If you have not heard about the rise of geopolitics over the past year, where have you been hiding?
So now I want to complicate your lives further and introduce you to its lesser-known but arguably even more important cousin: geoeconomics. Another fancy name for a nebulous concept that boffins regularly confuse you with, you say? Perhaps. But hear me out.
First, let’s begin with a (clunky) definition from my go-to think tank of the moment, Chatham House: “The term ‘geoeconomics’ has become popular but lacks an agreed definition. Most commonly, it is understood as the use of economic tools to advance geopolitical objectives. Other definitions reverse the ends and means, emphasising how flexing geopolitical muscle is used for economic results. Broadly, one can think of the interplay of international economics, geopolitics and strategy.”
I buy this definition, but, in this essay, I want to de-emphasise, where I can, the politics: in today’s fractious world, geopolitics has a way of hijacking almost any discussion to the extent that other considerations barely merit a look-in. I will rather emphasise the geoeconomic data and make a few suggestions as to how this data might be interpreted geopolitically.
Those who know me will know my bedrock contention is that the centre of economic gravity is moving resolutely back to Asia from whence it came some 200 years ago. There is deep demographic logic to this return migration: over half the world’s population lives within 3,200km of Mong Khet in north-eastern Myanmar, inside what is known as the Valeriepieris Circle.
I came across a new statistic last week that reinforces this paradigm shift: 113 million people will enter the world’s consuming classes next year, with 83% or 94 million being Asian, and only 4% or five million from the West.
And, for the first time, India will beat China 33 million to 31 million, underlining the fact that in 2023, India’s population rise overtook China’s.
This population centre of gravity is centrifugally pulling in the geoeconomics: McKinsey estimates the geographic centre of economic gravity in 2023 to be near Kyzyl, on the Russian side of its border with Kazakhstan.
As recently as 1990, this core was close to Norway’s Svalbard Islands; by 2030, it is forecast to be in northern China. From the icy Greenland Sea to the arid Gobi Desert in 40 years? That is paradigm-shifting.
But this is not the narrative you will hear on Bloomberg or CNBC. This is because they inhabit the atmosphere of capital – of “financial markets” – rather than that of trade. The capital atmosphere is captured in movements in stock markets and bond markets and, at a macroeconomic level on a nation’s capital account; furthermore, the only “language” it speaks fluently is nominal US dollars.
By contrast, the atmosphere of trade is best reflected in trade statistics as recorded on a nation’s current account and is very (and I mean very!) approximately measured in Purchasing Power Parity “dollars”. By the latter measure, China overtook the US as the world’s largest economy in 2014 and is now 22% larger. By the former measure, the US economy is still 32% larger than China’s.
Unsurprisingly, the narrative of capital markets remains focused on what is happening in US stock and bond markets: over 60% of the All Country World Index for equities is in US securities, as is over 40% of the All Bond Index.
Add to this the fact that the go-to US dollar index for FX markets is the DXY, an index composed of six Western currencies: the euro, yen, pound, Canadian dollar, Swedish kronor and Swiss franc. Even though Mexico and China are the US’ second and third-largest trade partners, there are no “trade-rich” pesos or renminbi in this “capital atmosphere” basket.
The atmosphere of trade reflects altogether different realities and is perhaps best captured in the statistic that, in 2022, China’s $3.6-trillion worth of exports beat the US’ $2.2-trillion. Without the US’ oil and gas sales abroad, China’s export total would be almost twice that of the US.
It will take several years for the Western-focused world of capital to align with the increasingly Asian-centred world of trade. And much of this catch-up will be facilitated not just by GDP growth in China, but also in ABC: Asia Beyond China.
The latest economic forecasts coming from the IMF’s September annual meeting in Marrakesh clearly show that Asia (and again, not just China) has become the world’s GDP growth locomotive: 2024’s 94 million out of 113 million new members of the world’s consuming classes being Asian will bear witness to that.
If you look through the prism of capital, you can make a case for the argument that the US-centric world is indeed deglobalising. But if you instead peer through the prism of trade, what you see is a world that is re-orienting (pun intended) – one that is moving into the heart of Asia by leaving the North Atlantic behind.
In the meantime, one can broadly expect the pre-eminent status of the US dollar – in its money functions as a store of value, a unit of account and as a standard of deferred payment – to hold sway. (That said, the US dollar’s share of global FX reserves has fallen 6% to under 60% in the past decade.)
What is changing most is that the world is witnessing the US dollar’s grip on the medium of exchange function slip, especially in commodity markets, be it UAE gas exports to India denominated in dirhams, or Indonesian nickel and Australian iron ore exports to China denominated in renminbi.
As the world moves from the post-Cold War unipolarity of the US to the age of multipolarity where many nations participate in helping define the economic character of the global economy, one refrain is constantly heard from these new players: “As a nation, we act in our own best interests: we do what works for us.”
So India will not join a US-led oil embargo on Russia which prevents them from settling that trade in US dollars. Instead, India is perfectly willing to pay Russia for its oil, even if it does so in Chinese renminbi.
And much to the chagrin of the US – which saw the dollar-based New York Clearing House mechanism as an irreplaceable link in the chain of most global trade – countries are finding that bypassing the dollar is surprisingly easy to do. And, what’s more, it is often cheaper too.
All of this threatens the economic hegemony of the US, and not just in the international arena as described above. Before long, these tectonic shifts are likely to have profound – and profoundly destabilising – implications for the US domestic economy as well.
