Recommended Weekend Reads

September 13 - 15, 2024

Geoeconomics

• The Innovation Paradox     MF Finance and Development Magazine

  We've long assumed that investing more in research and development is a surefire way to spur innovation, increase productivity, and fuel job creation and economic growth. And yet, as the US dramatically expanded R&D spending over the past four decades, the opposite happened. Innovation, productivity gains, and economic expansion slowed. What went wrong?
  

• High and Rising Institutional Concentration of Award-Winning Economists   National Bureau of Economic Research/Richard Freeman, Danxia Xie, Hanzhe Zhang, Hanzhang Zhou

  Abstract: We analyze the institutional clustering of award-winning researchers. We collect nearly 300,000 annual education and career affiliations of nearly 6,000 award-winning researchers across 18 major academic fields in the natural sciences, engineering, and social sciences. All fields, except for economics, exhibit a low and decreasing concentration, which suggests a trend toward decentralized knowledge production.  Conversely, economics shows a high and rising concentration.  We investigate potential reasons for this anomaly, including researcher mobility, reliance on physical assets, the age of fields, the role of prestige, and the influence of the United States in shaping disciplinary norms (Fulcrum Note: So, this proves economists do roam in packs? Hmmm…)

India

• Can India Change Course?  A Conversation with Pratap Bhanu Mehta   Foreign Affairs Podcast

  Pratap Bhanu Mehta, President of the Centre for Policy Research, is one of India’s wisest political observers—a great political theorist and writer as well as a fierce critic, and occasional target, of Modi and his policies. Foreign Affairs Senior Editor Kanishk Tharoor spoke with him on September 3 about what the election means for Indian democracy and where the country goes from here.

European Union

• The Future of European Competitiveness: A Comprehensive Strategy for Europe   Mario Draghi

  Former European Central Bank President and former Italian Prime Minister was asked by EU President Ursula von der Leyen to conduct a comprehensive study on how the European Union could become more competitive with the US and China.  This past week, Draghi published a 400-page comprehensive and wide-ranging report offering recommendations for ten main economic sectors.  Overall, Draghi says the EU needs to invest between €750 - €850 billion per year – close to 5% of the bloc’s GDP – to stay competitive in the face of shrinking populations, the need to rapidly and massively ramp up combined defense capabilities, and offset the supply of previously cheap energy (mostly coming from Russia).  

• A World of Chips Acts:  The Future of U.S.-EU Semiconductor Collaboration  Center for Strategic and International Studies

  The U.S. and the EU have each recently enacted legislation providing for an unprecedented volume of public investments in semiconductors, with the largest portion allocated to the establishment of new onshore chip production facilities. Substantial funds are also allocated to semiconductor research and development, supply chain security, and workforce expansion and training. These parallel initiatives have been prompted by an awareness in both regions of threats to economic and strategic security arising out of their dependency on foreign-made chips. The question posed by the enactment of the two Chips Acts is how such joint activities can be deepened, broadened, and leveraged by direct engagement between the United States, the European Union, and national authorities to address the vulnerabilities faced by both ecosystems.

• The EU has a playbook to de-risk from China.  Is it working?    Brookings Institution

  The European Union’s (EU) decision to raise its tariffs on Chinese electric vehicles (EVs) has prompted speculation about whether the EU and the United States could cooperatively “de-risk” from China. Much like the United States, the EU has developed a “de-risking” playbook with three goals: to protect its economy from outside encroachments, to promote its own competitiveness and resilience, and to partner with others to amplify its economy’s strengths and mitigate its vulnerabilities. In fact, the term “de-risking” was pioneered by European Commission President Ursula von der Leyen and later embraced by the Biden administration and all G7 leaders.   But is it working?
  

China

• China Decoupling Handbook: Where We Are, What To Do    American Enterprise Institute/Derek Scissors

  Scissors writes the case for a smaller US-China relationship keeps getting stronger, arguing that China under President Xi Jinping will not become a better partner.  To achieve this decoupling, which is already underway, additional policies are needed around imports, exports (especially technology), inbound investment, outbound investment, and supply chains.   In his “handbook,” Scissors details how best to carry out such policies in each area.

• Why Catching Up to Starlink is a Priority for Beijing   Carnegie Endowment for International Peace

  China’s push to enter the satellite internet market shouldn’t come as a surprise. The Chinese Communist Party (CCP) has poured significant resources into closing the gap with America’s space-based technologies, and its efforts are starting to pay off. on August 9, a Long March 6A rocket blasted off from the Taiyuan Satellite Launch Center in the northern Chinese province of Shanxi. The rocket carried eighteen low-Earth orbit (LEO) satellites from the government-backed company Qianfan. State media hailed the launch as China’s answer to Starlink, the U.S.-based satellite internet pioneer, and the first step toward breaking America’s dominance in this market. Qianfan intends to grow its constellation to more than 600 satellites by the end of 2025 and to eventually place 14,000 satellites into orbit

Recommended Weekend Reads

August 30 - September 1, 2024

Please find below our recommended reads from reports and articles we read in the last week.  We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list.

Geoeconomics & Markets 

• What is Driving China’s Long-Dated Bonds?  Carnegie China

  The People’s Bank of China (PBoC) is determined to rein in what it fears might be a government bond bubble because of its possible disruptive impact on Chinese banks. Yields on long-dated sovereign bonds have been falling since December of last year when, after a few fairly stable months during which China’s ten-year sovereign bond traded between 2.60 and 2.70 percent, bond prices rose sharply, causing yields to drop 10 basis points during the month.  What is driving this frenzy?

• The Downward Spiral: A Macroeconomic Analysis of the Opioid Crisis   Federal Reserve Bank of Cleveland Working Paper

  There have been more than 700,000 opioid overdose deaths since 2000. To analyze the opioid epidemic, a model is constructed where individuals choose whether to use opioids recreationally, knowing the probabilities of addiction and dying. These odds are functions of recreational opioid usage. The model is fit to estimated Markov chains from the US data that summarize the transitions into and out of opioid addiction as well as to a deadly overdose. The epidemic is broken down into two subperiods: 2000-2010 and 2010–2019. The opioid epidemic's drivers, their impact on employment, and the impact of medical interventions are examined. Lax prescribing practices and misinformation about the risk of addiction are important drivers of the first half of the epidemic. Falling prices for black-market opioids combined with an increase in their lethality are found to be important for the second half.

• Work More, Make Much More?  The Relationship between Lifetime Hours Worked and Lifetime Earnings   Federal Reserve Bank of St. Louis

  Earnings inequality in the U.S. and around the globe is a major topic of research among economists. A key objective of this research is to isolate the quantitatively important forces that shape inequality. In this post, we consider a factor that has been largely neglected so far by the literature, namely differences among individuals in hours worked. In particular, we investigate the relationship between lifetime earnings inequality and lifetime hours worked. In line with many empirical studies, lifetime here refers to ages 25 to 55, a person’s prime working years.  In this blog post, we focus on male workers, who were more likely to have uninterrupted employment histories than female workers during the period we are examining. We are able to construct a sample of 3,006 male workers for whom we have observations of earnings, weeks worked and weekly hours worked for each age from 25 to 55 (either via a direct report or via a simple imputation procedure for missing observations). Since we are interested in lifetime earnings, our sample already conditions on having worked in at least one year between 25 and 55.

Mexico’s Judicial Reform Crisis

• Last Crusade of Mexico’s President: A Drastic Redesign of the Judiciary  New York Times

  President Andrés Manuel López Obrador (AMLO) is scheduled to step down from power in October, succeeded by recently elected Claudia Sheinbaum.  But before he leaves, AMLO is driving hard to push through a highly contentious legislative effort that would require all judges to be elected and no longer appointed.  Foreign governments – including Canada and the US – and foreign investors have been openly critical of the effort as it will likely not only highly politicize the judiciary but also open it to significant interference by the drug cartels.   The effort is already having a significant negative impact on the Mexican Peso.

• Mexico Will Pay Dearly for AMLO’s Judicial Revenge   Bloomberg Opinion

  The ruling party’s huge constitutional overhaul sets the country on a volatile path, hurting investment potential and complicating the incoming political transition.  Just how intense is the pressure Mexican President Andrés Manuel López Obrador (AMLO) putting on judges?  Mexican Supreme Court judges have been told they can resign now and keep their pensions or risk competing in an election next year and then lose their benefits.  Mexico is in uproar over the future of its justice system.

