Aurelia Butler

Last week, the House of Representatives Select Committee on the Chinese Communist party notified the world’s largest asset manager, BlackRock, as well as MSCI, which selects the securities that make up many index funds Americans invest in, that they were being investigated for putting money into Chinese companies that the US government has accused of working with the Chinese military and violating human rights.This is the latest beat in a trend that I first wrote about two years ago, which is the evolution of trade wars into capital wars. It’s entirely predictable that we’ve reached such a place. Capital flows and trade flows are interlinked, and increasing examination of global supply chains and financial flows in the wake of “de-risking” has shown that the US and China are tightly linked in more problematic ways than anyone had ever imagined. It is quite common, for example, to find evidence of Chinese companies under American sanctions partnering with US firms, or blacklisted companies controlling multiple non-blacklisted affiliates, meaning that they could legally import goods and services for their sanctioned investor or parent. In my column today, for example, I look at how crucial slave labour and coal-fired power are to Chinese clean energy technology, which dominates the global market. The US government may be able to outlaw Chinese-made solar modules, but the raw polysilicon mined in Xinjiang isn’t tracked, which means that the White House may be putting a nice wrapper on a problem that hasn’t been fixed. As these inconvenient truths are teased out by global companies attempting to meet the letter of the law around decoupling, it’s becoming clear that there are some hard choices to be made by both western countries and China.Inconvenient truths of decoupling abound. The Biden administration is trying to protect domestic jobs from unfair trade practices, but American retirement money is being funnelled through Chinese companies to a state that has guns pointed at the US. Countries like America and Australia have the raw materials necessary to mine things like rare earth minerals and the quartz-based polysilicon needed for the clean energy transition. But doing so is costly and time-consuming, and at the end of the process, paying fair wages and using low-carbon power mean inputs will cost double what they would in Xinjiang.All these inconvenient truths apply to Europe as well. I’ve often wondered, for example, how European companies doing digital trade with China can hope to enforce EU rules around privacy. Given that these things go to the heart of the differences in political economies around the world (western finance companies expect to invest anywhere they like, for example, even as the Chinese state has massive capital controls on its private sector), I don’t know how all this gets resolved.Gideon, any bright ideas on that score? And what inconvenient truths have you noticed over the past few years of deglobalisation, decoupling or de-risking, depending on your term of art?Recommended readingThis New Yorker profile of star art dealer Larry Gagosian, by Patrick Radden Keefe (the author of Empire of Pain, about the Sackler opioid fortune) is one of the best magazine features I’ve read in some time. Keefe shows us how Gagosian essentially became the market maker for art in the modern era — and what it has meant for the art industry (hint: it’s not all good). Some of the reporting details here are incredible.I’m betting that like me, other Swampians sometimes suffer from the “second-hand stress” of being around difficult people. This Harvard Business Review article had some nice tips on how to deal with it.I’d agree with Daniel Blake who writes in the FT that a multipolar world need not be a bad thing for investors, but I also think Mohamed El-Erian is right that we may be too sanguine, particularly in the US, about markets at the moment.Gideon Rachman respondsIndeed — there are many “inconvenient truths” (ITs) around decoupling. Some of the biggest involve the green transition:1. IT one is that we can strive for net zero in the west — but if China doesn’t control its emissions then most of our efforts are likely to be in vain. China accounts for about 30 per cent of world’s carbon emissions, compared with 14 per cent for the US and less than 9 per cent for the EU.2. But — inconvenient truth two — before we get on our moral high-horse about China, remember that on a per-capita basis it emits about half of what the US does. And, of course, greenhouse gases are mainly a problem of stocks, rather than flows. And most of the carbon dioxide that’s in the atmosphere was put there by western countries.3. IT three is that China is both doing impressively well and impressively badly on the green transition. On the one hand, they dominate the global market for solar panels and 30 per cent of Chinese car purchases are now EVs or hybrids, compared with about 10 per cent in the US. On the other hand, China is increasing the opening of new coal-fired power stations — with more already approved this year than in all of 2021.4. And, finally, I really don’t see how we do our own green transition without China. As you know, the Chinese dominate the production of the critical minerals that are crucial for battery production. Of course, the west is trying to free itself of this