But back to those two atmospheres – one for capital, one for trade. They intersect in a nation’s current account position. For the US, their current account deficit means they are short the trade atmosphere by about $1-trillion a year and so – if the dollar is to hold its value, the US must be long of roughly an equivalent amount of imported capital from the rest of the world’s capital atmosphere.
Those nations that run current account surpluses – the Eurozone, China, Japan, Switzerland and Saudi Arabia, for example – are long the trade atmosphere and so are net contributors of their surpluses to that capital atmosphere. (Economists also characterise this situation as a nation that runs a current account deficit as being savings deficient and therefore needing to import savings through their capital account, savings generated from the current account surpluses run by other countries.)
So far, so good. But this is where the geoeconomics moves to another much higher level… and yes, this is where geopolitics starts to enter the equation.
Such is the level of net dissavings by the US created by its current account deficit that it generates 60% plus of ALL such deficits worldwide. In other words, the US consumes 60% plus of all internationally mobile savings to balance its trade-short external account. Sixty percent? Not bad for 4.2% of the world’s population!
And there are growing signs that at least some of those nations previously providing their savings to the US are growing weary of funding what is in effect the US’ excess consumption. Another way of saying this – using the logic of Ben Bernanke, the former chairman of the US Federal Reserve, but applying it in reverse – is that some of the world’s “surplus savers” no longer feel so inclined to let the US’ “surplus consumption” absorb the lion’s share of those savings.
Before proceeding, it is worth detailing exactly to what ends these surplus savings have been applied. The TICS data provided monthly by the US Treasury tells us where these savings go. (All figures are net flows; all trends are those evident over the past decade.)
Since 2014, foreign flows into US equities have – albeit with fluctuations, especially over Covid – been on a generally declining trend. Similarly, flows from foreign official sources like central banks have declined to be almost negligible today.
So what has been the principal destination for private foreign capital inflows – part of those foreign excess savings – into the US? The short answer is not US Inc equity instruments, but rather US government debt instruments. In particular, foreigners have bought Treasury Bonds and Bills, with much smaller amounts going into still-government-backed Agency Bonds as well as corporate bonds.
For the year to end September 2023, these net flows have been Treasuries $597-billion, Agency Bonds $125-billion; and Corporate Bonds $187-billion, together a total inflow of $909-billion.
Add in net flows into equities for the same period – $168-billion – and the US current account deficit is essentially covered, allowing the imbalance of its trade atmosphere to be “equilibrated” by that “kindness of strangers”: capital, or more precisely, savings from abroad.
As the above category totals show, foreign savings flowing into US Treasuries ($597-billion) contribute to the funding of the US’ budget deficit, this year forecast to top $1.7-trillion.
As a past rule of thumb, I estimated this kindness of strangers would fund over half of the US’ annual budget deficit, but this 50%+ ratio may now also be falling.
Earlier this year, the 12-month total into US Treasuries was close to $1-trillion; the subsequent drop off to $597-billion by September may help explain the disastrous performance of the US Treasury market in 2023.
Are foreigners “falling out of love” with US Treasuries? Given the disastrous performance of US Bonds since 2021, it would not be a surprise.
Now add this final observation to the mix: that the US, again with only 4.2% of the world’s population, runs over 42% of all budget deficits worldwide.
With these factual foundations laid down, let us now move on to the emerging geoeconomic tensions in the global economy; tensions that are exacerbated by the intensifying winds of geopolitics, be they blowing from Ukraine, Gaza or Taiwan.
There is growing evidence that leading players in the non-West – sometimes collectively called the Global South – are increasingly impatient with the underhand way the West loads the dice in its favour in the playing of the world economic game.
On 14 December 2022, the UN General Assembly voted on a resolution: “Towards a New International Economic Order”. The vote split perfectly between the Rest (123 in favour) and the West (50 against): only Türkiye abstained.
West vs Rest unanimity in this vote was near total, and there were plenty of democracies who voted in the latter camp: it was not a divide between democracies and autocracies.
However, there is far from unanimity in the reasons for this impatience among the Rest, and even less agreement as to what sort of economic order might replace it. But there is a coalescing sense coming from these discontents around the idea of, “well, definitely not the current one!”
So far, I have not seen any analysis where this impatience takes the form of: “Since some of we non-Westerners provide a sizeable share of our surplus savings to keep the US show on the road (and, albeit on a smaller scale, the British one), unless things really start to change, we might see fit to withhold some or all of those savings.”
But I fully expect a researcher in, say, the BRICS New Development Bank to put two and two together and come up with four.
Often, it seems as if a political event might give further impetus to the campaign to reform underlying economic grievances.
When the United States vetoed a resolution from BRICS founding member Brazil at the UN Security Council calling for “humanitarian pauses” in the Gaza conflict, it again highlighted the powerlessness of current multilateral institutions to address those issues that concern the wider UN Assembly: economic advancement and security and human rights for all – not just for those communities favoured by the West.
This resolution came soon after the end of the annual International Monetary Fund and World Bank meeting in Morocco. At Marrakesh, the contentious issue of global governance reform was again raised.
The IMF is arguably the most important economic organisation that the Global South wants reformed. At present, it has skewed-to-the-West voting ratios: the US’ 17.4% is almost three times that of China; the UK’s significantly larger than India, and Belgium’s is bigger than Indonesia.
The reforms envisaged would upend the pro-Western voting weights, including possibly ending the US’ right of veto were its quota to fall below 15%.
Likewise, the “droit de seigneur” exercised by the US and Europe at the two Washington DC multi-laterals (where the US gets to choose the head of the World Bank while Europe gets to nominate the head of the IMF) may need to be replaced with a more “democratic” arrangement.
