cetera. Right. They’ve exploded. China’s facing the exact same thing, except on a scale that people generally can’t imagine. The graduating high school classes are now down 50% versus where they were 25 years ago. That’s so mind blowing in terms of the impact of it.
TN: That’s pretty incredible. Hey, Mike, one of the things that I want to cover is from kind of the Chinese perspective. Okay. So we’ve had for the last 20-25 years, we’ve had Chinese companies going public on, say, Western exchanges and US exchanges. Okay. So if something happens with Taiwan, if China invades Taiwan, do you believe Chinese companies will still have access to, say, going public in the US? And if they don’t, how do they get the money to expand as companies?
Meaning, if they can’t go public in the west, they can’t raise a huge tranche of dollar resources to invest globally. So first of all, do you think it’s feasible that Chinese companies can continue to go public in the west?
MG: Yeah. Broadly speaking, I think that’s already over. Right. So the number of IPOs has collapsed, the number of shell company takeovers has collapsed. So the direct listing dynamics. I just had an exchange on Twitter with a mutual friend of ours, Brent Johnson, on this. Ironically, that would actually probably help us equities for the very simple reason that the domestic indices like the S&P 500 and the Russell 2000 do not include those companies. Right.
So if those companies fail to attract additional capital or those companies are delisted, it effectively reduces competition for the dollars to invest in US companies and US indices. Where those companies are listed and are natively traded, at least are in places like Hong Kong, China, et cetera, those are incorporated in emerging market indices. And I would anticipate, although it certainly has not happened yet. That on that type of action, you would see a very aggressive move from the US federal government to force divestiture and prohibit investment in countries like China.
I think that would very negatively affect their ability to raise dollars. Again, and I mean, no disrespect when I say this. I want to emphasize this, but we tend to think of Xi Jinping as this extraordinarily brilliant, super thoughtful, intelligent guy. The reality is he’s kind of Tony Soprano, right? I mean, it’s incredibly street smart, incredibly savvy, survived a system that would have taken you and I down in a heartbeat. Right. You and I would have been sitting there. Wow. Theoretically, someone would have shot. Congratulations. Welcome to the real world, right. He survived that system. But that leaves him in a position where I do not think that he’s actually playing third dimensional chess and projecting moves 17 moves off into the future. I think he very much is behaving in the “Ohh, that can only looks good.”
I think it’s really important for people to kind of take a step back and look at that in the same way that Japan wasn’t actually forecasting out the next 100 years. The Chinese are not doing that. It’s a wonderful psychological operation. One of the best things that people can do is go back and relisten to the descriptions of IBM’s Big Blue computer or Deep Blue. I’m sorry beating Gary Kasparov. Right. So one of the things that they programmed into that computer was random pauses. So the computer processed things and computed things at the exact same speed. But by giving Kasparov the illusion that he forced the machine to think, he started to second guess himself.
Well, what did I do there that made it think, right. He didn’t do anything. It was doing its own thing and designed to elicit a reaction from you. I think China’s done probably a pretty good job of getting a lot of people in the west and elsewhere. And I think Putin is even better at this, of second guessing our capabilities and genuinely believing that we’re second rate now.
It’s fascinating. There was just a piece that came out from the US Space Force where they’re talking about the rising capabilities of China. And if you read the public Press’s interpretation of this, China is moving ahead in leaps and bounds. And what actually he’s saying is, no, we’re way ahead. But they are catching up at an alarming rate.
TN: That’s what happens. Right.
MG: Of course, it is always easier to imitate than it is to innovate.
TN: Right. When I hear you say that it’s easier to imitate than innovate. I know you don’t mean it this way, but I think people hear it this way that the Chinese say IP creators are incapable of creating intellectual property. I don’t think that’s the case. I don’t think you mean that to be the case. They are very innovative. It’s just a matter of baselining yourself against existing technology. So it does take time to catch up. Right. And that takes years. Your TFP and all the other factors within your economy have to catch up. And it takes time. It takes time for anybody to do that.
MG: Well… And I think also it’s important to recognize that things like TFP, total factor productivity, tends to be overstated because we don’t do a great job of actually correctly defining it.