reliance. That is de-risking, if anything is. But most experts I know think that process will take decades. And we have to accelerate the green transition right now.Your feedbackAnd now a word from our Swampians . . . In response to “Should Biden pardon Trump?”:“I find myself coming down more on Rana’s side than Gideon’s where next November’s election is concerned. The 30 per cent who support Trump will continue to do so regardless. Meanwhile Dobbs is not losing its potency as a motivating factor in US elections, the realignment of moderate college-educated suburban voters to Team Blue continues apace, the 2024 electorate will comprise fewer Silent Gen / Boomer voters and more Gen Z voters than the 2020 electorate, and the kids lean left. Trump is shedding voters and it’s not at all clear where he might make up that deficit.” — Steven Robinson More

The change in sentiment comes as the U.S. economy continues to expand at a healthy pace.“Given this growth, we doubt the economy will quickly lose enough momentum to slip into a mild contraction as early as next quarter, as we had previously projected,” the economists wrote in a note.“While a recession is no longer our modal scenario, risk of a downturn is still very elevated. One way this risk could materialize is if the Fed is not done hiking rates. While we and the markets think it is done, it probably wouldn’t take much of an upside inflation surprise for the FOMC to deliver the extra rate hike that was signaled in the June dots, with perhaps even more to come.”Instead, they say recession risks are now elevated for the next year. JPMorgan also expects the Fed to start cutting rates in the third quarter of the next year. More

Donald Trump is a braggart and a liar. Donald Trump attempted to stage a coup. I think both those statements are true. But it is also true that, as president, Trump was responsible for historic shifts in US foreign and domestic policy that Joe Biden has built upon. Those shifts are likely to endure — even if Trump is sent to prison.What makes a presidency truly historic? Essentially, it requires a radical break with the past — whose consequences and premises are then accepted and absorbed by your political opponents. Franklin Roosevelt did it with the New Deal. Lyndon Johnson did it with the Civil Rights Act. Ronald Reagan did it with the deregulating, tax-cutting policies, now commonly referred to as neoliberalism.The presidents that came after Reagan basically accepted the free-market philosophy that he bequeathed. Bill Clinton pushed through the North American Free Trade Agreement. George W Bush welcomed China into the World Trade Organization. The Obama administration worked towards a US-China bilateral investment treaty and agreed the Trans-Pacific Partnership, a new trade deal.Trump, however, repudiated the pro-globalisation consensus of the previous 40 years. On the campaign trail, he accused China of laughing at America and raping it. In his inaugural address, he lamented the “American carnage” that he blamed on globalisation. Listening in the audience, Bush is said to have muttered: “That was some weird shit.”On his first day in office, Trump pulled America out of the TPP. In 2017, the US made a deliberate effort to hobble the WTO by blocking the appointment of new judges to its appellate court. Robert Lighthizer, Trump’s trade representative, imposed a raft of tariffs on China. Trump also renegotiated Nafta, which was rebranded as the USMCA. All this was justified in the name of bringing industrial jobs back to the US.The new rivalry with China was also geopolitical. The Trump administration’s national security strategy, announced in 2017, made “great-power competition” with China and Russia the centrepiece of its approach to the world.And what has Biden done with all this “weird shit”? Rather than shovel it to one side, his administration has retained most of these Trump-era policies — and even built on them. It made no attempt to rejoin the TPP and continues to block the WTO’s appellate court. In private, some administration officials say that it was a mistake ever to let China join the WTO. Trump’s tariffs on China are still in place. This administration has also embraced the concept of great-power rivalry with China. Biden’s own National Security strategy describes China as the “most consequential” geopolitical challenge for America. “Bidenomics”, the president’s ambitious and interventionist economic policies, are driven by a Trump-like desire to reindustrialise America and rebuild the middle class.The Biden team would argue, with some justice, that its policies are more systematic than those of the Trump administration and contain some new elements. The emphasis on encouraging clean energy and fighting climate change is distinctively Democratic. Biden’s efforts to contain Chinese power are also less vulnerable to presidential caprice. Trump tended to excoriate China with one breath and heap praise on China’s leader, Xi Jinping, with the next. He probably saw his tariffs as a means to eventually negotiate a better trade deal with China, until the pandemic threw all efforts to improve relations with Beijing off course. The Biden administration is less narrowly focused on the US-China trade balance, and is making a more systematic effort to restrict the export of key technologies to China. Biden’s team