Meanwhile, over at the UN, it is becoming increasingly untenable for the permanent five members of the Security Council (and especially the US, UK and France) to stall Indian and even Brazilian membership of that inner grouping.
Finally, this time thinking geostrategically, what might happen to the US’ defence budget ($837-billion) if foreign inflows began to dry up? That budget currently allows the US to spend more on defence than the next 10 countries combined and, in so doing, maintain over 750 foreign bases – 80% of all foreign bases worldwide.
My primary interest however is focused on the geoeconomic fallout of a possible shift away from non-Western countries choosing to deploy their international savings in US government debt instruments and thereby underwrite the ballooning US government deficit.
The reason for this is that their actions may yet destabilise the foundation of US capital markets: the US bond market. This they would do by undermining the foundational price of risk in global capital markets, the yield on the 10-year US Treasury.
It is difficult to speculate as to what would be the full ramifications if these non-Western surplus recyclers were to shift even some of their surplus savings elsewhere. Yet, as it is, there is tentative evidence that they are beginning to do just that.
And, though the connection is all but impossible to “prove”, this could be one reason why Western financial markets – led by that axiomatic US bond market – have been struggling for nearly three years. (This period has led to the worst returns for US bonds since 1871.)
Already we see that several surplus-running countries outside the West seem less inclined to recycle the same share of their surpluses into US securities as previously: even the Saudis have reduced their central bank Treasury Bill holdings by 45% in the past three years, to $108-billion today.
Instead, these surplus runners have directed more of their national savings towards a variety of alternative assets. Gold reserves have risen sharply in the Global South central bank community, notably in China, Russia, India, the Central Asian “stans” and Türkiye: in the first nine months of 2023, such holdings rose 800 tonnes, over seven times South Africa’s 2022 production of 110 tonnes.
Sovereign wealth funds from Greater Arabia are increasing their exposure to Asian assets, including private equity and property. Middle Eastern companies – especially in the oil and petrochemical sectors – have been increasing their foreign direct investments in existing companies as well as start-ups across Asia, including China and India.
Perhaps the most telling strategy of all comes from the biggest surplus runner: China. While systematically reducing its US Treasury holdings – from $1.3-trillion in 2014 to under $800-billion today – it appears as if a sizeable share of China’s surplus has rather been recycled into its strategic stockpiles of commodities.
Besides gold, oil, nickel, uranium and cobalt have all seen notably large Chinese purchases beyond China’s current consumption needs. Perhaps the most unremarked upon “beneficiary” has been grains. China now holds 70% of world maize reserves, 60% of rice, 50% of wheat and 30% of soya. (Note under IMF rules, gold can be included in their definition of FX reserves, but other commodities cannot.)
So how do these geoeconomic facts connect to the geopolitical environment? My sense is that the two are connected by a two-way feedback mechanism, where the geopolitical concerns get reflected onto the geoeconomic foundation and vice versa. Increasingly, political and economic decisions are then taken by nations – individually, collectively – that align both. All this tends to happen while prioritising an individual nation’s economic self-interest in the process.
If this is so, given that the US and much of the West are floundering in the geopolitical arena, the world is seeing nations outside the West taking actions that could destabilise the current economic structure of the world – and particularly in the atmosphere for capital – as we have come to know it.
Evidence of this growing frustration in the Rest with the priorities of the West was well captured in a quote from the Indian Foreign Minister, Subrahmanyam Jaishankar: “Somewhere, Europe has to grow out of the mindset that Europe’s problems are the world’s problems, but the world’s problems are not Europe’s problems.”
Many countries in the Rest would add the US to Europe in this quote.
Add to this the growing perception in much of the Rest that the moral high ground the Western democracies occupied for much of the postwar era is increasingly tarnished. The US-led wars in Iraq and Afghanistan – where, respectively, no weapons of mass destruction and no Osama bin Laden were found – accelerated this process; neither invasion was sanctioned by the UN, but both went ahead regardless.
The Gaza conflict provides an all-too-tragic current example. Many non-Western nations (though not South Africa) supported the West’s position on Ukraine in the UN, some decrying the neo-imperialism exhibited by Russia as well as its callous approach towards the wellbeing of Ukraine’s civilians.
With that in mind, these same nations of the Rest – while unreservedly deploring Hamas’ actions on 7 October – cannot understand why so many Western nations now implicitly defend Israel’s livelihood-threatening and even life-taking actions towards Gaza’s civilians.
Some Western nations – notably the trade deficit running US – even go so far as to veto “humanitarian pauses” that would allow medicine, food and water to be distributed within the besieged Palestinian enclave. The visible squirming of the US’ UN ambassador as she vainly tried to square this sad circle was there for all UN members to see.
The charge of hypocrisy against the US and its close Western allies now hangs heavily in the air.
Such duplicitous behaviour by some Western nations means the growing reservations of the Rest leak from the geopolitical arena into the geoeconomic one. And then, by the Rest’s subsequent economic actions no longer aligning themselves to Western priorities, they leak back from the geoeconomic into the geopolitical.
And thus we find a world that is very different from that of the 1950s. For then, the winners of World War 2 mostly had right on their side: even the Europeans had begun the process of decolonisation.
Today, for all the high-minded expressions from the leaders of the West as to, “what is the right thing to do”, their mask has slipped and the old – and terrifying – logic of “might makes right” has again been revealed.
And more and more, many nations in the Rest simply do not agree with that mantra, even if, regrettably, some of those same nations still practice such behaviour too.
Thus, where they can, some of these Global South nations have resolved to take their trade – and even their surplus capital – elsewhere.