TN: It’s residual. I can tell you.
MG: Exactly right. And just to emphasize what that means, it means it’s the part that we can’t explain with the variables we’ve currently declared. Right.
MG: And so when I look at TFP in the United States, I actually think TFP is quite a bit lower than the data sets would suggest, because I think that we are failing to consider the fact that we’ve introduced women into the labor force. We’ve introduced minorities into the labor force. Right. So the job matching characteristics or the average skill level of people has risen.
People live longer, so they get to work in different industries and careers for a longer period of time. The center of the distribution is now starting to shift too old, and that’s showing up as a negative impact. But we failed to consider that on the other side. And the last part is just again, remember going back to the start of the 20th century, the average American had three years worth of education at that point. Third grade education, where a year was defined as three months, basically during the non harvest season. Right.
TN: It’s the stock of productivity. Correct. We’re adding to that stock of productivity, and the incremental add is large compared.
MG: But small compared to the stock. Absolutely correct. Right.
TN: Okay. Just to sum up, since we wanted to talk about the impact on markets, I want to sum up a couple of things that you’ve said just to make sure that I have a correct understanding.
If China is to invade Taiwan, we would have in Northeast Asia a period of volatility and uncertainty. That would go across equity markets, across currencies, across cross border investments and so on and so forth. Okay. So we would have that in Northeast Asia.
MG: And I would just emphasize very quickly. So we’ve seen this rolling pattern of spikes in volatility. Right. So we saw it in 2018 in the equity markets. We saw it in late 2018 in the credit markets and commodity markets. We’ve now seen it in interest rate markets. What’s referred to as the Move index. The implied volatility around interest rates has reached relatively high levels of uncertainty.
The one kind of residual area where we just have seen no impact whatsoever has been in FX. That has been remarkably stable, remarkably managed. That’s kind of my pick for the breakout space.
TN: Okay. Great. Europe also appeared of volatility because of their exposure to both China and Russia. Since both China and Russia have a degree of kind of wiliness, especially Russia, I think almost a second derivative. Europe is volatile because of both of those factors. Is that fair to say? And that has to do with the Euro that has to do with their supply chains? That has to do with a number of factors.
MG: I would broadly argue that’s a reasonable way to think about it. I mean, almost think about it. Flip the image and imagine that the continents are ponds and the oceans are land. Right. What we’re describing is a scenario where a rock gets dropped into Asia or a rock gets dropped into Europe. You will see the waves spread across. There’s potential for sloshing over, and it’ll absolutely impact the United States. But in that scenario, we literally have two giant barriers in the form of the Pacific and the Atlantic Ocean that separate us.
And while our supply chains are integrated currently, in a weird way, COVID has been a bit of a blessing in starting to fracture those supply chains. We’ve diversified them significantly in the last couple of years.
TN: Okay. And then from what I understand from what you said about the US is supply chains will definitely be a major factor. Corporates will likely keep their investments in China until they can’t. They won’t necessarily come up with, say, dual supply chains or redundant supply chains.
US equity markets could actually be helped by the delisting of Chinese companies. Or we’ll say, US listed equities, meaning US companies listed could be helped by the delisting of Chinese equities, potentially.
MG: Certainly on a relative basis. I might not go so far as to say in an absolute simply again, because you do have people and strategies that run levered exposures. And so anytime asset values in one area of the world falls, you run the risk that the collateral has become impaired, and therefore there’s a deleveraging impact.
TN: Yes. Understood. And then the dollar continues to be kind of the preeminent currency just on a relative basis because there really isn’t in that volatile environment, there aren’t many other options. Is that fair to say?
MG: Well, again, I think there’s an element of complication. I would prefer to argue volatility. I think it is hard to argue that the dollar wouldn’t appreciate, but I also think it’s important, and this is why I go back and say we can’t actually stop Russia from taking Ukraine. We can’t stop China from taking Taiwan.
If they were to actually do that, then there is kind of the secondary loss of phase dynamic associated with it that may you could see and you’ve already seen Myanmar. You could see Thailand. You could see Vietnam. Say, you know what? We got to switch. I’m skeptical, but I’m open to that possibility.