China’s Unemployment and the World Economy

• China’s unemployment conundrum and its implication for global trade  Hinrich Foundation

  How bad exactly is unemployment in China? Consider these examples: An increasing number of fresh college graduates are joining the gig economy by taking low-skilled jobs such as delivering food as they struggle to find jobs commensurate with their degrees. The number of people under the age of 25 who applied for manual jobs in the first quarter of 2024 surged 165% compared with the same period in 2019. A memo from an airport in Wenzhou city indicated that the airport had hired architects and engineers as ground managers and bird controllers. Since December 2022, over 10 protests occurred at Carrefour stores across the country due to store closures and unpaid wages. Alibaba, China’s e-commerce giant, cut 20,000 jobs, or 12.8% of the total employment in the 2023 fiscal year, following a 7% cut in the previous year.

German State Elections

• Putin’s Next Coup Politico EU

  This coming Sunday, elections are being held in three eastern German states—Brandenberg, Saxony, and Thuringia—that are likely to usher in Russia-friendly parties, giving the Kremlin a foothold once again in Germany.

• Germany’s far-left disruptor claims credit for limiting aid to Ukraine: Sahra Wagenknecht’s party rises in polls ahead of regional elections in Eastern German States  Financial Times
  Sahra Wagenknecht, Germany’s most prominent far-left politician, has taken credit for the government’s decision to limit military aid to Kyiv, saying her strong opposition to arming Ukraine was influencing Berlin’s policy on the war. Her political party, the Sahra Wagenknecht Alliance (BSW)—yes, she named the party after herself—has surged in the polls in the three eastern German states holding elections this coming Sunday.

• German coalition unlikely to last until September 2025  Official Monetary and Financial Institutions Forum/David Marsh

  The Chairman of OMFIF, David Marsh, who is also a noted scholar of German politics and economics, writes that a sense of foreboding is building in Germany about prospects for government stability. Under pressure from all sides, the fractious three-party coalition under Chancellor Olaf Scholz may not last the legislative period up to the scheduled general election in September 2025. Scholz is trying to keep his creaking administration intact given the high-tension international environment, but the forces leading to break-up could soon become overwhelming.  And the ongoing and long-running public bickering among the coalition members over the 2025 budget is not helping. 

Recommended Weekend Reads

The Ongoing Crisis in Venezuela, Demographic Challenges Globally, and How is the Inflation Reduction Act Working Out?

August 23 - 25, 2024

Please find below our recommended reads from reports and articles we read in the last week.  We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list.

The Crisis in Venezuela

• A Question of Staying Power  Center for Strategic and International Studies

  In response to protests against its brazen election theft, the Maduro regime in Venezuela has unleashed a wave of violent repression. While the exact numbers vary, credible human rights organizations have logged nearly 2,000 arrests, some even of minors and young children, and more than two dozen people killed. Venezuelan president Nicolas Maduro bragged that more than 2,200 arrests had been made and that prisons repurposed to house new political prisoners would feature “reeducation” and “hard labor” camps.  Meanwhile, reports from low-income barrios around Caracas convey that regime intelligence services have marked homes of protestors with a black “X.” Rather than hiding repression, the regime has launched a public campaign called Operación Tun Tun (Operation Knock Knock) meant to instill maximum fear by arbitrarily knocking on doors. The regime has filmed security forces breaking into protestors’ homes and arresting them and openly publicized videos of arbitrary arrests—one of them set to the popular Christmas song “Carol of The Bells.”

• Venezuela: Possible Paths Forward  Americas Quarterly Podcast

  Since the election on July 28, Nicolás Maduro has unleashed a wave of repression not seen in Venezuela before. The question on everyone’s mind is, what now? Will Venezuela move further down the path of a dictatorship, or is there some chance of a negotiated solution that might lead to a democratic transition? In this episode, Roberto Patiño, a civil society leader and a member of one of the opposition parties, discusses the opposition’s strategies, evaluates the positions taken by Brazil, Colombia, the U.S., and Mexico, and describes what he sees as cracks in the Maduro regime.

  U.S. Elections 2024

• Beliefs About Political News in the Run-up to an Election  Charles Angelucci, Michel Gutman, and Andreas Prat/National Bureau of Economic Research

  The closer we get to the election, the more we hear about “fake news” and a lack of neutrality in the media.  From where we sit, there is definitely something to it – the question we have is how much of is intentionally slanted due to reporters’ personal political viewpoints filtering into the story or just poor reporting. But what about the reader’s role?  In this new study, three economists developed a model to look at the influence of elections on the formation of “partisan-driven information universes.”  The study shows a partisan impact on the news during election periods.  Outside of the election season, an individual is 4 percent more likely to choose a true story if it favors their party; in the days prior to the election?  This increases to 11 percent.

Global Demographic Trends

• Europe’s Demographic Winter and the New EU fiscal Rules VOX EU/Center for Economic Policy Research

  The EU recently settled on a revision of its fiscal rules replacing a system increasingly seen as “one size fits all” when it came to debt sustainability analysis for EU members.  While this might make a lot of sense, this paper argues that many EU member states are facing a sustained demographic decline now and in the years to come, a careful assessment of the uncertainty surrounding population projections is needed.

• Korea faces income losses within half a century without more labor migration  Peterson Institute for International Economics

  South Korea is facing a social and economic crisis caused by its rapidly aging population.   Today, South Korea is the second oldest nation in the world with 40 percent of its population being 65 years old or older.  For years, South Korea had highly restrictive immigration policies.  But in the early 2000’s the country began opening the door to immigration to offset the loss of workers.  But it is not enough as the below chart indicates, as Korean income losses per citizen due to aging is expected to decline by 10 percent within 18 years. The only way to avoid this projection (that only get worse in outlying years) to ramp immigration – a true social and cultural challenge to this ancient society.   And it should be noted: Italy, Germany, Spain, and China are not far behind South Korea in facing this demographic catastrophe.

 Geoeconomics and Industrial Policy 

• “Shadow Reserves”: China’s Key to Parry U.S. Financial Sanctions   War on the Rocks

  As the U.S. and China continue to spar over financial and trade issues, Beijing has found a way to insulate their strategic trade away from dollar-based sanctions.  China’s central bank has steadily shed its official U.S. dollar reserve holdings – which means, if China were to decide to invade or blockade Taiwan, the U.S.’ ability to impose financial sanctions on China will be diminished.  But it is not complete – far from it: only a third of China’s goods trade are settled in renminbi.

• Attracting CHIPS Investment: Industry Recommendations for Policymakers  Semiconductor Industry Association

  Chips are integral to the 21st century economy, from electric vehicles, AI data centers, and medical technologies to mobile devices, energy grids, and streaming platforms. Historically, semiconductor supply chain production activities have concentrated in a handful of regions. But as global chips demand increases, and the industry responds to geopolitical uncertainty and other disruptions, companies are diversifying their global investment footprint to improve supply chain resilience.  In our new SIA-BCG report, Attracting Chips Investment: Industry Recommendations for Policymakers, we recommend policy actions governments can undertake to better attract investment based on the following five key factors that semiconductor companies evaluate when making investment decisions.

• Clean Investment Monitor: Tallying the Two-year Impact of the inflation Reduction Act  Rhodium Group/MIT Center for Energy and Environmental Policy Research

  As the United States approaches the two-year anniversary of the Inflation Reduction Act (IRA), this report provides a comprehensive analysis of actual investments in clean technologies and infrastructure since its enactment.  From the second half of 2022 through the first half of this year, actual business and consumer investment totaled $493 billion, a 71% increase from the two-year period preceding the legislation. This report includes a detailed state-level breakdown of clean investment in the post-IRA period.

Recommended Weekend Reads

August 16 - 18, 2024

Please find below our recommended reads from reports and articles we read in the last week.  We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list.

Hacking, Deep Fakes, and the 2024 U.S. Elections

• 100 Days Until Election 2024   U.S. Director of National Intelligence

  Already seeing the foreign governments attempting to meddle in the upcoming U.S. elections, The Office of the Director of National Intelligence (DNI) issued this unclassified memo explaining how the U.S. intelligence community is monitoring foreign actors trying to influence and disrupt the upcoming elections.  Well worth the read to understand the threat at hand.