Frequently, this “elsewhere” means Asia, a destination that has the added advantage of offering product that is cheaper – and increasingly better – than that found in the West.
Indeed, the ultimate confirmation of this is that many leading Western multinationals also source their manufactured products from Asia – exhibit A, the iPhone 15 – for precisely the same two reasons.
After all, business is business. DM
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It would be so refreshing if someone actually defended the West and told the Global South off for being the bunch of histrionic whiners that they are. To be sure the West has many faults but by and large it is functional which is more than can be said for the Global South who are corrupt and incompetent to the point of dysfunction and who are incapable of achieving much without the West holding their hand. Do consultants-to-think-tanks get kudos for bashing the West and for lionising the incompetent or do they merely push that agenda on a voluntary basis ?
All of the Global South being histrionic whiners, James? Chile? Oman? Malaysia? I don’t think any group is without at least some histrionic whiners, the West included. And no, not all the Global South are corrupt and incompetent, whilst some of the West most definitely are. Meanwhile plenty of the Rest have made excellent progress without Western handholding. The world is changing. The Old Guard countries needs to face up to this awkward reality. Part of this means accepting they are not without faults – often big faults: 4.2% of the world’s population running 42% of the world’s budget deficit and expecting the rest of the world to underwrite 33%-50% of it?! – and that the New World – much of which is older than much of that Old World! – may be able to succeed in today’s environment by doing things differently.
That economic center of the world depends whether you look at a conventional map around Greenwich, which think tanks like Chatham default to. If you start with 180 degrees in center, capturing the largest and second largest economies, the center is somewhere in the middle of the Pacific. Perspective matters.
The same convention plays out in “west” versus rest except that is further distorted by ethnicity. For me the issue is not and has never been geography or ethnicity. Singapore, Korea, Australia and Japan would to my definition fall in the same camp as “the west”. They are not geographically “west” and their ethnicity is not “western”.
The “sides” are ACTUALLY split on values such as democracy, free market principles and human rights; absolutely nothing to do with geography.
Yes China was the largest economy in the world, until it stagnated under an insular chain of emperors followed by the Mao regime. In that time the “west” embraced democracy, open economies and individual rights.
Given freedom of movement to choose any country on earth, where would most ordinary families from South America, Africa and the Middle East move right now? Ask why?
Johan, my centre of gravity data comes from McKinsey. (Google ‘centre of gravity’, plus ‘McKinsey’.) The Economist shares this view.
I accept your adding of Japan and Australia to the West definition (plus NZ). The term as used is more political than geographically precise. Korea and Singapore are in the middle, with Korea leaning more to the West and Singapore more to the Rest. On Free Trade – and I quote UNCTAD here – “In 2021, Hong Kong SAR remained the most open economy to international trade, as indicated by the trade openness index of 182 per cent. Singapore (115 per cent), Viet Nam (115 cent), and Djibouti (100 per cent) ranked second, third and fourth. ” The US, Japan and yes China and India ranked very low in the index (15% or under.) In the latest Freedom House Index, that 4.2% country ranked 59th, between Panama and Samoa. And on your final point, as a friend of mine in the CIA put it, economic refugees tend to go to countries where the chances of a better life are high…but the fact that they receive government hand-outs when they get there is a huge part of that ‘better life’ definition. For how much longer can the West sustain this generosity given the increasingly parlous state of their Government Finances?
Thanks for response Michael:
US, China + Canada GDP = $45t, more than double the next 20 nations. That would mathematically place the Northern Pacific as the economic center of gravity if you simply use 180 longitude as middle of map. Even more so when remember Japan and Korea.
We’re at cross purposes with free market / capitalist systems and open economies for trade. No researcher would regarded China as based on free market principles. China is central planning to the core and deploys immense state intervention. It’s currency is entirely manipulated to stay in a range that suits China. How competitive would Chinese products be at 5:1 free floating instead of 7:1?
There have of late been articles about the 4% Americans, their deficits and debt. What those articles miss entirely is the asset side of balance sheet. US companies represent about half of all corporate profits and around half of global equity. Of the $40 trillion federal + agency debt : earlier this year foreign ownership was under 25%. It is a mistake to portray that the rest of the world funds US debt, most is owned by US retirement system and US corporations. The US also holds sovereign debt of other nations. One would need cross-country holdings to see which central banks have skewed weight of US debt but since US is more than 25% of world GDP, the 25% sounds sort of right.
As I understand it, here is how the centre of economic gravity is calculated by McKinsey, The Economist and Danny Qua at Lee Kuan Yew School of Public Policy, National University of Singapore. (Their various studies are online.)
It is a moot point as to what is the largest economic bloc by nominal GDP in today’s world. Wider Europe – the European Economic Area, the UK, Switzerland, Turkey, Ukraine, Belorussia and Russia plus a few Balkan and Caucus nations or the US and Canada? Both are around $25.5 trillion in terms of nominal GDP.
To complete the picture of the secondary regions (all in trillions), Latin America is $5.9; Africa $3; Middle East and Central Asia $4.8; the Indian subcontinent $4.5 and ASEAN $3.7. Asia collectively is $41.6 trillion. Only Latin America would add heft to the US-Canada combine: every other region is pulling east from Europe in the calculation.
The start point for the migration was Iceland in 1990… midway between Europe and North America.
Asia has been the fastest growing region since 1990, and it closer to Europe…a quick-and-dirty measure is to look at time zones. Beijing to Iceland is some 4000kms shorter than Beijing to Iceland via Alaska. Going West, Beijing is 15 time zones from Iceland, going East it is a lesser nine.