can also claim to have put far more money into efforts to reindustrialise the US than Trump did.But these are largely differences in implementation rather than underlying philosophy. Much as they would be loath to admit it, the Biden team has come to share many of Trump’s basic assumptions — about trade, globalisation and rivalry with China.Two factors have driven this reassessment. First, Trump’s victory in 2016 forced Democrats to take the plight and anger of US workers much more seriously. The Biden administration has concluded that it can no longer sell globalisation to the American people. Without an effort to address the economic drivers of Trumpism, democracy itself may be in peril. So Biden’s team has finally abandoned the free-trading nostrums embraced by Bill Clinton’s “New Democrats” in the 1990s.The Biden administration also believes, as Trump argued, that 40 years of US policy towards China have in effect failed, and that a China led by the Communist party will never be a “responsible stakeholder” in the international system. In important respects, therefore, Trump brought about a lasting revolution in US foreign and domestic policy.It may seem strange — even repulsive — to give him credit for serious shifts in ideology and policy. For many in Washington, Trump is a barbarian, whose defining legacy will always be his assault on the American democratic system. But perhaps it needed a taboo-breaking barbarian to engineer such a decisive break with a 40-year-old consensus on trade, globalisation and [email protected] More

BUENOS AIRES (Reuters) – Argentina’s fractured opposition may not agree on much ahead of an upcoming Aug. 13 primary election but it has coalesced around the need to end a dizzying system of multiple exchange rates that has spooked investors and crippled the economy. Both mainstream opposition candidates, Patricia Bullrich and Horacio Rodriguez Larreta, would dismantle the myriad of preferential rates in Argentina, custom made for dozens of daily transactions ranging from travel expenses to wine exports. A third contender, Javier Milei, is calling for the more untested solution of replacing the Argentine peso with the U.S. dollar. Unlike most other countries, Argentina has an artificially pegged exchange rate which is mandated by the state rather than market demand. This has allowed the widely used parallel currency market to flourish, where pesos are currently trading against the dollar at less than half the official rate. At the same time the government has been restricting access to foreign currency, what is popularly known as the “dollar clamp”, as a way to prevent further draining of low central bank reserves. Economists warn that any moves to unwind this highly distorted currency market, while removing artificial strictures which are holding back growth and investment, would likely lead to even higher short-term inflation, rising poverty and social unrest.”It is clear that the current exchange regime is a hindrance to the economy and has failed both to prevent an acceleration in inflation as well as preserving foreign exchange liquidity,” Ignacio Labaqui, senior analyst at Medley Global Advisors in Buenos Aires said. The main problem for an incoming government lies in the “inflationary consequences,” in a country where annual price rises are just shy of 116%, Labaqui said. In 2015, centre-right president Mauricio Macri fulfilled his campaign promise to float the peso currency freely triggering a 28% devaluation. While not immediately devastating, the measures eventually eroded Macri’s support to the point where he was forced to reintroduce controls in 2019.Bullrich, a former security minister under Macri, is advocating to unify rates and lift currency restrictions “on day one,” according to her economic advisor, Luciano Laspina. “We need to remove capital controls very fast. The sooner, the better,” Laspina said in a recent forum, betting an abrupt devaluation will bring short-term pain but potentially establish a healthier economy and attract longer-term investment. “With that and the IMF’s support, we can build the conditions to restore some credibility in Argentina.” Larreta, the current mayor of Buenos Aires, has a similar goal but argues that doing it immediately and across all sectors would be too painful for crisis-hardened Argentines. Instead he would close the gap between the official and parallel rate within his first year in office, according to his campaign website. Milei too is focused on a currency-based solution in the form of a devaluation and establishing one unit of exchange. “One of the most irritating things we have in Argentina right now are the government restrictions on who can buy dollars and at what price,” economist Diana Mondino and a senior advisor to Milei told Reuters.But such reforms are unpopular among an already inflation- bruised electorate, which is why the current Peronist administration is sticking to its guns ahead of the October 22 presidential election, pledging to avoid a big devaluation.It is unlikely that the next administration will remove all these restrictions, “simultaneously,” Labaqui said, even if it is part of their current campaign message. “What is clear is there is consensus within Juntos por el Cambio opposition economists about the need to undertake this task (of devaluing the official rate).” More