• How Foreign Governments Sway Voters with Online Manipulation   Scientific American

  2024 is the year of elections, with more than half the world’s population heading to the polls to vote. More than 100 countries including India, Taiwan, the UK, France, Russia, Venezuela, and soon, the United States, have held are holding national elections.  Most of the elections were free and fair, while others – such as Russia and Venezuela – were rigged, and opposition candidates either arrested or “disappeared.”  But one constant in most of these elections has emerged: Foreign government efforts to interfere and either discourage voters or mislead them with disinformation.  Scientific American Magazine did a deep dive into how malign foreign governments use social media and other mediums to achieve their goals.
  

• Iran Steps into U.S. Election 2024 with Cyber-Enabled Influence Operations Campaign  Microsoft On the Issues

  Two weeks ago, news broke that the Trump campaign had been hacked, and the most likely culprit is Iran.  How is this happening?  In a new report from Microsoft details how foreign countries are seeking to negatively influence the 2024 US election.  As the report details, these malign forces started off slowly in 2024 but have steadily picked up the pace over the last six months. Russia was primarily the initial operator, but more recently, Iran has picked up the pace.  China is not far behind.

Source: Microsoft On the Issues

• Iran using covert influence campaigns to undermine Trump's candidacy, U.S. intelligence says     CNN

  CNN reports how Iran is using covert social media activity and related influence operations in an effort to undercut the candidacy of former President Donald Trump, a US intelligence official said Monday in an updated assessment of threats to the November election.

China

• China’s Imaginary Trade Data   Brad Setser/Council on Foreign Relations “Follow the Money” Blog

  Council on Foreign Relations Senior Fellow Brad Setser took a deep dive into the IMF’s latest assessment of China.  In the appendix, he found something interesting: China has a new way of calculating its good trade balance - and that calculation is deeply misleading and helps to explain the apparent fall in the current account surplus.  For example, Setser believes the new method understates the current account surplus by $300 billion as of the second quarter of 2024 and that the actual surplus is closer to $700 billion.
  

• China’s Great Wall of Villages   The New York Times

  President Xi calls them “border guardians.”  In this superb interactive report using satellite imagery, the New York Times reports on how the government built twelve new villages in frontier areas claimed by other countries in recent years, the New York Times reported based on satellite images. They are among more than fifty new villages in frontier areas, and while civilian in nature, they provide access points for China’s military. A spokesperson for the Chinese Embassy in Washington said regarding border issues, Beijing seeks “fair and reasonable solutions” through peaceful consultation.

Source: New York Times

• Marijuana and Mexican cartels: Inside the stunning rise of Chinese money launderers  NBC News

  Over the past decade, Chinese organized crime groups in the U.S. quietly became the dominant money launderers for Mexican cartels. Then they used the profits to take over the illicit marijuana trade.  Experts worry that the organizations that now dominate money laundering worldwide pose a potential national security threat to the U.S.

Geoeconomics

• Don’t Believe the AI Hype   Daron Acemoglu/Project Syndicate

  Acemoglu, an MIT Economics Professor, writes that if you listen to tech industry leaders, business-sector forecasters, and much of the media, you may believe that recent advances in generative AI will soon bring extraordinary productivity benefits, revolutionizing life as we know it. Yet neither economic theory nor the data support such exuberant forecasts.
  

• Has the Recession Started?    Pascal Michaillat (UC Santa Cruz) and Emmanuel Saez (UC Berkeley)

  Abstract: To answer this question, we develop a new Sahm-type recession indicator that combines vacancy and unemployment data. The indicator is the minimum of the Sahm indicator -  the difference between the 3-month trailing average of the unemployment rate and its minimum over the past 12 months—and a similar indicator constructed with the vacancy rate—the difference between the 3-month trailing average of the vacancy rate and its maximum over the past 12 months. We then propose a two-sided recession rule: When our indicator reaches 0.3pp, a recession may have started; when the indicator reaches 0.8pp, a recession has started for sure. This new rule is triggered earlier than the Sahm rule: on average, it detects recessions 1.4 months after they have started, while the Sahm rule detects them 2.6 months after their start. The new rule also has a better historical track record: it perfectly identifies all recessions since 1930, while the Sahm rule breaks down before 1960. With July 2024 data, our indicator is at 0.5pp, so the probability that the US economy is now in recession is 40%. In fact, the recession may have started as early as March 2024.

Recommended Weekend Reads

July 12 - 14, 2024

Our apologies for the late delivery. We were traveling and had technical issues getting the Recommended Reads published. Here are our recommended reads from reports and articles we read last week. We hope you find these useful and that you have a relaxing weekend. And let us know if you or someone you know wants to be added to our distribution list.

China

• Ahead of the Third Plenum, Diverging Visions for China’s Private Sector  Christina Sadeler/Merics

  At the Third Plenum, a major policy meeting taking place this coming week, the Chinese Communist Party (CCP) will set China’s economic program for the next five years. The struggling private economy is an issue of concern, given its relevance for economic growth, tax revenues, and job creation.  Despite a series of policies and measures to support the private sector, steps taken so far have not been effective in rebuilding confidence.  Economic experts have diverging views on what the best measures for sustained growth are: One side points to stronger state guidance and collaboration between private and state-owned enterprises. The other calls for structural reforms for fair competition and a more predictable political and legal framework to revitalize entrepreneurial spirit.  Observers of the Plenum should pay close attention to what steps the party-state will take to rekindle trust in the private sector. The path ahead is crucial for China’s businesses and foreign companies doing business in and with China. 

• How Many People Are in China’s People's Liberation Army?    War on the Rocks

  The People’s Liberation Army is often described as “the largest military in the world.” But depending on who you ask and what you count, the details are murky and confusing. The deeper one dives into the numbers, the more complicated the picture gets, and the greater the differences between the Chinese and U.S. systems become. Though many recent reforms have surface aspects that appear to reflect U.S. structures, the new-look People’s Liberation Army does not mirror-image its American (or Russian) counterpart. Nor have its new organizations been tempered by combat.

• China’s Self-Imposed Isolation   Michael Shuman/The Atlantic

  In late June, a Chinese man stabbed a woman from Japan and her child at a bus stop for a Japanese school in the eastern city of Suzhou. Two weeks earlier, four foreign teachers from a U.S. college were attacked by a knife-wielding local as they strolled through a park in the northeastern town of Jilin. In a country where violence against foreigners has been practically unheard of in recent years, the assaults have led to some uncomfortable soul-searching among a shocked Chinese public. Are hard economic times fueling a dangerous spike in nationalism? some ask in online debates. Has the Chinese school system, with its focus on patriotism, fed people bad ideas? they wonder. Occasionally, a bold voice risks angering China’s censors by posing an even more sensitive possibility: Could the government be to blame?  That’s a salient question. Some dissonance has emerged in China’s mixed messaging and contradictory aims.

Post-Election France

• The French Left’s Pyrrhic Victory   Spiked

  There is something more than a little Pyrrhic about this semi-victory in France over the populist right. For a start, the far-right National Rally (RN) has still massively increased the number of seats it holds – by over 50 percent. It is easily the largest single political party in the French assembly. By contrast, Jean-Luc Mélenchon’s France Unbowed (LFI), the biggest party within the New Popular Front (NFP), has just 78 seats. Given the fragile nature of the coalitions now within the assembly, whatever government emerges after this weekend – Macron’s prime minister, Gabriel Attal, has already offered to step down – will struggle for coherence. Furthermore, while the RN may have lost the election, its raw vote share will give it plenty of encouragement ahead of the presidential elections in 2027. According to the latest figures, the RN received 37 percent (10 million) of all votes cast. That far outstrips the NFP’s 26 percent (seven million) and Ensemble’s 25 percent (6.5 million).
  

• How Le Pen’s Far Right Blew It  Politico EU

  Bad candidates, incompetence, and a fierce fightback by rivals denied the National R (RN) ally its election dream. The RN won’t come to power, its leader, Jordan Bardella, won’t be prime minister, and the party might not even end up as the main opposition in parliament. To cap it all, on Tuesday, Party chair Marine Le Pen was hit by a corruption investigation over allegations relating to her presidential campaign two years ago.

• How Macron Broke the French Political System  Philippe LeMoine/”Restoration” Substack

  French President Emmanuel Macron probably thought that, by calling snap parliamentary elections after his party was soundly defeated at the European elections and giving the parties only three weeks to prepare, the left would not have time to put together an electoral alliance and force them to present multiple candidates in most districts, so that left-wing candidates would only have been able to qualify for the second round in a handful of them. But, ironically, this strategy produced exactly the opposite result, precisely because left-wing leaders knew that they had no time. Unless they managed to make a deal they would be wiped out, so they decided to effectively tie their own hands by publicly announcing the day after Macron called elections that they had made a deal, even though at that point they had not agreed on anything. Paradoxically, if Macron had given them more time, they would have tried to work out the details first and there is a good chance they would have failed to strike a deal.