So the migration route took the shortest route possible from Iceland. This means East across Russia and not the long way round over North America to the mid-Pacific. Furthermore, a mid-Pacific centre of gravity would not sit well with the fact that Greater Europe is still one of the two largest economic blocs.
I am guilty of this charge myself but many who view the world through a Western perspective are often blinded by the rise of China and do not give due regard to ABC: Asia Beyond China. Added to the ‘gravitational pull’ of China’s rise, ABC’s growth most definitely would place that global centre of gravity in Central Asia today – en route back to where it started in 1000 AD, somewhere in the Himalayas!
One can do complex calculations & risk brain burnout by statistics, but I prefer a simpler measure. Take any liberal democracy & any of the Rest. Offer any person the opportunity to move wherever they like … to receive citizenship … I suspect with almost 100% certainty that the individual would move to one of the liberal democracies. Until that is no longer true, all other speculation about ‘the Rest resurgent’ are folderol. (I just read an article about how China’s very wealthiest are scampering … I believe it was in Bloomberg.)
Sorry, just No
Take a world map. Put 180 degrees longitude in the center. Tell map to draw circles sizes representing GDP by nation. Squint a bit and the center of gravity is North Pacific. I don’t care what McKinsey says (will leave my opinion of them for another debate as a former competitor) when their mid point is plain and simple WRONG or arbitrary. Why can’t the middle of the map be 90 degrees or 270 degrees or 180 degrees?
If I looked at an earth map flattened with North Pole at center the center of gravity would again be different. If I looked at earth from above South Pole another completely different view.
Your data assumptions are imho entirely wrong on debt, on debt owners, on assets and on income.
Lastly : when a thug strays into a region. Who are you going to call? China? Russia? The Rest? NATO is who you will pray arrives within two weeks.
Please see The Global Economy’s Shifting Centre of Gravity
Danny Quah Economics Department, London School of Economics
and Political Science and LSE Global Governance. Danny’s methodology is somewhat different: he uses the Equator as his ‘migratory path’. But he starts in the same place – under Iceland – and travels East not West.
using equator makes the math easier as weight only has one axis.
But using Greenwhich as reference center is lazy and self fulfilling. California and Hong Kong are about equal Pos and Neg longitude (115), leaving the center of gravity of those two on Greenwich. (imagine there was only US and China)
If the researcher were smarter, he would realize that using 180 longitude as reference and adjusting California and Hong Kong weights now being plus and minus 65 degrees will leave the center of gravity in the north pacific. North Pacific is not only a different valid answer, it is physically far more accurate in freight miles.
Johan, That is very simply not how the calculation is made. The Greenwich Meridian never enters into the C.O.E. G. mathematical calculation, (nor did I ever imply it did). The point near Iceland was the most westerly point of the migration that began around 1000 AD in the Himalayas. This near Iceland point was broadly between – using the Great Circle – the two overwhelmingly dominant economic blocs of 1950: the US and Europe.
Johan, you state that the west embraced human rights. I guess that explains events such as the German genocide of Herero and Nama people, the rampant and horrifying human rights abuses in the Belgian Congo, the Trans-Atlantic slave trade, the British genocide of Boere in the concentration camps… Need I go on?
btw, it is grossly incorrect to say iphones are manufactured in China. They are assembled there for a $2 per item toll fee using parts from all over the world. Less than $8 of the cost of an iPhone is value-add by China.
What word would you use, Johan? Made? The fact is that no-one can ‘make’ it better AND cheaper for now. India might yet do this, but the initial feedback on quality control issues suggests ‘more work to be done’! Vietnam possibly…but my point is ASIA…
The correct term is “assembled” Michael. Not made or manufactured by any stretch.
Assembled then. The point stands. Asia – led by China – is an excellent place – for quality, for price – to assemble.
Given multinational supply chains, there are many products that are no longer manufactured or made in one place…except perhaps for those solar panels on my roof and if I had an EV, the batteries in such a vehicle. Often a Tesla EV too! And I could go on…Asia is doing so much more than mere assembly…even though it excels at that to. Time for the Old World to realise the reductio ad absurdum of outsourcing. Soon you forget how to make things. And please see Vaclav Havel – reputedly Bill Gates’s favourite author – as to what happens when a nation foregoes “making things”… MENE MENE TEKEL UPHARSIN…
The Swiss might disagree with Havel. They “make” virtually nothing and have probably the single strongest economy and currency over past century. Their primary export is not product but service : tax evasion and banking secrecy for nervous billionaires from russia, china, india plus the rest (and the west).
The version of Havel that I prefer is that no country has ever imported itself to greatness. Look at Japan and Germany after WWII as clearest example. Nowadays, one MUST however understand that imports and exports are not restricted to goods and some goods are a destructive export. The latter is the commodity curse. Japan and Germany imported commodities and turned them into high technology exports. Norway spotted it early and put oil and gas boom into a sovereign fund investing in broad domestic infrastructure and foreign assets. Their own energy comes from renewables instead of the bountiful oil and gas that they export.
China spotted this and will move from exporting their commodity : cheap labor. China is moving up the value-add ladder. Its big problem is their property bubble. If one had to value the “assets” sitting in loans made by government and all its agencies there is a 3 to 5 trillion dollar hole in China’s finances (four times the value of their US Treasury holdings). Officially, NPL is under 2%. Delve two inches into provincial records and informed opinions put NPL at 30% to 35%
Simply not true, Johan. Switzerland’s number 1 export is pharmaceuticals and medical products, about $120bn. Gold and Jewellery came in2nd, about $100bn. Not included in the latter would be watches c $25bn, ahead of financial services $22bn. (US 5x Switzerland in FinServ, UK 4x, Lux 3x, with Singapore, Germany and Hong Kong also bigger. Switzerland is home to a number of powerhouse multinationals led by Nestle, Schindler, Holcim and ABB, all very much “makers of things”…as are of course the pharma companies Novartis, Roche and Syngenta.
