Chips, Debts and Gaza Bets: Tangled Trade Wars, America’s Gatsby Complex, and Trump’s New Middle East Diplomacy #240
Grüezi!
This week:
Plus: Why Japan’s mere 195,000 STEM graduates keep outperforming Iran’s 335,000, and a dash of indie folk rock in Bermondsey.
1?? The World Cannot Afford a US-China Economic War
But that’s exactly where we’re heading
China’s trade surplus just reached a trillion dollars give or take. Its factories now produce a third of the world’s manufactured goods. And China’s exporters faced 160 trade investigations in 2024 alone.
Meanwhile, America clings to its unsustainable role as global consumer of last resort whilst resisting the very economic rebalancing the world so desperately needs.
These statistics are warning signs of an impending crisis – and both global superpowers are super-responsible for it.
China’s vast manufacturing overcapacity, fuelled by industrial bank lending that soared from $83 billion in 2019 to $670 billion by 2023, has triggered a price collapse that’s exporting deflation worldwide.
America’s fed China’s export dependency through:
The rest of the world is caught in the crossfire. Either we find a managed path to global rebalancing – one requiring difficult compromises from both Beijing and Washington – or markets will force a chaotic adjustment that serves no one’s interests.
Previous attempts at forcing adjustment through tariffs have foundered on economic reality: exchange rates shift to offset their impact, and higher costs for imports end up hurting domestic manufacturers.
The tools exist for managed adjustment, but they require coordinated trade, monetary, and industrial policies – not just simple barriers.
The mechanisms for coordination exist too. The G20, IMF, and World Bank could provide frameworks for a managed transition. But they require something that’s currently lacking: the recognition that even bitter rivals share common interests in avoiding disaster.
Each power is being forced to confront its economic reality rather than its economic fantasy.
There is a place for the kind of ‘behind the scenes’ conversations that can act as a prelude to this kind of action: the World Economic Forum’s Annual Meeting in Davos.
I’ll be there next week. Will the right actors be having the right conversations in the ice? That remains to be seen.
2?? America’s “Gatsby” Moment
Can it finally grow up and beat its cheap import addiction?
Just like Jay Gatsby, America came from nothing, transforming itself through ambition and innovation.
But –?somewhere along the way – it became trapped in its own performance of prosperity – borrowing heavily to maintain a lifestyle that increasingly resembles Gatsby’s parties: magnificent, ephemeral, and ultimately ending in a hangover.
Each evening, across the Pacific, a green light blinks. Unlike Gatsby’s beacon, this one isn’t symbolising lost love – its the treasury bills where America’s IOUs are stacking up.
That green light across the Pacific isn’t just about Treasury bills – it’s about factories, supply chains, and industrial capacity. Each time America reaches for that light, it’s not just borrowing money – it’s trading away pieces of its industrial base.
The challenge isn’t just fiscal restraint, it’s rebuilding productive capacity in a world where supply chains and production networks have become almost as unknowable as Gatsby himself.
The solution? In place of Fitzgerald’s dramatic ending – self-destruction – may I propose a more prosaic but palatable four-point plan:
1. Stop living beyond your means
2. Get serious about jobs
3. Fix your finances
4. Plan for the future
Yes, China encourages America’s bad habits through cheap loans and exports. But just as Jay Gatsby’s banker wasn’t to blame for his spendthrift habits, America can’t simply point fingers at Beijing.
The good news? Like any trust-funder who finally grows up and takes responsibility, America has immense underlying advantages. The US is not short of the technology, institutions, and human capital needed for a healthy transition to fiscal maturity.
The question is whether it is interested in using them.
3?? America’s AI Supremacy Gamble – The Chips Are Down
Why controlling chips may not control the future.
Talking of preventing others catching up, the US just rolled the dice on what may be the most ambitious tech control regime since the Cold War.
But even as Washington moves to regulate global access to artificial intelligence chips, events in China suggest this high-stakes gamble could backfire.
This week’s sweeping export controls divide the world into three camps:
Departing US Commerce Secretary Gina Raimondo says these measures are essential to maintain American technological primacy.
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Yet a remarkable development challenges this strategy’s core premise. DeepSeek, a Chinese AI laboratory, has achieved what many thought impossible: creating a world-class language model whilst operating under existing chip restrictions. More striking still is how they managed it – by being smarter rather than more powerful.
DeepSeek’s latest model improved chip efficiency by 60% in just six months. The cost? Just $6 million. They achieved this through clever mathematics and innovative architecture rather than raw computing muscle. Rather than limiting progress, the constraints appear to have spurred innovation. The company
Geopolitical risks compound the technical ones:
This “golden handcuffs” approach – offering controlled access to advanced AI infrastructure whilst maintaining dependency – echoes past attempts at technological containment. Yet history suggests such strategies often accelerate the very developments they aim to prevent.
By focusing on controlling a single technological bottleneck, Washington risks both alienating key allies and inadvertently accelerating the development of parallel and potentially superior approaches among restricted nations.
Sometimes the tighter you grip, the more slips through your fingers.
4?? “America Is Not An Exceptional Country…
It is no longer even a great one.” Who said it?