Africa

• Why Europe Needs Africa  Carnegie Endowment for International Peace

  In 2017, Africa’s population under twenty-five years old surpassed the total population of Europe. By 2050, Africa will have added 796 million people to the workforce, while Europe’s working-age population (aged sixteen to sixty-four) will decline by 156 million.  Europe is aging while Africa’s youth population booms.  This demographic transformation is perhaps the defining shift that could recast the fortunes of the two continents, which are separated, at the closest point between Morocco and Spain, by just 14 kilometers (less than 9 miles).  Labor shortages and pension costs are already impacting the credit ratings of European countries,3 while the massive demand for employment in the African continent will have significant implications—positive and negative—in terms of migration, stability, future market potential, and economic dynamism.

Geoeconomics

• Industrial Policy in the Global Semiconductor Sector  Pinelopi Goldberg/Reka Juhasz/Nathan Lane/Giulia Lo Forto/Jeff Thurk, National Bureau of Economic Research

  Abstract: The resurgence of subsidies and industrial policies has raised concerns about their potential inefficiency and alignment with multilateral principles. Critics warn that such policies may divert resources to less efficient firms and provoke retaliatory measures from other countries, leading to a wasteful "subsidy race." However, subsidies for sectors with inherent cross-border externalities can have positive global effects. This paper examines these issues within the semiconductor industry: a key driver of economic growth and innovation with potentially significant learning-by-doing and strategic importance due to its dual-use applications.  Our study aims to (1) document and quantify recent industrial policies in the global semiconductor sector, (2) explore the rationale behind these policies, and (3) evaluate their economic impacts, particularly their cross-border effects and compatibility with multilateral principles. We employ historical analysis, natural language processing, and a model-based approach to measure government support and its impacts. Our findings indicate that government support has been vital for the industry's growth, with subsidies being the primary form of support. They also highlight the importance of cross-border technology transfers through FDI, business and research collaborations, and technology licensing. China, despite significant subsidies, does not stand out as an outlier compared to other countries, given its market size. Preliminary model estimates indicate that while learning-by-doing exists, it is smaller than commonly believed, with significant international spillovers. These spillovers likely reflect cross-country technology transfers and the role of fabless clients in disseminating knowledge globally through their interactions with foundries. Such cross-border spillovers are not merely accidental but result from deliberate actions by market participants that cannot be taken for granted. Firms may choose to share knowledge across borders or restrict access to frontier technology, thereby excluding certain countries. Future research will use model estimates to simulate the quantitative implications of subsidies and to explore the dynamics of a ``subsidy race'' in the semiconductor industry.
  

• Does geopolitics now determine global trade?   Stewart Paterson,  Hinrich Foundation

  The increasingly popular thesis that the world is fragmenting into geopolitically defined blocs potentially ignores the very real aspirations of regional powers and the fact that not all neighborhoods are composed of like-minded or politically aligned countries. While US-China rivalry has resulted in a rapid decoupling of their economic engagement, it is far from clear that geopolitics is the key determinant of trade patterns beyond that.

• Partisan Politics and Annual Shareholder Meeting Formats  Yuanzhi Li & David Yermack, National Bureau of Economic Research

  Abstract: We study companies’ decisions about holding annual shareholder meetings online during the Covid pandemic and returning to classical in-person meetings post-pandemic. Among S&P 1500 companies, the frequency of virtual meetings shot up from less than 10 percent to more than 80 percent in the first year of the pandemic, with only gradual reversion to in-person meetings since then. Partisan politics has significant associations with these decisions. In-person meetings are more likely for companies that have Republican CEOs, and for companies with headquarters located in jurisdictions that vote Republican. Corporate democracy therefore seems to have been swept up by the tides of contemporary political feuds.

Recommended Weekend Reads

May 31 - June 2, 2024

Here are our recommended reads from reports and articles we read in the last week.  In this issue, we have a new suggestion: Twitter accounts we follow and find interesting, informative, and fun.   We hope you find all of this useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list. 

Geoeconomics

• Why is the U.S. GDP recovering faster than other advanced economies?  FEDS Notes/May 17, 2024

  In this note, we investigate possible drivers explaining the stark difference in economic performance between the U.S. and AFEs over the past few years, considering both cyclical factors, such as fiscal and monetary policies, as well more structural factors, such as labor market flexibility and business dynamism. We also recognize the role of large shocks that particularly affected certain regions such as the economic shocks resulting from Russia's invasion of Ukraine that had an outsized effect in Europe. Although a precise quantification of each channel is left for future research, we argue that structural factors play a role in the way different economies responded to cyclical policies.3 In addition, we caution against interpreting recent productivity developments as only reflecting permanent shifts across economies.

• The Rise of Mesoeconomics   William Janeway/Project Syndicate

  The digitalization of economic life and real-world data has opened up new possibilities for the study of the economic networks, regions, and sectors that ultimately determine how economic policies play out in the real world. Such modes of thinking will be crucial for economic policymaking in a new age of geopolitical risk.

• Instruments of economic security  Bruegel

  Geopolitical and economic developments, including Russia’s invasion of Ukraine and trade disruptions during the COVID-19 pandemic, have raised concerns about the European Union’s exposure to hostile countries. The challenge of improving European economic security (which we narrowly treat here as exposure to foreign trade or production shocks) has grown in importance, with various relevant policy measures introduced at the EU level.  Focusing in particular on the threat posed by economic coercion, this paper begins by assessing the nature of this threat before outlining two lessons that can be drawn from two recent instances of this coercion in action: China’s actions against Lithuania and Australia, respectively.

•  Commercial Real Estate in Focus   Federal Reserve Bank of St. Louis

  Commercial real estate (CRE) is navigating several challenges, ranging from a looming maturity wall requiring much of the sector to refinance at higher interest rates (commonly referred to as “repricing risk”) to a deterioration in overall market fundamentals, including moderating net operating income (NOI), rising vacancies and declining valuations. This is particularly true for office properties, which face additional headwinds from an increase in hybrid and remote work and troubled downtowns. This blog post provides an overview of the size and structure of the U.S. CRE market, the cyclical headwinds resulting from higher interest rates, and the softening of market fundamentals.  As U.S. banks hold roughly half of all CRE debt, risks related to this sector remain a challenge for the banking system. Particularly among banks with high CRE concentrations, there is the potential for liquidity concerns and capital deterioration if and when losses materialize.

Ukraine War/Russia

• Russia is using the Soviet playbook in the Global South to challenge the West – and it is working  Chatham House

  Russia has been courting the states of the Global South to circumvent Western sanctions and avoid international isolation – with notable success. In February 2024, Moscow hosted the first ‘For the Freedom of Nations’ forum with 400 delegates from 60 countries, aiming to rally the countries of the Global South against ‘Western neo-colonialism’.  In its war on Ukraine, Moscow has turned the Global South into both an instrument and a theatre of geopolitical competition, capitalizing on long-held grievances of colonialism and power imbalance. Much like its Soviet predecessor, Russia uses ‘anti-imperialism’ as its main propaganda theme and as an ideological basis for its global engagement. It has effectively leveraged legacies such as memories of Soviet support for decolonization and traditions of non-alignment, bringing deep-seated resentment against the West to the fore. 

• The End of the Near Abroad   Carnegie Endowment for International Peace

  Putin’s war on Ukraine marks the end of the near abroad—the idea that Russia enjoys a special status in much of the post-Soviet space. But while Russia’s neighbors are seeking greater independence, they are not necessarily turning West.  Are these states a new buffer between NATO and Russia?  Or a threat to Russia in and of themselves?

• The Memo-Affair: Plan, Bluff, or Accident? Russia’s “Project” on Altering Maritime Borders in the Baltic Sea   Wilson Center

  On the evening of Tuesday, May 21, 2024, Russian media reported on a short technical document posted online by the Russian Defence Ministry (MOD) regarding a maritime border project in the Baltic Sea. In the memo, the Ministry was seeking approval for its proposal on a “draft list of geographical coordinates” that would help recalculate “baselines measuring the width of Russia’s territorial sea, mainland coastline and Baltic Sea islands.”  By establishing “a missing straight baseline system,” the “maritime border” of the Russian Federation would, according to the document, ultimately be altered. This redrawing of the boundary, pertaining specifically to the Kaliningrad region (near Baltiysk and Zelenograd) and the eastern Gulf of Finland (around several islands that the Finnish government ceded to the USSR in 1940), would allow Russia to “use these waters as internal.”  To the governments of Finland and Lithuania, this news came as a complete surprise.