I 100% agree about your ‘vital role played by exports’ comment.
Michael, in response to your simply not true statement…
80% of Swiss workers are employed in the services sector. I’d venture over 70% of Swiss GDP is services.
Switzerland has no mines. It imports jewelry metals and diamonds and even then a BIG chunk of the actual physical crafting work happens in India and Eastern Europe.
Yes Switzerland does not just yodel in the hills and import everything, they run a surplus = maybe why they are the 50y currency champion. They pivoted to services.
There is a big difference between Swiss company revenue and Swiss manufacture. Many measures are now upside down with globalization. Is Apple’s revenue and profits American?
An alternative way (from gross imports and exports) of looking at countries is using corporate profits as a crude proxy for ownership of value-added. Then the US about 3 trillion, China 800 billion. Expressed per capita it is insane differential.
Back to this article (and several others recently) about that 4% nation and the size of its debt. 1 : it has a lot of debt but also immense assets. 2 : it owns most of its own debt. 3 : its cost of its debt is the benchmark for risk-free rates. 4 : its debt service cost relative to GDP is easily sustainable. 5 : it has a young and growing population. Conclusion : the rest of the world is NOT funding spendthrift Yanks disproportionally to the US’s share of world GDP.
Nice discussion – now have to go fix stuff 😉
Maybe I misread you, Johan. you wrote “Their primary export is not product but service : tax evasion and banking secrecy for nervous billionaires from russia, china, india plus the rest (and the west).” I detailed that this was not the case, not by a long shot: medical supplies are. Yes: the 80% in services is correct: ditto US. And like the US, consumption is 70%+ of GDP. No issues there…except that Switzerland runs a decent current account deficit…and the US a massive deficit (60%+ of all deficits worldwide with 4.3% of global population). They way economic stats work is that – unless US Dollar value changes (no FX reserves to speak of); no $ change – this means the US absorbs 60% + of all globally mobile savings. My focus is on ‘flows’ – the atmosphere of trade – than ‘stocks’ – the atmosphere of capital. But I accept the size of the US’s stock in my piece (quote): over 60% of the All Country World Index for equities is in US securities, as is over 40% of the All Bond Index. Why focus on flows? They are forward looking (just like the P&L is to the balance sheet and for the same flow/stock reason.) This is why I follow the TICS data: last year foreigners funded c$1 trillion of Treasury and Agency debt; budget deficit $1.376bn. Foreigners HAVE deserted the T-Bill market this year, QED the worst year EVER for T-bills looms…
By the way, in case I was not clear. There isn’t an entity in China that buys all those parts all over world and then assembles iPhones. Apple buys everything, pays the Chinese company $2 to put Apple’s parts in together. A few minor molded bits are purchased by Apple from Chinese suppliers.
With all the politics going around, expect to see Apple (and others) move assembly to for example Mexico or Texas. On a $1500 item, paying $8 instead of $2 assembly is negligible when weigh up the risk of your $40b of high tech components being seized by the Comrades…
Useful to reflect how BYD has now surpassed Tesla as the largest EV producer in the world., producing almost 50% more units than the former leader. In the process, it has helped China overtake Japan as the world’s largest car exporter. Almost all of BYD’s supply chain is Chinese…as indeed is a significant proportion of Tesla’s supply chain. And BYD designs, makes, manufactures and assembles most of its output in China: ask Warren Buffet!
One of the most instructive reads of the past year. You might have added that the US’s confiscation of Russian assets and blocking of settlements added to the impetus of removing national savings from America.
Louis, There is – sadly – a lot I could have added! But you are right. There are signs that countries are even starting to diversify their assets further from their FX reserves. Data patchy. Early days yet!
Louis : why did the same part of the world confiscate those assets?
The assets are peanuts so they did not need them.
Always ask WHY at least four times
Not sure whether the rest has enough economic power or control over what are today’s essentials (the sky, information and its flow) to trouble what you call the west. India decided that rather than joining the whining team they’d learn from the west but follow their own strategy which is paying huge dividends as they will soon displace China with very much of a mixed economy. As for China the moment TSMC and Co move all their chip manufacturing facilities out of Taiwan the west will say have it just like China took over the empty shell that is Hongkong today (and without the newest lithographic machines the plants China will inherit will produce obsolete products). History is a spiral with very little changing over time the strong always dominate the weaker until the weaker become strong and the strong become weak. It has been like that for time immemorial and it will continue to be like that past the time you and I will be pushing daisies.
Difficult to know Michele. US leads in the sky and subsea (though China ahead in sky-based quantum cryptography.). China likely leads on land as a result of the Belt and Road initiative. China ahead subsea in the Indian Ocean. India may have overtaken China in population, but its economy has a long way to go: 5 years of 2023 GDP Growth by China will add the equivalent of another India to the global economy. China absolutely dominates the main energy sources of tomorrow: solar/wind/EV. And whilst they may not yet have EUV lithographic machines, they cracked DUV ones very quickly. The new Huawei Mate Pro 60 uses a Chinese made 7nm chip and has shocked many Western techies as to how good it is. (Not just about less and less nms: energy usage, heat generated etc.)
