Diner as Corporate Foundry, Part 2

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The post-WII global order is feeling some stress. It hasn’t yet buckled, and may never do so – we hope. The US dollar remains the world’s premier reserve currency. SWIFT, the Bretton Woods institutions, and other features of the global architecture continue to function. Yet conscious dissent with how things run, and weakening deterrence invite more state gamesmanship. For global risk-takers, sharpened observation, scenario testing, and being able to hedge dynamically will all be increasingly important.

Think of a race that’s being run, where the competitors utilize fundamental advantages, or experience fundamental disadvantages in the competition. As the race progresses, those distinctions – those advantages and disadvantages – are borne out, and the distance between competitors increases.

Further, indulge in a couple of metaphors – imagine a person who can heal from an injury or learn and recover from a mistake. Imagine someone who can’t. Differences in outcomes for these two people can be easily envisioned.

So, the US system may have some advantages: with its flexible labor markets, its domestic sources of banking- and non-banking capital, and its receptiveness to innovation – from the top down (witness DARPA) and from the bottom up (witness Jensen Huang, his fellow diners at Denny’s, and the formation of NVIDIA).

In “Part 1”, we cited Oliver Coste’s analysis in his book Europe, Tech and War (New York, New York: 203 West 81st, November 2022). Coste shows that US companies in the tech sector have more resources to invest further in research and hence foster innovation, perhaps more innovation than others. Their ability to re-size payrolls and adjust company direction helps them in this regard, while foreign competitors are often impeded from doing so. Citing data from 2020, Coste reports that US business investment in tech research and development (R&D) amounted to USD 200 bln; while EU and Chinese tech R&D levels came in at USD 40 bln and USD 65 bln, respectively, for the same year.

Admittedly, those stats are from 2020, it’s currently 2024. Things can change. But, think about it for a second, there may be one system, which is admittedly a little bare-knuckled but which is very pragmatic, allowing for innovation from all quarters and also facilitating timely adjustment. This system stands against two others that have their own respective qualities, but that carry disadvantages: the EU corporatist model dampens ready change, adjustment and by extension innovation; the Chinese model constrains the easy flow of information in that society, therefore in turn possibly suppressing innovation – or at least innovation not benefitting from the official writ.

In addition, in the midst of these different systems and their diverging results have been moves to adjust the current global order. Some countries have expressed dissent with the way things are currently organized, or some would say tilted, among sovereign states. As reported in the Financial Times, China has actively grown its sphere of influence, enacting “free trade agreements” (FTAs) with 28 countries, representing a collective market for 40% of China’s exports. China has also implemented Belt and Road Initiative (BRI), fostering infrastructure development projects in 140 participating countries.

It’s of course fine for any country to compete, especially in an international system that is ultimately seen as “positive sum” where nations see that they all benefit from participating in that system. What it’s interesting to consider, though, is how nations behave when they see material differences in how different nations perform, with some nations out-competing or out-performing others. The frustration or misunderstanding that may accrue is what can foster adventurism and geopolitical risk. That sounds very basic, but it’s very human. The geopolitical order may be intrinsically “positive sum” – that is, everyone stands to benefit overall from participating in that order, but focused national emotion and ambition can still confound it.

The political refugee and writer Cai Xin, currently a US resident but formerly a professor at the prominent Central Party School of the Chinese Communist Party (CCP), highlights the prevailing disconnect in US policymaking circles, at least until recently, and the clear view held at the CCP, a view that dissents with the current geopolitical order. It would seem that Cai thinks we are “projecting”, or seeing what we want to see. Cai Xin writes:

“However, looking at it objectively, the Chinese Communist Party’s fundamental interests and its basic mentality of using the US while remaining hostile to it have not changed over the past seventy years (emphasis added). By contrast, since the 1970s, the two political parties in the United States and the US government have always had unrealistic good wishes for the Chinese communist regime, eagerly hoping that the People’s Republic of China (PRC) under the CCP’s rule would become more liberal, even democratic, and a ‘responsible’ power in the world. However, this US approach was a fundamental misunderstanding of the CCP’s real nature and long-term strategic goals.”

(see Cai Xin, China-US Relations in the Eyes of the Chinese Communist Party – An Insider’s Perspective; The Hoover Institution-Stanford University: CGSP Occasional Paper Series No. 1, June 2021)

Now, consider what has been discussed in “Part 1” and now further in “Part 2” of this blog sequence: the ability in the US to draw innovative power from different levels in society – from established businesses, from scrappy newcomers. This implies a receptiveness to change and an ability to adapt, a capacity also to break through established paradigms when they are no longer as effective. That is an altogether disruptive capacity to anyone (or state) that has a more “zero-sum” view of the world.

With that in mind, consider now the work of the Harvard scholar Graham Allison and his warning that the United States runs the risk of stumbling into a “Thucydides Trap”, where the US reacts like a threatened paranoid Sparta to the surging China, a proxy for the dynamic ancient Athens. If not careful, the US could precipitate a modern Peloponnesian War, so the thinking goes (see Graham Allison, Destined for War: Can America and China Escape Thucydides’ Trap; New York: Houghton Mifflin Harcourt, 2017).

Think about that in the context of current conditions. The seemingly steady weakening of American deterrent power has been stoking the actions and ambition of dissenters, who see the effects reflected in the Afghan botched withdrawal in 2021, Russia’s carried-out aggression and invasion in 2022, China’s recent and more strident saber rattling over Taiwan, and the Hamas attack on Israel last October. China, Russia, Iran, North Korea are acting muscular and exercising prerogatives. They may have been emboldened, as deterrence is perceived to be more tenuous.

And, now think about this, it might be apt to consider turning the Allison thesis on its head, actually. It’s not so much an incumbent, paranoid and bellicose United States that will precipitate war against an advancing China. Instead, the scope of US adaptiveness and ingenuity calls everyone to either adapt and change (ie liberalize in the broader sense) to “keep up” or to quicken their pace and tumble the existing framework, if only to curb the US momentum of inspired change and the creation of a gap that cannot be closed.

For a country such as China, one ruled under a totalitarian dictatorship, the existence of a rival system that could create such an unbridgeable gap in scientific innovation, commercial and military technology, economic effectiveness is existential. It can’t be tolerated. To conclude, global risk takers – lenders and investors – will have to account for market events stemming from either a cogent re-assertion or a further failing of deterrence in the present geopolitical order. That accounting will have to include thinking about primary product substitutes, energy security assessments, “friend shoring”, thoughtful diversification, scenario testing and hedging strategies. We will be living in exciting times.

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