• Action Plan 3.0: Strengthening Sanctions Against the Russian Federation Working Group Paper #19 of the International Working Group on Russian Sanctions

  Significant sanctions have already been imposed on Russia, for which the sanctions coalition should be applauded. Sanctions have had a major impact on the Russian economy and have constrained Russia’s military and financial capabilities. In particular, the international sanctions coalition –around 50 countries – has substantially reduced Russian export markets and revenues. In addition, the Kremlin’s inability to access roughly $300 billion in central bank reserves has dramatically limited its policy maneuvers. But more efforts are needed.  The Working Group, made up of independent experts from many countries, proposes the following in their latest report: Confiscate frozen Russian assets abroad, impose new sanctions on Russian exports (gas, nitrogen fertilizers, metals), impose import tariffs on all remaining Russian exports, strengthen technology bans, tighten financial sanctions, impose more sanctions on Russian companies, impose more personal sanctions, prevent lawyers from enabling sanctions evasion, designate Russia as a sponsor of terrorism, stop Western companies from doing business with Russia, strengthen enforcement of existing sanctions, and expand secondary sanctions on other countries that do business with Russia.

 Taiwan 

• Beware forecasts of doom for Taiwan under Lai   Ryan Hass/Brookings Institution

  Newly inaugurated Taiwanese President Ching Te (“William”) Lai. Lai famously once referred to himself as a “pragmatic worker for Taiwan independence.” Considering Beijing has threatened to go to war to prevent Taiwan's independence, the thinking goes that Lai’s recent inauguration could spell impending trouble. Such analysis is easy to write and almost certainly wrong. Lai is not a wild-eyed zealot with a one-track-minded focus on Taiwan's independence. He is a professional politician who has organized his career around becoming Taiwan’s president. Now that he has ascended to Taiwan’s top elected position, he will want to win reelection. To do so, he almost certainly will need to tack to the center of Taiwan’s political spectrum rather than cater to the wishes of a small minority of Taiwan voters who favor throwing caution to the wind in service of Taiwan's independence or unification. Indeed, less than 6 percent of Taiwan’s voters support “the immediate pursuit of independence from, or unification with, the People’s Republic of China.”

 Recommendations from the Twitterverse 

We are starting something new with this issue: We will periodically offer recommended Twitter accounts we find particularly informative and useful.  We hope you find them useful, too.

• Robin Brooks/Brookings Institution (@robin-j-brooks)

  Brooks is the former Chief FX Strategist at Goldman Sachs and the Chief Economist at the Institute for International Finance. He is now a Senior Fellow at the Brookings Institution. His voluminous stream of great charts and graphs revealing the massive back-door trade avenues employed by Russia to evade sanctions is jaw-dropping.  But he covers a host of other well-researched global economic issues, as well.

•  Ryan Berg/Center for Strategic and International Studies (@ryanbergPhD)

  I will say it right up front: Ryan is a good friend.  But he’s also hands-down the best observer/academic I know of all things Latin America, and his Twitter site is the “one-stop shopping” place to go to stay up to date on the region.  As the Director of the Americas Program at CSIS, he somehow devours the many diverse political, economic, social, and business streams running through the region and is able to synthesize is quickly and right on target. He’s also the leading expert on China’s growing investment entanglements in the region. 

• Milei Explains (@Milei_Explains)

  I’m not sure who produces this twitter page, but I find it quite fun and informative as Argentine President Javier Milei fights to transform the economic mess that Argentina is in today.  The site explains: “Milei in English. translates [Argentine President Javier] Milei for friends. No politics. 100% Economics.  Not affiliated with Javier Milei.”  

Recommended Weekend Reads

April 19 - 21, 2024

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list. 

India

• A Short History of India in Eight Maps  The Economist

  In his decade in power Narendra Modi, India’s prime minister, has centralized the state to an unprecedented extent. Yet his ruling Bharatiya Janata Party(BJP) has failed to attract many voters in the more prosperous south. The regional divergence is not unique to the BJP. Throughout India’s long history, rulers have tried and failed to unite the subcontinent under central authority. The chief reason is India’s diversity, summed up in clichés about dozens of cuisines, hundreds of languages and thousands of gods. The clichés may be trite, but they are also useful. A whirlwind tour through 2,500 years of Indian history helps explain why.
  

• “Meet India’s Generation Z”  Foreign Policy

  India changes more in five years than many countries would in a quarter century. This is partly because it is still relatively young: The country gained independence just 76 years ago, and nearly half of its population is under the age of 25. As one would expect, then, much has happened in the five years since 2019, when Indian voters issued an overwhelming mandate to keep the Bharatiya Janata Party (BJP) and Prime Minister Narendra Modi in power.  But what do those aged 18 to 25 think about India’s future?
  

• “The Hindu Nationalist Foreign Policy – Under Modi, India is Becoming More Assertive”  Foreign Affairs

  As India enters into historic elections, and unlike in previous elections, foreign policy is a major issue. Today, more Indians care about their country’s place in the world than did so a decade ago, and the aspirations of average citizens are mirrored in their nation’s fortunes like never before. The BJP has used this new attention to craft a self-reinforcing message: if the party can catapult an “ordinary citizen” such as Modi to global prominence, it can do the same for a country that has languished in poverty and weakness. Similarly, if Modi can make India secure, prosperous, and widely respected, he can do the same for the Indian voter.

Geoeconomics 

• Quantitative Tightening Around the Globe: What Have We Learned? National Bureau of Economic Research

  This paper uses the recent cross-country experience with quantitative tightening (QT) to assess the impact of shrinking central bank balance sheets. We analyze the experience in seven advanced economies (Australia, Canada, the Euro area, New Zealand, Sweden, the UK, and the US)—documenting different strategies and the substantive reduction in central bank balance sheets that have already occurred. Then we assess the macroeconomic and financial impact of QT announcements on yields and a range of other market prices. QT announcements increase government bond yields, steepening the yield curve and potentially signaling a greater commitment to raising policy interest rates, but have more limited effects on most other financial market indicators. Active QT has a larger impact than passive QT, particularly on longer maturities. The implementation of QT has been associated with a modest rise in overnight funding spreads and a decline in the “convenience yield” of government bonds, but QT transactions did not significantly affect the pricing and market liquidity of government debt securities. Finally, we evaluate who buys assets when central banks unwind balance sheets, an issue that will become increasingly important if central banks continue to reduce their security holdings while government debt issuance remains elevated. We find that increased demand by domestic nonbanks has largely compensated for reduced bond holdings by central banks. This series of cross-country results suggest that QT has had more of an impact than “paint drying” but far less than simply reversing the effects of the quantitative easing programs launched during periods of market stress. Looking ahead, although QT has been smooth to date, frictions could increase in the future so that QT quickly evolves into more like watching “water boil.”

Europe

• EP Spring 2024 Survey: Use Your Vote - Countdown to the European Elections EU

  The Parliament’s Spring 2024 Eurobarometer reveals strong interest among citizens in the upcoming European elections (6-9 June) and awareness of their significance in the current geopolitical context. The survey sheds light on Europeans’ voting behavior, their attitudes toward campaign topics, and their preferences for the priority values for the next term of the European Parliament. It focuses also on citizens’ perception of the EP and EU, their perspective on life in the EU, as well as on their opinions about the EU within the current global context.

Russia

• The Impact of Semiconductor Sanctions on Russia American Enterprise Institute

  After Russia again invaded Ukraine in February 2022, the US and its allies restricted Russia’s access to semiconductors, aiming to disrupt the Kremlin’s defense industrial supply chains. Have these semiconductor controls worked? The secrecy of the Russian defense industrial base makes it difficult to answer this question fully, but this report examines the evidence to provide some tentative conclusions on the impact of tech export controls.

• The Five Futures of Russia: And How America Can Prepare for Whatever Comes Next Foreign Affairs

  Vladimir Putin happened to turn 71 last October 7, the day Hamas assaulted Israel. The Russian president took the rampage as a birthday present; it shifted the context around his aggression in Ukraine. Perhaps to show his appreciation, he had his Foreign Ministry invite high-ranking Hamas representatives to Moscow in late October, highlighting an alignment of interests. Several weeks later, Putin announced his intention to stand for a fifth term in a choiceless election in March 2024 and later held his annual press conference, offering a phalanx of pliant journalists the privilege of hearing him smugly crow about Western fatigue over the war in Ukraine. “Almost along the entire frontline, our armed forces, let’s put it modestly, are improving their position,” Putin boasted in the live broadcast.

