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R&R Weekly Column

Trade Skirmishes And Technological Wars

by Brunello Rosa

16 July 2018

A series recently-published of articles (for example in the New York Times and Le Figaro) reported on the rapid development of facial-recognition and other surveillance technologies in China that allow the authorities (central and local governments, public administrations, school boards, etc.) to follow almost any moment of people’s lives, in a country with a population of 1.4 billion. The authors of these articles suggest how these systems are the technological evolution of other forms of social control that have traditionally characterised Chinese society for centuries, from household communities to workplaces. These surveillance technologies would also allow the government to finally implement a system of “social reputational scores” that was conceived in the 1990s as way of assessing people’s creditworthiness, only now expanded to take in a much greater scope.  

In schools, systems of continuous surveillance would allow the teaching board to make a complete, 360-degree evaluation of scholars, not just through traditional test scores but also by assessing the presence, participation and activity of pupils during school hours, interest in the subjects studied, and overall behaviour during examinations as well as during recess. This way, the authorities claim, only the best of the best (not just academically, but also in terms of behaviour) will emerge in a dramatically competitive environment such as Chinese society today. At the same time, it is quite natural to think that, with these technologies, governmental control of people’s activities (including those of a political, or politically-sensitive, nature) can also be more fully implemented and enhanced. 



Let’s set aside, for a moment, the moral, ethical and political implications of these technologies, which could amount to a rather dystopian, Orwellian big-brother future, where the combination of artificial intelligence (AI), Internet of Things (IOT), big data, robots and automation eventually lead to the emergence of a combined system of machines not dissimilar to the Skynet of the Terminator saga, which eventually becomes self-sufficient and auto-directed. (With some sense of humour, the Chinese police chose the name “Skynet” for their system of surveillance cameras). What is mostly relevant for us at this juncture is the fact that the new battlefield for world economic leadership is precisely within the perimeter marked by AI, IOT, big data, robots and automation. This technological battlefield also includes a geopolitical component constituted by the use of cyberwarfare, as well as a financial aspect deriving from the addition of Fin-Tech to the mix. 

As discussed in a recent report by Nouriel Roubini, in this race to the 21st century economic supremacy, China is ahead of any other country in the world, having set the goal of being the number one performer in the 10 most advanced technologies of the future (including AI, robotics, EV and driverless cars, biotech, aerospace, and others) by 2030, even using aggressive industrial policies that will include government funding, subsidies and below-market rates loans in order to achieve this goal. One can see how the ongoing trade tensions (with tariffs and counter-tariffs between US and China) are just skirmishes (that could still lead to a full-blown trade war, if not contained), compared to the much deeper and broader lingering technological war between the world’s super-powers. 

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The Geopolitical Corner by John Hulsman

The unholy trinity of Trump, Corbyn, and Mandelson point the way to a better Brexit

17 July 2018 

Introduction: Out of the mouths of babes

To my amazement, three dangerous men I almost never agree with all said something profound, and in the same week no less. While the odds of this are happening are infinitesimal, it is nevertheless a delightful fact. And in the combined comments of Donald Trump, Jeremy Corbyn, and Peter Mandelson, lie a devastating critique of how disastrously the duplicitous Theresa May has bungled Brexit with her Chequers initiative. Better still, they outline a better way forward for a Britain hopelessly entangled by its government’s shocking timidity and incompetence. For in seeking to be all things to all people over Brexit, the May government has ended up being nothing to anyone.

The Trump Indictment

Donald Trump is so devilishly hard to analyse because almost everyone is shocked by the outward manifestations of his boorish behaviour; what he actually says in terms of policy often slides by unnoticed. Constantly corroding the public discourse, suffice it to say I would not want the present occupant of the Oval Office dating my daughter (or anyone else’s).

But that surely does not mean this serial disruptor is wrong on the merits that the tired western establishment has outlived its usefulness. For over policy Trump is right about NATO (it’s decades past time that Europeans either pay their way or we wind up the whole thing), the recent glaring failures of our leaders (wrong about the Great Recession, wrong about Iraq, wrong about Afghanistan), and the need to see the new era as it is, one of great power competition.

The human wrecking ball also happens to be right about the glaring deficiencies of Theresa May’s Soft Brexit aspirations. Before he was so unfortunately muzzled, the President forthrightly told the beyond nervous Prime Minister that given her determination for the UK to have a common rulebook with the EU over goods, there is no practical way the UK would be able to strike a meaningful free trade deal with the US. As seeking new accords with the parts of the world that are actually growing (the US, India, China) was a major positive feature that Brexit was supposed to deliver, the president’s delicious candour exposed the Chequers agreement for that policy disaster that it is.

