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As readers of Swamp Notes will know, I have always advocated some degree of regionalization and localization of economies as a way to create greater resilience and rebalance the global economy with nation-state politics. My feeling is that we need a better balance between local and global to create a more sustainable, safe and just world. As I go into how and why we’ve had a backlash to globalization, there’s also a lot of optimism and many examples of how the new trend toward economic localism is working out in positive ways.
That said, there is no doubt that the paradigm shift from rampant globalization to what comes next poses huge challenges. I will focus on two of them in this note. First, the chip wars are heating up. I’ve long thought that the US and China would end up with two different technology ecosystems for a variety of reasons, from national security concerns to the differences in how each country views personal privacy and state control of data.
Donald Trump began the process of decoupling. But last week, the Biden administration’s new export controls on the chip industry significantly accelerated it, with huge restrictions preventing US companies from exporting advanced chips to China and restricting Americans from working for companies that do. (According to this Twitter thread from a Rhodium analyst, many are already leaving China in droves.)
I heard from a source close to the administration that the Chinese have made significant chip purchases in recent months to build up inventories (which happened after the Huawei sanctions), and have been working hard to ramp up homegrown production. But there is no doubt that the sanctions will slow developments in artificial intelligence and advanced military technology (around things like hypersonic weapons) and lead to even more technological withdrawal by US companies (and some allies, depending on how the Foreign Direct Product Rule has been used).
How will the Chinese react now? That’s a huge question. The best-case scenario is that they’ll just continue working on native chip designs (and hopefully focus more on civilian use), as the two superpowers learn to live with and increasingly without each other. The worst? China is being cornered and taking extreme action around Taiwan. As my colleague Robin Harding noted in a column, if the Chinese feel that their growth is being thwarted, it can make geopolitics even more precarious. Ed, I’m curious, what actions do you think Beijing will take now? And what are you hearing from people at the White House or the State Department about what the best and worst scenarios could be here?
Now for challenge two: the global competition between energy and debt. The Fed is raising rates to keep inflation in the US in check, and a big part of that effort is to try to cut energy prices (by cutting consumption, though not so much that you get a hard landing). Meanwhile, many countries have to sell dollar-denominated assets to pay for energy and defend their own currencies. Selling Treasuries in an already volatile market could backfire and hurt the Fed. But turning away from quantitative tightening before it gets there might be even worse.
Vladimir Putin, of course, counted on all this. (His speech about how people “cannot be fed with printed dollars” or that their homes can be heated with it was eerie.) And now, with the Saudis piling up and OPEC cutting production, the situation is even more dangerous. Is there a way out? The Fed is talking about some regulatory easing for banks (allowing them to escape certain capital requirements to stabilize bond markets). But that too has its risks. The bottom line is that while central banks used to be the only game in town, they now face stiff competition from resource-rich countries.
Ed, what would you add to the list of deglobalization challenges right now?
Featured events and reading
Anyone who is in DC tomorrow night, please come and listen to me discuss my book with the amazing Sarah Bloom Raskinat Politics and Prose.
And if you’re in New York City on Friday and want to hear more about the post-neoliberal world, view this one day event on the subject sponsored by the FT and Columbia University Law School – I will have another book review but there will be many more wonderful people like Joe Stiglitz, Gary Gerstle, Heather Boushey, Dani Rodrik, Kate Judge, Quinn Slobodian, Asutosh Padhi , and much more.
Finally, don’t miss this fascinating and sobering summary of how FT readers deal with inflation.
Edward Luce responds
You’ve asked me variations on the deglobalization question a few times and I don’t have radically different answers for you. What has surprised me is the extent and speed of the US semiconductor decoupling. Undoubtedly, China will redouble its efforts to climb the indigenous innovation ladder and its ability to make rapid progress cannot be discounted.
China has made remarkable progress in many areas, including electric vehicle batteries, nanotechnology, quantum computing and solar energy. I understand that the high-end design and manufacturing of semiconductors is probably a bigger leap. But where there is a will, there is a way – and for Xi Jinping, this will be an overriding national priority. Undoubtedly, this accelerated pace of high-tech decoupling will make Taiwan more vulnerable to Chinese aggression in the near future.
I can also imagine TSMC and other Taiwanese producers coming under increasing pressure to diversify their production to other countries, including the US. Either way, we are entering a very different world where global technological bifurcation will become more and more a reality. If China’s growth continues to slow and its politics continue to become more autocratic, this will diminish China’s appeal to other countries. On a personal note, if disconnection shortens TikTok’s shelf life, no one will be happier than me.
As for the effects of global monetary tightening, I was struck last week by the bleak consensus at the annual IMF/World Bank meetings in Washington. We are in a phase of rate hikes that “however much it costs,” led by a Fed determined not to see a repeat of the 1970s. It was serendipity that my FT lunch with Mark Carney, the former governor of the Bank of England, came out just after Liz Truss, Britain’s all-embracing prime minister, fired Kwasi Kwarteng, her kamikaze chancellor of the treasury.
Carney did his best to provide a diplomatic assessment of Britain’s pranks, but his amazement at the UK’s recent casual mistakes was nonetheless apparent. A very senior former British official, who also attended the annual meetings, said the way people inquired about events in Britain reminded him of a question about a recent death in the family – in a tone of pity and sadness . His analogy struck a chord with me. For the time being, and I very much hope for the foreseeable future, the UK has become the butt of well-deserved jokes. From David Cameron to Boris Johnson and Kwasi Kwarteng, Britain’s reputation is being squandered on the playing fields of Eton.
And now a word from our Swampians. . .
In response to ‘America is the tallest dwarf in the world again‘:
“China is in much worse domestic shape than you suggest. Omicron has ruined the zero-covid strategy that for many residents increasingly feels like a function with no clear end. It is brutally enforced. . . On a macroeconomic level, the collapse of the real estate boom is still a major problem. As long as many poor ex-farmers new to the cities feel like they’re doing better than before, Xi’s probably fine. But foreigners are leaving en masse, just like the Chinese upper middle class, with English, foreign contacts and good jobs, especially those with children. Xi is probably happy to see the back of them.” — Swamp Notes Reader
“In the short term, your assessment that the US is the biggest dwarf may be correct, but it seems to me that in the long term China will be the real beneficiary of Russia’s miscalculations. While the rest of us fight this conflict to the last Ukrainian, China is expanding its ties with an increasingly weakening Russia, which can address China’s key strategic weaknesses. China is now the world’s largest manufacturing powerhouse, but it still suffers badly from a lack of water, lack of resources, climate change and declining agricultural yields. It needs Russian resources and will simply become Moscow’s last resort thanks to Western sanctions against Putin’s regime. In this new Cold War 2.0, it is unclear whether the US/EU/Nato alliance will be on the winning side. Two can play the sanctions game and the US has already downgraded its manufacturing base to the point that it will become increasingly vulnerable if and when Beijing decides to respond in kind.” — Marshall Auerback, New York, New York