China

• A Chinese Perspective on the Russia-Ukraine War: A Conversation with Dr. Zhao Hai CSIS ChinaPower Podcast

  In this episode of the ChinaPower Podcast, Dr. Zhao Hai joins us to discuss China’s views on the Russia-Ukraine war and its broader implications for China. Dr. Zhao provides an assessment of how he thinks China perceives the evolving situation on the ground, emphasizing China’s concerns about the risk of further escalation between Russia and the West, potentially involving the use of nuclear weapons. He argues that the Ukraine crisis has heightened U.S.-Russia competition and speaks to how China views the conflict as a sign of the world order shifting towards one of multi-polarity. He also shared his assessment of the United States engaging in enhanced proxy warfare in Ukraine that could be used in the Indo-Pacific in the future. 

• The CCP’s Role in The Fentanyl Crisis The Select Committee on The Strategic Competition Between the United States and The Chinese Communist Party

  The House Committee this week released an in-depth report on the Chinese Government’s role in the Fentanyl trade and its impact on the U.S.  The fentanyl crisis is one of the most horrific disasters that America has ever faced. On average, fentanyl kills over 200 Americans daily, the equivalent of a packed Boeing 737 crashing every single day. Fentanyl is the leading cause of death for Americans aged 18-45 and a leading cause in the historic drop in American life expectancy. It has led to millions more suffering from addiction and the destruction of countless families and communities. The report charges that beyond the United States, fentanyl and other mass-produced synthetic narcotics from the People’s Republic of China (PRC) are devastating nations around the world. It is truly a global crisis. The PRC, under the leadership of the Chinese Communist Party (CCP), is the ultimate geographic source of the fentanyl crisis. Companies in China produce nearly all of the illicit fentanyl precursors, the key ingredients that drive the global illicit fentanyl trade.

• Why China Remains Unlikely to Invade Taiwan The Interpreter

  The United States, and Washington DC in particular, is awash with expectations of war against China in the near future, most likely caused by a Chinese decision to forcibly annex Taiwan. Plenty of Americans — including senior military officers, academics, and politicians — think Chinese leader Xi Jinping sees war as the best option. Those making this argument typically say Xi is tired of waiting for unification to happen peacefully, sees a military window of opportunity, or has set a deadline for finishing the job. Some think China’s recent economic problems create an incentive for Beijing to launch a diversionary Taiwan war.
  

• China, Russia, and Iran Are Reviving the Age of Empires  Hal Brands/Bloomberg Opinion

  The ghosts of empire are haunting Eurasia. President Xi Jinping’s China is seeking to reclaim the power and privileges of the great dynasties that once bestrode Asia. President Vladimir Putin is channeling the memory and the methods of famous conquerors from Russia’s imperial past. Iran is using proxies, missiles, and other means to build a sphere of influence encompassing parts of the old Persian Empire. Not so long ago, much of the world was ruled by empires. If today’s revisionist states have their way, the future could resemble the past. 

The Economics of a Good Sleep

• Sleeping Our Way to Being Productive VoxEU

  Sleep is key to our physical and mental health. It also affects people’s employment and productivity. This column explores how the amount of weekly sleep influences employment, productivity, and the income of individuals in Germany. Each additional hour of sleep per week increases the probability of employment by 1.6 percentage points and weekly earnings by 3.4%. Sleep is partly the product of both public and private decisions and can be incentivized so that the negative economic effects of not sleeping enough are more salient to individuals.

• Americans Sleeping Less, More Stressed Gallup

  For the first time in Gallup polling since 2001, a majority of U.S. adults, 57%, say they would feel better if they got more sleep, while 42% say they get as much sleep as they need. This is nearly a reversal of the figures last measured in 2013, when 56% of Americans got the sleep they needed, and 43% did not. Americans’ perception that they aren’t getting enough sleep is borne out by the diminished number of hours of sleep they report getting per night.

Recommended Weekend Reads

March 15 - 17, 2024

Here are our recommended reads from reports and articles we read last week. We hope you find these useful and that you have a relaxing weekend. Also, let us know if you or someone you know wants to be added to our distribution list. 

Americas

• “Annual Threat Assessment of the U.S. Intelligence Community”  Office of the Director of National Intelligence

  The Director of National Intelligence (ODNI) released their annual global threat assessment.   The report outlines how, in the coming year, the United States will face an increasingly fragile global order strained by accelerated strategic competition among major powers, more intense and unpredictable transnational challenges, and multiple regional conflicts.  The report details the US Intelligence Communities unclassified assessment of China, Russia, Iran, and non-state actors and the risk they pose to the US.

• “Redefining US Strategy with Latin American and the Caribbean for a New Era”   Atlantic Council

  The Atlantic Council launched this study because of the perception of waning US interest, and the rise of external influence necessitates a rejuvenation of and renewed focus on the region.  The study focuses on what can be done in four areas: 1) economy, investment, and commerce, 2) energy security, 3) regional migration and security, and 4) democracy, institutions, and governance.

• “How banking regulations affect US foreign policy”  The Atlantic Council

  Economics, finance, and national security overlap. Obvious areas of convergence include sanctions and trade policy. But the average US foreign policymaker is now also expected to develop at least rudimentary knowledge of critical minerals and what constitutes a reserve currency. Banking regulations may seem a step too far, but they must be added to the list because they, too, carry foreign policy implications.

• The Puzzling Persistence of Financial Crises”  National Bureau of Economic Research

  The high social costs of financial crises imply that economists, policymakers, businesses, and households have a tremendous incentive to understand and try to prevent them. And yet, so far, we have failed to learn how to avoid them. In this article, we take a novel approach to studying financial crises. We first build ten case studies of financial crises that stretch over two millennia and then consider their salient points of differences and commonalities. We see this as the beginning of developing a useful taxonomy of crises – an understanding of the most important factors that reappear across the many examples, which also allows (as in any taxonomy) some examples to be more similar to each other than others. From the perspective of our review of the ten crises, we consider the question of why it has proven so difficult to learn from past crises to avoid future ones.

• Driving Under the Influence of Allergies: The Effect of Seasonal Pollen on Traffic Fatalities  National Bureau of Economic Research

  Traffic fatalities are the leading cause of mortality in the United States despite being preventable. While several policies have been introduced to improve traffic safety, and their effects have been well documented, the role of transitory health shocks or situational factors in explaining variations in fatal traffic accidents has been understudied. Exploring daily variation in city-specific pollen counts, this study finds novel evidence that traffic fatalities increase on days in which the local pollen count is particularly high. We find that the effects are present in accidents involving private vehicles and occur most frequently on the weekends, suggesting potentially a missed opportunity to avoid these fatalities. We do not find similar effects for fleet vehicles. These findings remain robust to alternative specifications and alternative definitions of high pollen count. Taken together, this study finds evidence that a prevalent and transitory exogenous health shock, namely pollen allergies, increases traffic fatalities. Given our lack of evidence of avoidance, these effects are not mechanical and are likely driven by cognitive impairments that arise as a result of seasonal allergies.

European Union

• “EU-US relations after the Inflation Reduction Act, and the challenges ahead”  European Parliamentary Research Service

  In this paper, Bruce Stokes, visiting senior fellow at the German Marshall Fund of the United States, and associate fellow at Chatham House, offers an overview of US-EU relations since the passage of the US Inflation Reduction Act of 2022.  This paper is based on the author’s interviews with leading European and US experts and published analysis by major think tanks and journalists on both sides of the Atlantic.  The paper discusses current efforts to manage longstanding pre-IRA disputes, the Trade and Technology Council, the US Chips and Science Act and the EU’s response, looming issues such as CBAM and critical minerals, and how politics in both the US and Europe may affect the handling of these issues.

• “Opening Shots: What to Make of the European Defense Industrial Strategy”  European Council on Foreign Relations

  The European Commission’s new defense industrial strategy sets out to strengthen the EU’s defense industry through common and local procurements. But it will need both financial and political buy-in to succeed. Firstly, money matters. The €1.5 billion mobilized to establish the European Defense Industrial Policy (EDIP) between 2025 and 2027 represents a fraction of European spending (roughly 0.2 percent), which will make it difficult to shape the market. Significant additional money could only be allocated under the EU’s next multiannual financial framework in 2028.