Michele : good points. System on chip new boards now are “3 micron” (a title not reality) tech while China lagging at 5 micron and need twice the memory and Wh to not match benchmark scores.
The REST will not like what happens when the WEST pull their operations out. It’d take Apple or Dell or HP less than a year to move 100% of their off-shored assembly to a safe harbor free from comrade politics.
I don’t get why a slice of the analysts are on a mission to critique the only part of the last century that provided the only defense against the hair-brained-crazy regimes. I can name 50 countries that go on their knees and thank the evil West for delivering them from the crazies.
WWI was easy. WWII came close to delivering 50y of what the world experienced for 500y in the dark ages.
Ayn Rand (three books) should be prescribed reading. Read them three times between 13 and 30 and you’re sorted for life. You don’t need to be unfeeling, all fine with helping deserving people. They’re the next you, which is the whole point.
What makes me laugh is that the biggest co-opter of the Global South (ignoring Russia as it’s useless at the moment) is China, which is in the Global North! Frankly, apart from having a lot of very cheap labour, that they will send to the GS, rather than using the local workers, they have one of the biggest idiots of the lot as their president. Communism has never worked, and will never work, especially with New Maos like him in charge. It’s just a form of capitalism (and even worse in Russia), but with no competition.
Yes, Asia is a big market, but where does the innovation come from? Where does the new science come from? The West, where people are not constrained (too much) by The Party thinking (or a racist like Modi in India). What has China ever discovered, apart from stuff like gunpowder back in prehistoric times?
The only people worried about Asia taking over are the West’s businessmen who have been making a fortune out of the situation for the last 40 years, where they could transfer the hard work for their products to China and deny the workers in their own countries jobs – and see what that’s done with the rise of The Chump!
So much, Steve. But for starters check out quantum cryptography…
Michael : why do you believe China has an advantage in quantum cryptography?
The evidence in prime numbers points elsewhere.
Hard to say NOW Johan: all the R&D tends to be done by the military. But when the Chinese showed the world how they had got two photons to talk instantaneously and across vast distances (ground station to satellite) in Vienna in 2017, it was no secret that the Pentagon was gobsmacked!
Erm, sorry Michael but you are really talking through your backside. I went into Wikipedia and searched on ‘quantum cryptography’. I came up with one freaking Chinese oke, Andrew Yao!! Got any other brilliant ideas or will you rather admit the Chinese discover NOTHING?!
If Wiki is your source, check under ‘Quantum key distribution’, Steve. And I am not going to get into a slanging match with you. Very few serious thinkers in Tech discount what China has done, is doing and has the capacity to do. This was made clear in MIT’s Technology Review in 2019. (I read it as a warning to the US Government not to underestimate China.) One point was especially brought home by MIT: whilst the Western bias with tech leans heavily towards consumer tech, China’s bias is far more industrially focussed. This was the point made in Dan Wang’s Foreign Affairs March 2023 article: China’s Hidden Tech Revolution; How Beijing Threatens U.S. Dominance
Also check out Dan Wang’s article in Foreign Affairs. China’s Hidden Tech Revolution: How Beijing Threatens U.S. Dominance. Dan is ex-Gavekal and now working alongside Stephen Roche at Yale.
Mr. Davidson. Agree with you almost 100%. The old saw about these authoritarian countries taking over comes & goes like waves on a beach, yet the immutable (modern era) status quo remains. Liberal democracies rule. In a sense, freedom rules. Countries where the Rule of Law means something, where governments serve the people … &, ultimately, places where the best & the brightest want to be … will, notwithstanding naysayers, wishful thinking & reams of statistics, be triumphant.
Absolutely. And the most important thing for me is that people are allowed to think outside the box. This is why Japan is very similar to China. They’re very good at using (or stealing!) free countries’ ideas but their Bushido culture just won’t allow free thinking.
There were major inventions before the Age of Democracy hit us…which I take from the 1920s when women finally got the vote. (1893 New Zealand). Marie Curie got two Nobels in different fields long before women got the vote in France (1944). China’s Tu youyou got the Nobel Prize for medicine in 2015 and is – via Artemisinin – saving countless lives every year (mostly in Africa.) For its part, Imperial China gave us blast furnaces, cast iron, crankshafts, drilling rigs, drydocks, gunpowder, horse harness, paper, porcelain, printing, silk… and much more.
But my issue is different – government debt in the West is rising inexorably and that debt is mostly used to finance consumption (not as in China infrastructure; China is rather emulating 1870-1914 and the US Railroad Era). US Social Security runs out in 2033. Today only 57% of US Government expenditure is covered by income and this ratio is falling fast. (US debt has quadrupled in the 15 years since the GFC.) I strongly recommend you read Stanley Druckenmiller – he who worked out how to break the Bank of England. After that Ray Dalio’s Changing World Order. Neither man is remotely an ‘apologist for the Rest’. But both see clearly the writing on the wall in the West.
Really Sorry, but who cares who is the quoted Gavekal? Irrelevant firm on any measure’
I may as well quote what a lawyer in a three partner family law practice in Somerset East has to say about no-fault divorces.
Great article. Thank you. Stirred up some really entertaining comments.
Gavekal is regarded as one of the top 10 independent research houses in the world.
Apologies, the comment was rude. I’ve not come across them but don’t really dwell in that space anyway.
You can get a good taste of what Gavekal does on Twitter – sorry X!
I stick to peer-reviewed research for information rather than opinions on social media.
Half the problem in the world at the moment is unfiltered, unreviewed opinions being put out as “research” to crowds of like-minded people that stick to this “research” in their echo chambers.