The Corbyn Charge

While I was just savouring the president popping the May government’s Brexit balloon, Jeremy Corbyn awoke from his socialist slumber, proving that a stopped clock is still right twice a day. For his droning mantra that the May government is haplessly unable to govern--and that only the clarity of new elections could sort out the mess—suddenly made eminent sense over Brexit.

For the dirty little secret is that at present there is simply no majority in the House of Commons for any sort of Brexit. If May’s bungled general election of last year ruled out the Tory votes to secure a Hard Brexit, the present shambles in both the Conservative party (whose base remains for a Hard Brexit), as well as the calculations of its Labour opponents (based on a curious mix of high principle and low cunning) means that there is simply not the arithmetic to see the Chequers agreement over the line, what with the minority government having a working majority of only 13.

Following last year’s catastrophic outcome for her, it is said the prime minister’s first instinct was to resign, as she clearly saw that given the contention of the Brexit debate she would be simply unable to govern. If this is so, May ought to have followed her inner voice, as events since have proven her feelings entirely on the money. Since then, she has been all about tactics, merely trying to get from week to week, perpetually obfuscating, as May knew that to say anything of any substance about Brexit was to automatically lose her majority. This is cowardice of the most craven sort, and to put it mildly has not served the British people well. Jeremy Corbyn is right. Only another Brexit election can lead Britain out of the impenetrable maze the May government has thrust it into.


The Mandelson Accusation

Just when it seemed the week could not get any stranger, a voice from the dead reappeared from the other end of the Labour Party spectrum. Peter Mandelson, arch-Europhile and Svengali of the Blair era, rose from wherever he has been lurking (one imagines the crypt of the House of Lords) to saliently explain that the present Brexit deal is the worst of all possible worlds, and that it would be better to crash out of the EU without a deal (as many hardened Brexiteers dream about) than to stay chained to Brussels, without the ability to influence its decision-making. Oddly enough, he seemed to concur with former Foreign Secretary Boris Johnson that the Chequers agreement amounted to accepting a form of British vassalage to the EU.

And of course in policy terms, Lord Mandelson is entirely right. The only way forward for the UK to thrive is to definitively break with Brussels, or to re-join the club. To do anything else is to accept all the strictures of EU rules without possessing the off-setting benefit of getting to shape those laws.

But it must be remembered that May was always a Remainer at heart; more than this, she is a product of the very British establishment that Brexit was intended to upend, an elite that is to a person for remaining in the EU. It should thus come as no surprise that the foreign policy bureaucrats May entrusted to craft the Chequers deal did what civil servants always do; they created mush in trying to split the bureaucratic difference between the Leave and Remain camps. In doing so, they predictably satisfied no one.

Worse, in policy terms, as Mandelson astutely recognises, they left the UK in the worst possible position. Perpetually confusing caution with wisdom, this typical middle way, if accepted (we can only pray the EU will continue to be utterly arrogant and inflexible in the negotiations) would mean a UK with actually less sovereignty than it has now, with no voice in the EU, and yet unable to secure free trade deals with the rest of the world, shackled as it would be to the EU’s onerous over-regulation.

It is time to say it. Donald Trump is right. Out western elite—self-regarding as it still is—has utterly failed in the first rule for perpetuating ruling classes throughout history. It has been spectacularly inept and unsuccessful.

Conclusion: Giving The Donald the last word

As he is certain to grasp it anyway, let us give Donald Trump the last word regarding May’s utterly awful Brexit plans. “The deal she is striking is a much different deal than the one the people voted on…So a lot of people don’t like it.”

Just so. And even worse, to ignore the will of the people by slyly over time watering down their desires is not clever; rather than being Machiavellian it is the height of gormlessness. In the end, both May and her wretched half-in, half-out Brexit plans will come to nothing. However, in attempting to fool her electorate, the Prime Minister is coarsening and damaging the body politic in her country.

Instead, Donald Trump, Jeremy Corbyn, and Peter Mandelson point to a better way forward (and yes, I cannot believe I am writing this). For Brexit to work, the UK must be able to strike far-reaching free trade agreements with the rest of the world, the UK needs to have another election to confirm the policy course of action, and the UK must strive to either re-join the EU, or far better, to quit it altogether, rather than in trying to have the best of both worlds, ending up with only the worst.

And always, forever, and whatever the issue, it is both ethically and practically the right course to always level with your own people, and not hide painful truths from them. So may it be.