TN: Interesting. Okay. Very good. Mike, thank you so much for your time. I really appreciate how generous you’ve been with what you’ve shared. I’d love to spend another couple of hours going into this deeper, but you’ve been really generous with us.
I want to thank everyone for joining us. And please, when you have a minute, please follow us on YouTube. We need those follow so that we’ve we can get to the right number to reach more people.
So thanks again for watching. And Mike Green, thanks so much for your thoughts on China’s invasion of Taiwan.
WASHINGTON — The former U.S. Secretary of the Navy and former Senator Jim Webb recently issued an article in which he put forward an interesting proposal in which he called on the Biden administration to launch the “American version of the Belt and Road Initiative” to counter China’s influence in the world. Weber believes that the United States can do better than China. This proposal has sparked a lot of debate. Some scholars believe that the United States encourages free competition and that the “Belt and Road” initiative is not the way the United States does things.
Weber published an article in the Wall Street Journal on February 17 advising the Biden administration to consider launching the “US version of the Belt and Road.” “China invests in large-scale infrastructure projects all over the world to increase its influence, and the United States can do the same,” he said.
Weber pointed out that as an important part of China’s global strategy for hegemony, the Chinese government has established economic and diplomatic ties with developing countries in Asia, Africa and Latin America through the “One Belt, One Road” project, and conducted military infiltration on the grounds of protecting the interests of these projects. However, public discussions in the United States have not paid enough attention to this.
Weber believes that the Chinese government’s escalating military, diplomatic provocations and human rights persecution in recent years have made many developing countries hesitate to participate in the Belt and Road Initiative. He called on the Biden administration to seize this opportunity and begin to attach importance to the “often neglected countries” in U.S. foreign policy, and to give these regions the opportunity to choose the U.S. in order to counter China’s influence and prevent the world system from being coerced by authoritarianism. This is conducive to the “diplomatic and economic health” of the United States.
“This is not a doomed career, but an unrecognized opportunity,” Weber said.
Weber proposed that the Biden administration implement a comprehensive and coordinated policy in Asia, Africa and Latin America, integrating thoughtful diplomacy, security commitments, and project investment and participation by the American business community to fill the vacuum.
Weber also believes that the United States can do better than China. “The U.S.’s major investment in this—without colonial motives and based on a more credible and more time-tested business model—will forcefully start developing economies, and at the same time boost the U.S. economy, and inspire further progress in a global free society. Pre-development,” Weber said.
The United States encourages free competition, “One Belt One Road” is not our way of doing things
As soon as the article came out, supporters called Weber a “visionary pragmatist”, and the United States urgently needed to implement it, and it was not too late. Jose Manuel, a student of international relations at King Juan Carlos University in Spain, said on Twitter: “If the United States wants to prevent China from winning the title of world superpower, it will be able to retaliate and support the Asian and African countries. Investment projects in Latin America.”
However, American liberal economists urged that the United States should not follow China in its competition with China.
Tony Nash, founder of the data analysis company Complete Intelligence, told VOA: “The Belt and Road Initiative or the Made in China 2025, this is not an American way of doing things.”
Nash believes that the best way for the United States to deal with competition among major powers is to encourage free competition. The United States’ world influence should come from an international system that advocates transparency and free competition.
On February 23, John Tamny, editor of RealClearMarkets, a US economic news website, pointed out that “the influence of the United States is freedom.” He believes that projects such as the “Belt and Road” highly dependent on government regulation will only waste huge amounts of resources. , And damage the United States’ world image of advocating free competition.
In an interview with VOA, Michael Kugelman, director of Asian projects at the Wilson Center in Washington think tank, said that the United States’ number one strategic competitor, China, is exerting its influence on a global scale through the Belt and Road Initiative. It is true that the United States has increased its investment in overseas infrastructure projects. There is strategic value, but now is not the time. Currently, the focus of the Biden administration is to revitalize the US economy.
However, Joyce Mao, a professor of history at Middlebury College in Vermont and an expert on U.S.-Asia relations, supports the United States’ overseas infrastructure investment. She told the Voice of America that the US foreign policy that integrates mature diplomacy and strategic intervention is inseparable from the domestic development of the United States. But she also pointed out that it is a challenge to obtain sufficient American public support and bipartisan consensus on this point.
