Geopolitics Trumps the Markets

America led a 30-year hiatus from history. It was nice while it lasted, but it’s over.

That crashing sound you heard in world markets last week wasn’t just a correction. It was the sound of the end of an age.

During the long era of relatively stable international relations that succeeded the Cold War, markets enjoyed an environment uniquely conducive to economic growth.

.. The results were extraordinary. Between 1990 and 2017, world-wide gross domestic product rose from $23.4 trillion to $80.1 trillion, the value of world trade grew even faster, more than a billion people escaped poverty, and infant-mortality rates decreased by more than 50%. The number of people with telephone service grew roughly 10-fold.

This hiatus from history was, by most measures of human flourishing, a glorious era. Now it has come to an end, or at least a pause, and the world is beginning to see what that means.

.. the basic elements of economic globalization appeared firmly in place.

  • Russia, the most obvious challenger to the geopolitical order, was an insignificant and diminishing player economically.
  • And China, notwithstanding its rapid economic growth and its anxiety about American military power, was unlikely to challenge the economic basis of its own success. Geopolitics might have been back, but that wasn’t an issue for markets.

That complacency was misplaced. The return of geopolitics means the basic framework for economic policy has changed. In periods of great-power rivalry, national leaders must often put geopolitical goals ahead of economic ones. Bismarck’s Germany could have saved money buying armaments from Britain, but building a domestic arms industry was worth the cost. If the U.S. is in a serious strategic competition with China, an American president might well be willing to sacrifice some economic growth to banish China from important supply chains.

,, by invoking “national security,” the Trump administration has found a legal basis, with roots in the Cold War and even earlier, to assert sweeping powers over the nation’s commerce. It has upended a generation of U.S. trade policy in a dramatically short period of time.

.. The new era of geopolitics is unlikely to be an era of small government.

.. The Trump administration is

  • reversing some of the regulatory excesses of the Obama era, and
  • the president’s judicial appointees are prepared to rein in the administrative state.

.. A recalibration of the U.S.-China relationship was likely inevitable as the world’s oldest civilization became an economic superpower.

Hillary Clinton, who as secretary of state clashed with Mr. Obama over the need for a tougher approach to China, would not be a popular figure in Beijing if she had won the 2016 election.

Mike Pence Announces Cold War II

The administration is orchestrating a far-reaching campaign against China.

Did Cold War II break out last week while no one was watching? As the Kavanaugh confirmation battle raged, many Americans missed what looks like the biggest shift in U.S.-China relations since Henry Kissinger’s 1971 visit to Beijing.

.. Denouncing what he called China’s “whole of government” approach to its rivalry with the U.S., Mr. Pence vowed the Trump administration will respond in kind.
..  its “Made in China 2025” plan for tech dominance, and its “debt diplomacy” through the Belt and Road initiative.
.. The speech sounded like something Ronald Reagan could have delivered against the Soviet Union: Mr. Xi, tear down this wall! Mr. Pence also detailed an integrated, cross-government strategy to counter what the administration considers Chinese military, economic, political and ideological aggression.
.. Navy plans for greatly intensified patrols in and around Chinese-claimed waters in the South China Sea were leaked to the press.
.. the recently-entered trilateral U.S.-Mexico-Canada trade agreement was revealed to have a clause discouraging trade agreements between member countries and China. The administration indicated it would seek similar clauses in other trade agreements.
.. Congress approved the Build Act, a $60 billion development-financing program designed to counter China’s Belt and Road strategy in Africa and Asia.
.. highlighting the danger that foreign-based supply chains pose to U.S. military capabilities in the event they are cut off during a conflict.
.. Mr. Pence warned that even higher tariffs are on the way. The White House report highlighting supply-chain vulnerabilities could provide the basis for new and more far-reaching restrictions.
.. Business and investors may still be underestimating both the Trump administration’s determination to challenge China and the amount of economic disruption that greater U.S.-China tension can bring.
.. To the mix of longtime China hawks and trade hawks now driving U.S. policy, national security matters more than economic friction, and many of the protestations from the U.S. business community may fall on deaf ears.
.. Both China and the U.S. are likely to move quickly, unpredictably and disruptively as they struggle for advantage; Wall Street should brace itself for further shocks.
.. Democrats who have relished attacking Mr. Trump for allegedly being soft on Vladimir Putin will have a hard time explaining why a hard line on Russia is a patriotic duty but a tough China policy is a mistake.

.. Replacing the North American Free Trade Agreement, reshaping the Supreme Court, and launching a new Cold War in the same week is quite the trifecta. America may or may not be on the road to greatness under Mr. Trump, but it is certainly going somewhere, and at an accelerating pace.

a16z Podcast: Connectivity and the Internet as Supply Chain

3 forms of connectivity:

  1. transportation
  2. energy: 2 million km pipelines
  3. communications: 1 million km fiber on ocean floor

We think that states are the organizing unit, but we are moving:

  • from nations and borders to flow and friction
  • things become organized by connectivity

The more pipelines you build between Russia and Europe, the more resistance to turning off the routes

In the gig economy, your connectivity will affect your prosperity.

People’s loyalty is more to their employer because their employer gives them greater access to places where their citizenship would otherwise not.