  Secondly, the commission needs to clarify the functioning of different financial tools, including the Fund to Accelerate Defense Supply Chain Transformation (FAST) to support small- and medium-sized enterprises; the Structure for European Armament Programme (SEAP), which bolsters cooperation in part through a VAT exemption; and the European Military Sales mechanism (which is apparently modeled on the US Foreign Military Sales tool, though focused on the availability of EU equipment).

  Thirdly, as it grows, this effort needs to be well aligned with defense planning priorities, which are primarily defined at the national level or in NATO. This will require much closer NATO-EU engagement. Fourthly, member states, especially the larger ones, have traditionally been reluctant to Europeanize defense policies and could resist a perceived power grab by the commission. The EU will have to convince them – and their industries – of the added value of this approach, including, for some, the choice to buy European. 

  Finally, given the money initially allocated and the usual timeframe before implementation, EDIS and EDIP will not address the immediate requirements of Ukraine or short-term capability shortfalls.

NATO

• NATO’s decision process has an Achilles’ heel  By Eric S. Edelman, David Manning, and Franklin C. Miller The Atlantic Council

  In Washington this July, the most successful political-military alliance in modern history will celebrate its seventy-fifth anniversary.  Today, the Alliance stands as a barrier to Russian President Vladimir Putin’s ambition to recreate a “Russian world,” bringing Russophone citizens back into something like the borders of the Soviet Union by reabsorbing Ukraine and possibly Moldova and the Baltic states. The Russian autocrat’s invasion of Ukraine has strengthened the Alliance by adding two very capable members (Finland and now, finally, Sweden), and by strengthening the will of member states to stand together against Russian aggression. But the fact is the principle of consensus which holds the alliance together, except in the case of accession, is not enshrined or codified in any Alliance document. What worked for the Alliance earlier, when all of its members were like-minded states facing an overwhelming military challenge, and the memories of World War II were fresh in the minds of both the public and leaders, may not be fit for purpose today with a broader and much more diverse membership.

China

• “Export controls: China’s long game to defend its tech advantage”   Merics

  Rather than abruptly pulling the plug on certain exports, Beijing is gradually sharpening an instrument to better control global tech supply chains and pursue a range of other goals. Chinese export controls came into focus in the summer of 2023 when the Ministry of Commerce (MOFCOM) announced new licensing requirements on the export of gallium and germanium, critical minerals in semiconductor manufacturing. Some saw this as a response to the Dutch government’s new export restrictions – under pressure from the US – on products made by ASML, a major supplier of chipmaking tools to China.  And retaliation it was – just not in a simple, tit-for-tat manner, and likely not aimed at that target. If the past year is of any indication, it is plausible that these mineral controls – which do not constitute an export ban – were chiefly aimed at US companies. While germanium is used in fiber optics and solar panels, and gallium in consumer electronics and 5G telecommunications, both are key for the aerospace and defense industries. In 2023, the Chinese government added US defense contractors Lockheed Martin and Raytheon to its Unreliable Entities List – companies China marks for punitive action. It also deemed memory chips from US defense contractor Micron to pose a risk to its domestic critical information infrastructure. 

• “China’s Food Security: Key Challenges and Emerging Policy Responses”  Center for Strategic & International Studies

  Feeding China’s vast population is a priority issue for Beijing, given the historic ramifications of famines and food crises for social and regime stability. Yet the task is vast—China must feed nearly 20 percent of the global population but is home to under 10 percent of the world’s arable land—and the challenges to stable food supply are many. These include inefficient agricultural practices, supply chain bottlenecks, changing consumption habits, international trade dynamics, domestic environmental degradation, corruption and data misrepresentation, and a history of food safety scandals. Diagnosing a more contentious international environment, Xi Jinping has placed greater emphasis on agricultural self-sufficiency and diversified sourcing of critical inputs, foodstuffs, technology, and know-how. This brief explores key trends, challenges, and policy measures in China’s pursuit of food security. It is part of a joint CSIS-Brookings Institution project, Advancing Collaboration in an Era of Strategic Competition, which seeks to explore and expand the space for U.S.-China collaboration on matters of shared concern.

Russia

• “All the autocrat’s men: the court politics of Putin’s inner circle”  The Atlantic Council’s Eurasia Center

  There will be very little suspense surrounding Russia’s presidential election this month. Vladimir Putin will certainly win a fifth term as Kremlin leader. This is because Russian elections are not elections. Instead, they are mobilization and legitimization rituals in which the results are preordained. And even such a shock as opposition leader Alexei Navalny’s death probably won’t change this.

  However, the lack of suspense surrounding the result of the vote does not mean that it will not be meaningful. On the contrary, this ritual is a political watershed that will determine the landscape in Russia for years to come—and possibly what Russia will look like after Putin finally passes from the scene. That is because, in the absence of institutions, Russian politics are effectively court politics, dominated by the clan battles within the Kremlin leader’s inner circle.  What is the state of the “Putin court?” And how has Russia’s war against Ukraine influenced the clan battles that define it? Why does the Kremlin seek to leverage traditional conservative values and the Russian Orthodox Church? This report is based on extensive interviews with dozens of current and former Russian officials who spoke on condition of anonymity to discuss the inner workings of the Kremlin power elite without fear of reprisals.

Statistics and Map of the Week

Which Chinese Local Governments Are Facing The

Most Severe Debt Obligations?

The Financial Times recently reported how officials from China’s most indebted provinces and cities were recently brought into meetings with state bankers in Beijing to attempt to accelerate the renegotiation of debt payments on billions of dollars in outstanding liabilities.  Infrastructure spending drove up much of the local debt – much of it now unserviceable.   And it is now a severe drag on China’s overall economy and threatening to add new pressure on the country’s effort to get its struggling economy back on track.  Most of the provinces are on the outer rim of China and tend to be the poorest areas.  It is estimated that 18 local governments have amassed as much as $13 trillion in debt, with a growing number of their public bonds coming due by the end of 2024.

Recommended Weekend Reads

March 8 - 10, 2024

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list. 

United States

• “Joe Biden’s Last Campaign”  Evan Osnos/New Yorker Magazine

  In a wide-ranging interview with President Biden, the author helps shed light in what drives the President to want to run for another term in office, what motivates him to face former President Donald Trump again in November despite poor polling, and how he views the first three years of his presidency.

• “Implications of Cannabis Legalization for the US Federal Budget”  American Enterprise Institute

  Abstract: Federal legislation to legalize, regulate, and tax cannabis could have significant impacts on the federal budget.  While the specific details of any potential cannabis legalization are unknown at present, such reforms are likely to affect both tax receipts and federal outlays through a wide range of mechanisms, including excise tax collections, changes in the size and composition of the labor force, and the major federal health care programs.  We identify the main federal budgetary implications of legalizing cannabis and estimates their likely magnitude where possible.

• “How Americans View Weight-Loss Drugs and Their Potential Impact on Obesity in the U.S.”  Pew Research Center

  About three-quarters of Americans say they have heard a lot or a little about Ozempic, Wegovy, and other similar drugs that are being used for weight loss. Among those familiar with these drugs, 53% think they are good options to lose weight for people with obesity or a weight-related health condition, while just 19% think they are not good options, and 28% say they’re not sure. By contrast, just 12% of those familiar with these drugs say they are good options for people who want to lose weight but do not have a weight-related health condition. A far larger share (62%) say these drugs are not good options for people without a weight-related health condition, while 26% aren’t sure.

Latin America

• “Poll Tracker” Mexico’s 2024 Presidential Vote” Americas Society/Council of the Americas

  This real-time tracker updates on the Mexican presidential race between Claudia Sheinbaum, representing an alliance of the Workers Party (PT), the Let’s Keep Making History Party (Seguimos Haciendo Historia//SHH), and the Green Party (PVEM) versus  Xóchitl Gálvez of the National Action Party (Pan).  The reader can check regularly for changes to the polling in advance of the June 2, 2024 election.

• “Brazil’s Polarization Is Here to Stay Even As Politicians Have (Mostly) Dialed Down the Rhetoric”   Americas Quarterly

  Little suggests polarization has gone away since the highly contentious election cycle in October 2022. Polarization in Brazil seems to have “calcified“: A poll in December indicated that more than 90% of people who had voted for either Lula or Bolsonaro did not regret their choice, even though Bolsonaro had been convicted for abuse of power and barred from holding office until 2030 by then.  And yet, while both President Lula and former President Bolsonaro possess an unrivaled capacity to mobilize their respective supporters and single-handedly produce confrontations on social media, a broader analysis reveals that the intensity of polarization in Brazil, in many ways, seems to have declined considerably over the past year.