Whether the proposal can be supported by the American public
Henry Blodget, the founder of the news website Business Insider, said on Twitter: “Good idea, but the United States has not yet reached an agreement on investment in domestic infrastructure.” Independent media “Chinese “Non-projects” also said on Twitter: “U.S. taxpayers’ own roads, bridges, and airports are in a state of disrepair. It is hard to imagine that they will support huge investments in infrastructure construction in developing countries to compete with China.”
Nash of Complete Intelligence believes that the American public cannot accept spending trillions of dollars on overseas projects right now. Under the impact of the epidemic, there are too many places to spend money in the United States. If the US government spends money and energy on this knot to form a global infrastructure investment plan, it will certainly make many taxpayers angry.
Kugelman of the Wilson Center said that the top priority of the Biden administration is obviously to restart the motor of the US domestic economy. Investment in overseas infrastructure is a strategic issue worth considering in the future, but at least it will have to wait a few more months. “If you do this at the same time, Two things become a situation where you have to keep the cake and eat the cake,” Kugelman said.
“People who are struggling in the’rust zone’ due to industrial decline will not have a good response if they hear that their government will launch such a huge plan to develop infrastructure projects thousands of miles away,” Kugelman said.
Professor Mao of Mingde College said that Weber’s proposal while the U.S. economy is still trapped by the epidemic is worthy of scrutiny. She pointed out that there are many debates about where the health and well-being of the American economy come from. This has always been a classic political issue that has divided opinions between conservatives and liberals in the United States. At this special moment of the epidemic, this disagreement focuses on what kind of economic plan is the one that will enable the United States to recover from the epidemic.
Weber said in the article that US investment in infrastructure projects in developing countries not only helps to counter China, but also benefits the US economy. But Professor Mao pointed out that Weber’s proposal seems to “assume that most Americans can understand and agree that the future of the US economy depends on the existence of internationalism and interventionism”, but the reality is not the case. She said that although there is a lot of political support in the United States, especially within the Republican conservatives, in the fight against China, investing in large-scale overseas infrastructure projects may not be consistent with their political priorities.
“What benefits will the U.S. version of the Belt and Road Initiative bring to ordinary U.S. citizens? How will employment opportunities be realized? To what extent can it help develop overseas markets and other resources for U.S. goods?” Professor Mao believes that this proposal is necessary Get enough support. These are the basic questions that need to be answered to the American public and policymakers.
Kugelman: There are ready-made investment frameworks available
Kugelman pointed out that although a large-scale plan such as the “US version of the Belt and Road” should first give way to the restoration of the domestic economy, Biden’s policy can make good use of the relevant institutions and tools that have been established during the Trump administration to implement Related investment commitments.
In 2018, Trump signed the “Good Use of Investment Guidance and Development Act” (referred to as the BUILD Act), which merged the Overseas Private Investment Corporation (OPIC) and the Development Credit Administration (DCA) under the United States Agency for International Development (USAID) to form a new establishment The United States International Development Finance Corporation (IDFC) was established to enhance the United States’ international development financing capabilities, and expanded financing and financing tools to coordinate and promote the participation of the U.S. private sector in the economic construction of developing countries.
Under the “Free and Open Indo-Pacific Policy”, the Trump administration signed a memorandum of cooperation on a trilateral infrastructure investment partnership with Japan and Australia in 2018 to jointly encourage and support domestic private companies to build high-tech projects in the Indo-Pacific region that meet international standards. Quality infrastructure construction project.
In 2019, the United States, Japan and Australia jointly launched the Blue Dot Network (Blue Dot Network) to counter China’s “One Belt One Road” initiative in Asia. The plan unites the government, enterprises and civil society to evaluate and certify infrastructure projects under “common standards” to promote high-quality projects for sustainable development.