‘Peer review’ is not how ‘international research works. But Gavekal being quoted by market leading commentators – Bloomberg’s John Authers this morning, John Mauldin last week, Martin Wolf of the FT (arguably the most read financial and economic journalist in the world) on 24th October – is about as high praise as a firm like Gavekal can get in this business. An X account is used by almost all global research houses as a pointing mechanism to the heavy stuff the company produces (and this tends to be behind a pay wall.) Gavekal’s paying client list is amongst the most prestigious in the world as I realised at their 25th Anniversary Party in Paris in October. The only firm I regard as equally superb is Kiril Sokoloff’s WILTW.
Michael:
In response to your comment about peer-reviewed.
imho opinions from journalists and publishers are just that : opinions. They might do their own research to form the house view they are pushing, but none of that is reviewed research and is often fatally flawed.
Unfortunately nowadays most content users do not differentiate opinion from research. If McKinsey submitted their economic enter of gravity nonsense it would score a D in Economics 101 for methodology and a Fail in Conclusion.
If I find the time I’ll do you the two different centers of gravity calculations based on difference in reference point but I’m sure you can appreciate that when you think of a round earth, the short actual physical distance among US, Canada, China, Japan, Korea as a cluster that represents over 1/2 of world GDP, the world center of GDP must logically be in North Pacific, probably not far off the dateline. Compared to 25y ago that center will have moved west closer to China.
I am curious to know your academic qualifications, Johan. How is it you are so knowledgeable that you can call out Quah, Wolf, Authers, Gavekal and the McKinsey Global Institute?
Michael: RE “ your academic qualifications”
My background is irrelevant unless you show where I am wrong and I quote my research.
That Quah model is proper math to a point where it goes theoretical rather than address : which point on earth surface is the nearest to most of earth’s GDP. Have not looked at your other references.
What I pointed to in the main article are:
1. US debt without considering assets is plain weird.
2. The US owns ¾ of their own debt.
3. Their debt is affordable.
Use it if you want, ignore it if it doesn’t suit you.
Here is my assessment of the US national balance sheet. My deeper look at it adopts two lenses. Firstly, on versus off balance sheet liabilities. Secondly, I look at both stock and flow, the latter being akin to a national cash flow statement.
Firstly, on balance sheet: Assets: $220 trillion; Liabilities: $33.7 trillion; GDP: $27 trillion; Gearing i.e. current liabilities to GDP: 125%; 2008 gearing: 67.5%
Secondly including off-balance sheet liabilities: Assets: $220 trillion; Liabilities: $211 trillion.
Part of the reason debt is rising so fast in the US is that previously off-balance sheet liabilities are ‘bleeding’ on to the current balance sheet. This will accelerate fast after 2032 when the Social Security Savings Fund runs out.
PART 2 follows: flows.
Now flows: US on balance sheet liabilities – issued federal debt – have more than quadrupled since 2008, from $8 trillion to $33.7 trillion. This year a deficit of c $1.8 trillion is forecast or 6.7% of GDP, unheard of in a) peacetime with no COVID; and b) at the top of the employment cycle. This deficit is 42% of all deficits run worldwide. 2024’s deficit – assuming no slowdown or recession – is forecast to top $1.9 trillion.
This time last year, foreigners were buying about $1 trillion of T-bills and notes; the deficit last year was $1.4 trillion; they were financing roughly 70% of new debt. As of August, foreign funding had halved to $500bn, about 28% of new debt. Foreigners are scaling back US bond purchases.
This is hardly surprising: bond returns last year were the worst since 1871; this year will likely be worse. 2023 will also be the 3rd year of negative bond returns in a row: an unprecedented run in the history of the US.
As a stock, foreigners own about 23% of US debt, the Federal Reserve about 15% and US private sector about 62%. There are huge (mostly unrealized) losses on these holding: Bank of America wrote off $108bn in Q3. The Fed’s losses are $100bn; the Bundesbank far worse at Euros 200bn! The US Congress has not passed a budget on time since 1996; today it lives on ‘continuing resolutions’. The current budget is about 57% covered by income meaning 47% creates new debt.
As Stan Druckenmiller – his idea broke the Bank of England whilst he was at Quantum – has recently written: “If you wanted to fix the (US’s) situation today without touching entitlements, you’d have to raise taxes 40% tomorrow morning, and keep them there forever, or cut spending tomorrow morning by 35% and keep them there forever.” The US is in a far more precarious position than many realize.
I surrender 😉 but leave this : balances of power are changing and people should adapt investment strategies just like with shifts in technology.
A lot of the “west” but also many parts of the “rest” have a deep problem with shrinking aging populations that carry large future social welfare obligations. Those unfunded obligations will knock countries off pedestals but by same token I do not believe for one second what China says about the value of state and province and city and bank exposure to their infrastructure and property sector fiasco. China should be less concerned over the value of their $800b Treasuries and fix the trillions in white elephant infrastructure investments. When (not if) China has their Arab Spring, it will be ugly.
I invest virtually nothing in bonds, focusing instead on half a dozen truly world class individual equities. So the bond market value drop with recent tremendous interest rate hikes mostly passed me by.
I don’t invest in companies that are owned by the state or located in countries that do not have Rule of Law, Free Market, Free Floating Currency or have Undemocratic autocratic communist regimes that can do whatever they want.
Sure, several of my halfdozen equities have exposure to China both in supply chain or as customer market. Some are already shifting their exposure.
Especially the first half, the recent interview by Paul Tudor Jones of Stanley Druckenmiller at the Robin Hood Conference is very sobering. On YouTube.
Michael, as ever insightful! M