• “What Happened to Lulu?  How He Dashed High Hopes for Brazil’s Foreign Policy – and How He Can Get Back on Track”  Foreign Affairs

  Few leaders could claim on taking office, to have induced sighs of relief from both Chinese President Xi Jinping and U.S. President Joe Biden. Yet, in January 2023, that is exactly what Luiz Inácio Lula da Silva did. His narrow victory over Brazilian President Jair Bolsonaro, a right-wing extremist and an admirer of Donald Trump, sparked optimism across borders. But during his first year in office, Lula, who is chairing the G20 in 2024, has struggled to translate his vision for a more progressive global order into action. His foreign policy thus far has been beset by diplomatic missteps that have strained relations with partners in both the West and the developing world. His statements and actions have cast doubts on his role as peacemaker, coalition builder, and champion of the marginalized. His commitment to environmental leadership has been marred by his decision to turn Brazil into the latest petrostate. And his grand design overlooks his country’s most pressing threat: the explosive expansion of criminal networks that are working hard to turn Brazil into a failed state and that are undermining the ecological integrity of the Amazon rainforest.

China 

• “Can Electric Cars Power China’s Growth?”   Federal Reserve Bank of New York Liberty Street Economics Blog

  China’s aggressive policies to develop its battery-powered electric vehicle (BEV) industry have been successful in making the country the dominant producer of these vehicles worldwide. Going forward, BEVs will likely claim a growing share of global motor vehicle sales, helped along by subsidies and mandates implemented in the United States, Europe, and elsewhere. Nevertheless, China’s success in selling BEVs may not contribute much to its GDP growth, owing both to the maturity of its motor vehicle sector and the strong tendency for countries to protect this high-profile industry.  

• “China’s long-term struggle to become integral in semiconductor supply chains”  Merics

  In semiconductors, China is much less able to exploit its dominant supply chain position than the US. However, Beijing is building up the legal framework and market power to use dependencies in the semiconductor industry as a bargaining chip if necessary. What can Europe do? This article is part of our series on China’s strategies to reduce vulnerabilities.

• “U.S. Military Theories of Victory for a War with the People’s Republic of China”  Rand Corporation

  Abstract:  military conflict between the United States and the People's Republic of China (PRC) would entail escalation risks that the United States has not seriously considered since the Cold War. The authors of this paper consider how the United States can prevail in a limited war with the PRC while avoiding catastrophic escalation. 

  The authors do so by considering theories of victory for the United States in a war with China. A theory of victory is a causal story about how to defeat an adversary: It identifies the conditions under which the enemy will admit defeat and outlines how to shape the conflict in a way that creates those conditions. The authors consider five theories of victory and identify two as the most viable: denial (persuading the enemy that it is unlikely to achieve its objectives and that further fighting will not reverse this failure) and military cost-imposition (using military force to persuade the enemy that the costs of continuing the war outweigh the benefits). The authors maintain that denial offers the best chance for delivering victory while avoiding catastrophic escalation, whereas military cost-imposition has lower prospects of success and higher chances for catastrophic escalation.

Russia

• “Legal options for confiscation of Russian state assets to support the reconstruction of Ukraine”   European Parliamentary Research Service

  This report analyses the options under international law for the confiscation of Russian state assets to support Ukraine’s reconstruction.  It focuses on Russian Central Bank assets, US$300 billion, which are frozen in various jurisdictions. The report considers four avenues for overcoming Russia’s immunity for enforcement: avoidance of immunity through purely executive or legislative action; justification for the breach of international law on the grounds that it is a countermeasure; evolution of international law to lift immunity from enforcement upon, for example, a finding of aggression by a United Nations principal organ; and an exception in international law for the enforcement of an international judgment.

Map of the Week (and Photo Essay) 

How Ukraine Overcame Russia’s Grain Blockade

Russia’s sealing off of Ukraine’s vital Black Sea ports and its attacks on Ukrainian grain storage centers at one point raised worldwide alarm about possible food shortages. But by early this year, grain exports were nearly back to prewar levels.    The map below shows how Ukraine modified its traditional export routes to avoid destruction by Russian forces (notably by hugging the coasts of NATO members Romania, Bulgaria, and Turkey).  The map below – created by the Council on Foreign Relations (CFR) – shows the route.  And you can see the CFR’s excellent Photo Essay on Ukrainian grain growth and shipping HERE.

Recommended Weekend Reading

January 12 - 14, 2024

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list. 

Global

• “Top Ten Global Risks for 2024”  The Stimson Center

  In the 7th edition of their annual “Top Ten Global Risks,” the Stimson Center conducted an exercise in foresight drawn from their forecasting experience at the U.S. intelligence community’s National Intelligence Council. In their previous forecast, they focused on the proliferation of small wars, food insecurity, developing-country debt, and growing climate-change impacts — an ongoing polycrisis, entangled events and developments linked to and cascading off each other — is emblematic of our times: The post-World War II global system that the U.S. engineered is unraveling. Amidst this disorder and strife, even more signs of distress will surface in 2024.

Taiwan/China

• “The Taiwan that China wants is vanishing”  BBC

  In Taiwan, there are also 600,000 or so indigenous peoples who trace their ancestry back thousands of years to China. And then there is a younger, ambivalent generation that is wary of questions about identity. They feel Taiwanese but see no need for Taiwan to declare independence.  They want peace with China, they want to do business with it, but they have no desire to ever be part of it.

• “Taiwan’s Status Quo Election”  Foreign Affairs

  Why the Result Won’t Have Much Effect on Cross-Strait Relations—or U.S.-Chinese Tensions.

• “China’s Global Energy Interconnection: Exploring the Security Implications of a Power Grid Developed and Governed by China”  Rand Corporation

  In 2015, Chinese President Xi Jinping endorsed a new initiative, known as the Global Energy Interconnection (GEI), that could help solve humanity's pressing energy and climate dilemmas through the development of a global power grid. The GEI would connect remote renewable sources of energy to global consumption centers using ultra-high-voltage power transmission lines spanning continents and smart technologies. This way, peak demand for electricity in the evening in eastern China, for example, could be met using solar power at noon in central Asia, matching supply and demand across countries and continents more efficiently.  On paper, the proposal presents many benefits. However, concerns about China's intentions and the political, security, and economic implications of a China-led GEI also exist.

The United States

• “National Defense Industrial Strategy”  US Department of Defense

  The National Defense Industrial Strategy (NDIS) – the first of its type to be produced by the Department of Defense – provides a path that builds on recent progress while remedying remaining gaps and potential shortfalls in the US Industrial base and workforce.  The report also seeks to answer the question: How does the Defense Department prioritize and optimize defense needs in a competitive landscape undergirded by geopolitical, economic, and technological tensions?

• “Empire or Republic? The Choice in ‘24”  GoodFellows Podcast/Hoover Institution

  Hoover senior fellows Niall Ferguson, H.R. McMaster, and John Cochrane also discuss the odds of Cold War 2 morphing into World War III; whether economic conditions will overshadow fearmongering in a grim Trump-Biden referendum (in Niall’s words: the choice of “empire or republic”); the best use of this leap year’s spare day; plus why King Charles III would choose to break with tradition by spending a “dry” January in a very wet Scotland.

Russia

• “Challenges of Export Control Enforcement: How Russia Continues to Import Components for its Military Production”  Yermak-McFaul International Working Group on Russian Sanctions and the KSE Institute

  This analysis shows that, while export controls have had some effect on trade flows, Russia continues to be able to import large amounts of goods needed for military production.  Since the imposition of restrictions, supply chains have adapted, and most of the items in question now reach Russia via intermediaries in third countries, including China.  Almost half of the imports in the first ten months of 2023 consisted of goods that were produced on behalf of companies from coalition countries, including major enforcement challenges.

Yemen 

• “Houthi anti-ship missile systems: getting better all the time”   International Institute for Strategic Studies

  Over just a few years, Houthi rebels in Yemen have amassed a remarkably diverse array of anti-ship weaponry, incorporating both cruise and ballistic missiles, which they have recently used to threaten shipping in the Red Sea. The critical role that Iran has played in this build-up raises broader questions about Tehran’s regional strategy.