David Dollar and Jonathan Stromseth, fellows of the Brookings Institution’s China Program, also called on the Biden administration to implement a series of infrastructure investment commitments in Southeast Asia during the Trump administration. They pointed out that nearly 42,000 U.S. companies export products to 10 member states of the Association of Southeast Asian Nations (ASEAN), supporting approximately 600,000 jobs in the U.S. However, the U.S.’s economic position in the region is facing the erosion of China, and Southeast Asia has become Beijing. A hotbed of strategic competition with Washington.
Nash: Government-supported projects shouldn’t be a way of American competition
Nash, who had provided consulting and assistance to China’s National Development and Reform Commission on the “Belt and Road” project, told VOA that China’s “Belt and Road” operation principle is to transfer funds from banks that carry out overseas business in China to China, which invests in infrastructure projects around the world. Among state-owned and semi-state-owned entities, it is a way of financing overseas and domestic debt. Although the United States also has international financing institutions such as the International Development Finance Corporation (IDFC), its scale of operation is unlikely to support large overseas investment projects such as China’s “One Belt, One Road” initiative. In addition, China can provide loans with negative interest rates for certain projects, but US financial institutions that have always focused on risk management standards are unlikely to do so.
Nash also said that the best way for the United States to compete among major powers is to compete freely. Whether it is China’s “One Belt, One Road” or “Made in China 2025” industrial policy, it should not be the way the United States follows. These projects are highly dependent on the role of the government, and the government has invested heavily to support the technology industry or support domestic companies to invest in overseas projects. Doing so may nourish a group of companies and industries whose actual competitiveness is not up to the standard.
“The best way is to let American construction companies and infrastructure companies go out to compete for projects. If they can’t compete, then they should fail because they are not competitive enough,” Nash said.
At a seminar last month, Clyde Prestowitz, a well-known American expert on globalization and Asian issues and director of the Institute for Economic Strategy, said that the Biden administration should have a far-reaching industrial policy. “China has their Made in China 2025, and we should have our Made in America 2025,” he said.
Nash believes that the way for the United States and China to maintain influence and leadership on a global scale is to uphold the values of transparency and free competition. He believes that the United States previously required NATO allies to be open and transparent in defense spending as a manifestation of leadership.
He believes that the United States should also continue to pursue transparency against government subsidies and non-tariff barriers, so as to ensure that the World Trade Organization can effectively perform inspections in this area, so that the world can see how the industries of various countries are protected. of. At the same time, the United States should also call on the international community to pursue transparency in foreign aid. Where does the money go?
“The United States has come forward to demand transparency in multilateral organizations, transparency in foreign aid, and a free competition environment for international bidding for infrastructure projects. This is the best way for the United States to demonstrate and maintain leadership,” Nash said.
How to do the “US version of the Belt and Road Initiative”?
Kugelman believes that the United States is still gaining the upper hand in the competition between the United States and China, whether it is military strength or a leading advantage in high-tech fields. Like Weber, he also believes that although the United States has faced some setbacks in soft power in recent years, it is still ahead of China.
Kugelman therefore emphasized that the United States should have its own pace and expectations in terms of overseas infrastructure investment, and there is no need to equalize with China in the order of magnitude. After all, China has already led too many steps in this area. “With some progress in the field of infrastructure investment, instead of investing heavily in this to catch up with China in vain, why not focus more on maintaining the United States’ competitive advantage and comparative advantage in its traditionally leading field?” Kugelman said.
Kugelman partially agrees with Weber’s view that the United States can do better in infrastructure investment. He said that the quality of many of China’s Belt and Road projects has been criticized, such as financial opacity, the breeding of corruption, damage to the local environment, and the substandard rights of workers. The United States can provide a higher standard and high-quality options for these issues. China has built surveillance systems through infrastructure projects in some areas to export authoritarianism. The United States obviously can also provide less intrusive options in this regard.
Like Weber, Kugelman also believes that China’s “wolf war diplomacy” in recent years has opened up opportunities for the United States. Kugelman cited, for example, that China’s aggressive strategy of flexing muscles in the South China Sea has sounded the alarm for many countries in the region, and began to question whether the consistent attitude of “asking the United States for security and asking China for money” should continue. He believes that the United States should focus on investing in countries like the Philippines that hesitate to China and are a key regional ally of the United States.