The ups and downs of decoupling

As Swamp Notes readers know, I have always advocated for some regionalization and localization of economies as a way to create more resilience and rebalance the global economy with nation-state politics. My feeling is that we need a better balance between the local and the global to create a more sustainable, safer and fairer world. While I discuss how and why we have had a backlash to globalization, there is also a lot of optimism and many examples of how the new trend of economic localism is unfolding in a positive way.

That said, there is no doubt that the paradigm shift from unfettered globalization to what comes next brings enormous challenges. I will focus on two of them in this note. First, the chip war is heating up. I’ve long thought that the United States and China would end up with two different tech ecosystems for all sorts of reasons, from national security concerns to differences in how each country views privacy and government data control. ‘State.

Donald Trump has started the decoupling process. But last week, the Biden administration’s new export controls on the chip industry sped it up dramatically, with sweeping restrictions that will stop U.S. companies from exporting advanced chips to China and limit trade. Americans working for companies that do. (According 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 large purchases of chips in recent months to build up inventory (this happened after the Huawei sanctions) and worked hard to increase local 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 greater technological disengagement by American companies (and some allies , depending on how the foreign direct product rule is used).

How will the Chinese react now? It’s a huge question. The best case scenario is that they just keep working on indigenous chip designs (and hopefully focus more on civilian uses) while the two superpowers learn to live with and increasingly without each other . The worst? China is stuck and taking extreme measures around Taiwan. As my colleague Robin Harding pointed out in an op-ed, if the Chinese feel their growth is being thwarted, it could make geopolitics even more precarious. Ed, I’m curious, what steps do you think Beijing will take now? And what do you hear from people in the White House or the State Department about what might be the best and worst case scenarios here?

Now let’s move on to challenge number two: the global competition between energy and debt. The Fed is raising rates to control US inflation, and a big part of that effort is trying to lower energy prices (reducing consumption, but not so much that you get a hard landing ). Meanwhile, many countries have to sell dollar assets to pay for energy and defend their own currency. Selling Treasuries in an already volatile market could backfire and hurt the Fed. But walking away from quantitative tightening before it’s time could be even worse.

Vladimir Putin was, of course, counting on all this. (His talk about how people “can’t be fed printed dollars” or heat their homes with them was chilling.) 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 easing of banking regulations (allowing them to get out of certain capital requirements to stabilize bond markets). But this too carries risks. Ultimately, while central banks were once the only game in town, they now have stiff competition from commodity-rich countries.

Ed, what would you add to the list of challenges of de-globalization right now?

Recommended events and reading

• Anyone in DC tomorrow night, please come hear me discuss my book with the wonderful Sarah Bloom Raskin of Politics and Prose.

• And if you’re around Friday in New York and want to learn more about the post-neoliberal world, check out this one-day event on the subject sponsored by the FT and Columbia University School of Law – I will do another lecture, but there will be many more fabulous people like Joe Stiglitz, Gary Gerstle, Heather Boushey, Dani Rodrik, Kate Judge, Quinn Slobodian, Asutosh Padhi and many more.

• Finally, don’t miss this fascinating and sobering look at how FT readers are coping with inflation.

Edouard Luce responds

You have repeatedly asked me variations on the question of de-globalization and I do not have radically different answers for you. What surprised me was the degree and speed of the decoupling of semiconductors by the United States. There is no doubt that China will redouble its efforts to climb the ladder of indigenous innovation and its ability to make rapid progress cannot be ignored.

China has made remarkable progress in many fields, including electric vehicle batteries, nanotechnology, quantum computing and solar energy. I understand that the high end of semiconductor design and production is probably a bigger leap. But where there is a will, there is a way – and for Xi Jinping, this will be a top national priority. There is no doubt that this acceleration of high-tech decoupling will make Taiwan more vulnerable to Chinese aggression in the near future.

I also imagine that TSMC and other Taiwanese producers will come under increasing pressure to diversify their production to other countries, including the United States. Either way, we are entering a very different world in which the global technological fork will increasingly become a reality. If China’s growth continues to slow and its politics continue to become more autocratic, it will reduce the attractiveness of the Chinese sphere to other countries. On a personal note, if decoupling shortens TikTok’s lifespan, no one will be happier than me.

As for the effects of global monetary tightening, I was struck last week by the grim consensus at the annual meetings of the IMF and World Bank in Washington. We are in a ‘no matter how much it costs’ phase of rising interest rates, led by a Fed that is determined not to see a repeat of the 1970s. It was by chance that my lunch with the FT with Mark Carney, the former governor of the Bank of England, walked out just after Liz Truss, Britain’s omnishambolic prime minister, sacked Kwasi Kwarteng, his suicide bomber Chancellor of the Exchequer.

Carney did his best to give a diplomatic assessment of the British shenanigans, but his astonishment at the UK’s recent unforced errors was nonetheless evident. A former senior British official, who also attended the annual meetings, said the way people inquired about events in Britain reminded him that he had been asked about a recent death in the family – on a tone of pity and sadness. His analogy touched me. For now, and I really hope it won’t last too long, the UK has become the butt of well-deserved jokes. From David Cameron to Boris Johnson and Kwasi Kwarteng, Britain’s reputation is wasted on Eton’s playing fields.

Your reactions

And now a word from our Swampians. . .

In response to ‘America is once again the world’s tallest dwarf‘:
“China’s internal situation is much worse than you suggest. Omicron has ruined the zero-Covid strategy that increasingly appears to many locals as a seemingly endless feature. It is brutally applied. . . On the macroeconomic front, the collapse of the housing boom remains a big problem. As long as many ex-poor peasants who are new to the cities feel they are doing better than before, Xi is probably fine. But foreigners are leaving in droves, as are the Chinese upper middle classes, with English people, foreign contacts and good jobs, especially those with children. Xi is probably happy to see their backs. — Swamp Note Reader

“In the short term, your assessment that the United States is the greatest dwarf may be correct, but it seems to me that the real long-term beneficiary of Russia’s miscalculations will be China. As the rest of us fight this conflict to the last Ukrainian, China is expanding its ties with an increasingly weakened Russia, which can address China’s key strategic weaknesses. China is now the world’s manufacturing power, but it still suffers deeply from lack of water, lack of resources, climate change and declining agricultural yields. It needs Russian assets and will simply become Moscow’s buyer of last resort thanks to Western sanctions against the Putin regime. In this new Cold War 2.0, it is unclear if the USA/EU/NATO alliance will be on the winning side. Two can play the sanctions game and the United States has already degraded its manufacturing base to such a degree that it is increasingly vulnerable if and when Beijing decides to respond in kind. —Marshall Auerback, New York, New York