This article was originally published on the Author's LinkedIn Page.  John Hulsman's new book, To Dare More Boldly: The Audacious Story of Political Risk, was published by Princeton University Press in April 2018. 

Looking Ahead

The Week Ahead

Week  16 - 22 July  2018


On Monday, the presidents of the US and Russia will meet. The meeting—which follows a tense NATO summit last week—is expected to improve the relationship between the two countries. 

In the US, retail sales are expected to decelerate (c: 0.4% y-o-y; p: 0.9%). In the EZ, June CPI should remain in line with the ECB target (June CPI, c: 2.0% y-o-y; p: 2.0%) with a minor pickup in core inflation (c: 1.1% y-o-y; p: 1.0%). 

In China, Q2 2018 GDP growth is expected to have softened. Data on Chinese GDP growth (Q2 y-o-y) are likely to confirm a deceleration of the economy (c: 6.7% y-o-y; p: 6.8%). 

The Quarter Ahead

In the US, the Fed will continue to hike rates and reduce USD global liquidity… In the US: a) the Fed will accelerate the pace of balance sheet reduction to 40bn per month in Q3 and 50bn per month in Q4); b) the government will increase bond issuance; while c) the Fed will keep hiking rates (likely in September and December), to close the year with a 2.25-2.50% policy rate.

… putting pressure on EM currencies to weaken further. EMs will remain vulnerable to outflows in Q3 due to: a) declining USD liquidity; b) rising US interest rates; c) a stronger USD; and d) trade war fears. EM assets are under increasing pressure: while currencies remained stable (MSCI EM currency index: -0.1% w-o-w), stocks suffered outflows: investors withdrew USD900m from EM equity funds for the week ending on July 11. This was the 10th straight week of outflows, accumulating losses to more than USD17bn since the start of May. EM CBs will likely be forced to increase interest rates to pre-empt further currency depreciation. 

In the near term, trade tensions will remain high, but will not lead to a trade-war. Concern continues to rise after the US—following the adoption of tariffs on USD34bn of imports from China last week—announced this week that it is considering tariffs on a further USD200bn of imports. These concerns weakened the CNY by 0.7% w-o-w against the USD (to USD/CNY 6.70). As the US November mid-term elections approach, further tariffs are likely to be imposed. Thereafter, the US government will likely soften its position.   


In Turkey, investors’ concern will remain high in the near term. The announcement of the new cabinet and recent changes in the CBT governance rules—reducing the tenure of the board members and giving the president full power on their appointment—have increased investors’ concerns and caused the TRY to depreciate against the USD (USD/TRY 4.84, +5.9% w-o-w). 

Bahrain will continue to face a decline in fiscal revenues. Bahrain’s economy shrank—for the first time in seven years—by 1.2% y-o-y in Q1 2018, hit by a 14% y-o-y fall in oil production. 

Brent oil prices will remain above 70 USD/b, in spite of the announced Opec output expansion. Brent prices declined by 2.3% w-o-w, to 75.3 USD/b due to the improvement on Libya’s exports and trade war fears. However, the risk of output shortage remains elevated: Opec has only 2.1m b/d of spare capacity (in KSA, Kuwait and the UAE), which will be further reduced if KSA delivers on its promise to increase output to 11mb/d (June, a: 10.42; p: 10.0).    

Last week's Summary (9 - 15 July 2018)

U.S. Inflation and Stock Market

In the US, signs of economic strength drove stock market performance. Global stocks rose by 0.2% w-o-w (MSCI ACWI). In the US, the S&P500 increased by 1.5%, reaching a five-month high, driven by: a) the upbeat economic assessment of the Fed’s semi-annual monetary policy report; and b) supportive June CPI data, both headline (a: 2.9% y-o-y, the highest since 2012; c: 2.9%; p: 2.8%) and core (a: 2.3% y-o-y, an 18-month high; c: 2.3%; p: 2.2%).  

The VIX index declined by 1 point to 12, further below its long-term trend of 22. The 10y UST yield remained stable at 2.83% (+1bps w-o-w). The USD strengthened against a basket of currencies (DXY +0.7% w-o-w), and was flat against the EUR (EUR/USD 1.17). 

Inflation in Germany and China

In the EZ, Germany’s June CPI remained unchanged, in line with expectations (c: 2.1% y-o-y; c: 2.1%; p: 2.1%).  

In China prices rose moderately (June CPI, a: 1.9% y-o-y; c: 1.9%; p: 1.8%).  

Bank of Canada Raises Rates

In Canada, the BoC raised its benchmark rate by 0.25bps to 1.50% (c: 1.50%), on account of the strength of the economy.  

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