Full marks if you identified the author as Tolkien-loving tech billionaire Peter Thiel!
That money quote lay buried in a quasi-mystical, conspiracy-laden wortsalat, published by the Financial Times. Less creed more screed, it probably won’t feature approvingly in their next style guide.
It came right before Thiel provided this diagnosis of what’s wrong with America:
The 50-year slowdown in scientific and technological progress in the US, the racket of crescendoing real estate prices, and the explosion of public debt.
These were probably the few lines of sense.
Thiel’s solutions are less clear. They seem to involve breaking things and letting things reform. For someone so critical of “muddling through” he hasn’t yet produced a manifesto.
TL;DR You may not want to take Thiel seriously, but he has money and power. So you are obliged to.
5?? The Gaza Deal Is Just the Beginning
The new deal-maker diplomacy.
Putting aside all the death and destruction – as diplomacy somehow must – the emerging Israel/Hamas deal looks surprisingly favourable to Hamas.
Israel would completely withdraw from Gaza, including from the Philadelphi Corridor beside Egypt. Hamas prisoners would return to Gaza and not face exile.
Prime Minister Benjamin Netanyahu has previously rejected similar terms. What changed?
Washington. Donald Trump’s influence is already reshaping diplomacy, and in an unusual departure from protocol, his envoy Steven Witkoff – a property developer – has been aggressively pushing a deal, with the Biden administration stepping aside.
Witkoff’s blunt approach, included – according to Haaretz – demanding a Sabbath meeting with Netanyahu. Welcome to the Trump style.
But Netanyahu’s meek acceptance suggests there’s some substance, and something bigger afoot.
The Gaza withdrawal appears to be part of a broader strategic realignment, potentially involving action against Iran, changes in Lebanon and Syria, and possible West Bank annexation. Netanyahu seems to be betting that Trump’s support for these larger Israeli moves outweighs immediate concessions in Gaza.
The immediate question – what comes next? Netanyahu needs to justify these concessions to his right-wing base. With Trump’s support, that may come in the form of moves elsewhere in the region.
6?? STEM Your Way to National Success?
More STEM grads, more moolah?
Adam Tooze is one of my favourite commentators but even I spluttered at this post.
Quite remarkable how Japan has stumbled into becoming a global technology powerhouse with just 195,000 STEM graduates – fewer than Iran’s 335,000.
Meanwhile, the United States, with its paltry 568,000 graduates (just 12% of China’s 4.7 million), somehow keeps churning out Silicon Valley unicorns.
Perhaps raw graduate numbers don’t tell quite the full story of technological and economic capability…
7?? Like Music?
A shameless plug for my daughter.
My daughter Ella Monck and her pal Lucie Goddard are playing in a small bookshop in Bermondsey next month.
Its indie folk rock is influenced by lots of people I haven’t heard of and some I have: Laura Marling, Mitski, Simon & Garfunkel.
Anyway –?it’s stuff you can hum, and there are some real “bangers” as I believe young people say.
Tickets here!
Thanks for reading!
best,
Adrian
Brilliant newsletter as always Adrian Monck! And great advice for the US: “it means recognising that maintaining economic leadership requires more than just preventing others from “catching up” – it demands genuine renewal and reinvestment.” I’m eager to hear your reflections post inauguration and Davos address from Mr T. If the US could follow your four point plan, I and many other expatriated Americans might actually be inclined to return to the mothership. But I don’t believe they are capable of that. Living within your means is inherently “un-American” — couple that with a rejection to supporting your community and an allergy to tax reform — and that’s why there’s an orange face instead of a brown face leading the country. It started years ago when small town shops were replaced with Walmarts then Amazon … and infiltrates the culture from peoples everyday shopping habits to the fundamental business and political decisions.
Business Manager & Business Analyst at Lombard Odier Group
1 个月Thanks Adrian Monck for taking the time to write another interesting newsletter despite an intense but for sure interesting week ahead in Davos. My favorite bit, DeepSeek’s latest model improving chip efficiency by 60% in just six months with just $6 million in costs, showing that computing muscle might give you an edge or advantage but without innovation most AI models might become obsolete overtime.
Digital Strategy and Learning Development Lead. Education specialist, English Teacher & early Media career in TV production and News.
1 个月Really engaging read about the Gatsby legacy of the American Dream. Thanks,Adrian Monck
Business Diplomacy | Global Public Affairs | Strategic Partnerships | Societal Impact
1 个月look forward to running into you on the Promenade, Adrian ;-)
PA, Broker Associate - G.R.I. - ONE Sotheby's International Realty - Weston
1 个月The solutions you propose for the U.S. are all perfectly logical, which is why they don't have a chance in hell to be implemented. As Churchill said:?“The United States can always be relied upon to do the right thing — having first exhausted all possible alternatives.” I think that's true for most human beings, and all countries. For decades we've elected future-faking leaders who use our current "exorbitant privilege" to deliver short-term comfort to be paid with serious pain by upcoming generations. Trump is the latest, a perfect example of a deficit-swelling moon promiser, who'll leave a much bigger debt hole than he found, as he did in his first term.