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State of the World, July 2020

Blog

State of the World, July 2020

Politics is not linear or steady. History is only sequential in textbooks. Real life takes place in fits and starts, and only after the fact do we look back and apply a superficial order to events. Consider the end of 2010 and the beginning of 2011. During roughly the same four-month time period, The Arab Spring, the Fukushima nuclear disaster, and the Libya Intervention all occurred – all while the European sovereign debt crisis loomed.

There were other blips that followed to be sure – Xi Jinping became China’s President in 2013 and Donald Trump became the U.S. President in 2016. The UK voted to leave the European Union and an attempt at coup d’état failed in Turkey. But compared to those four months – December 2010 through April 2011 – the rest of the decade was, for the most part, relatively calm. Even when it wasn’t, there wasn’t the dread of those four months – as if some new unforeseen black swan was lurking around every corner, just waiting to throw markets and geopolitics into turmoil. 

There is an old saying – “when it rains, it pours.” It is not clear who used the phrase first – many mistakenly believe that The Morton Salt Company coined the phrase in a marketing campaign to promote its new anti-caking salt in 1911. The earliest use we can find is in an 1855 edition of the American Cotton Planter, in which an angry Carolinian demands an explanation for why their writers recommend fall and winter plowing. American country star Luke Combs wrote a song in 2017 and took the phrase for his own – and as an opportunity to play beer pong in the music video. (Jacob’s sister is probably shocked Jacob knows who Luke Combs is, but we digress.)

All we can say for certain now is that it is definitely pouring.

Obviously, COVID-19 will go down as one of the most important episodes of the century. But as we have continually tried to remind our clients and readers, COVID-19 is not so much a disruptive force as an incredibly powerful catalyst for underlying forces that were building throughout the course of the previous decade. COVID-19 has ripped the band-aid off and eliminated some of the possibilities for cooler heads to prevail, but in and of itself, COVID-19 is not the root cause of the disruption. It is merely the symptom of another historical explosion, like those four months in 2010/2011 but on an even greater scale.

Consider the high-level transformations advancing on an almost daily basis. At the beginning of the year, there was talk of a Phase 1 U.S.-China trade deal. Fast-forward six months and U.S.-China relations are at their worst in almost half a century. The U.S. Commerce Department – despite previous objections from the U.S. Defense Department – decided in May that it would sanction any company that used U.S. software and technology to supply Huawei with semiconductors. In June, Hong Kong’s special status was revoked and the U.S. restricted exports with U.S. defense or dual-use technologies to Hong Kong.

China’s dependence on imports of advanced technology, especially of cutting-edge microchips, was one of the primary arrestors to potential U.S.-China conflict. After all, Chinese-headquartered companies accounted for just 6.1 percent of China’s almost $125 billion integrated circuit market last year. Tariffs and strongly-worded statements about Hong Kong’s new security law and China’s (appalling) treatment of Uighurs was annoying but ultimately tolerable by Beijing. The steps the US has taken in recent months are not. Agreeing or disagreeing with these measures is immaterial – they are done, and the U.S.-China relationship has changed as a result – and not for the better.

Then there is the European Union, whose future direction as a political project will be determined by the negotiations and compromises (or lack thereof) reached on the proposed “Next-Generation” 750 billion-euro COVID-19 rescue plan. When the beginnings of the plan were announced by French President Emmanuel Macron and German Chancellor Angela Merkel, we wrote about how this could be a transformative moment for Europe. It wouldn’t be a European plan if there wasn’t vociferous disagreement about the particulars, and those conversations will play a major role in deciding the EU’s future: whether it will emerge as a true geopolitical player on the world stage or remain an economically powerful but politically weak bloc. Merkel has said repeatedly this is the EU’s greatest challenge since it was founding and her logic is sound.

India gets slightly less attention in Western media but the changes occurring there are no less significant. In May, Indian Prime Minister Narendra Modi declared that “Self-Reliance” would become the driving political principle of his government. (As far as we know, Modi has not been reading Ralph Waldo Emerson during quarantine, but who knows what kids are reading these days.) Hindu nationalism and Modi’s “Make in India” campaign to make India “the Next China” have not fallen by the wayside – but they are now inextricable from Modi’s vision of a self-reliant India, a sort of non-alignment policy on steroids.

To that end, India is setting up new industrial corridors in Uttar Pradesh and Tamil Nadu so that it can produce its own defense and aerospace equipment. The Indian Bureau of Standards is reportedly in the process of finalizing new and stringent standards and even tariffs for Chinese imports. The Indian government is mandating transparency requirements on where imports come from – in the same way some look for “organic” produce at the store, Indians seem to be craving “Made in India” at the market. India even wants customers to know how much of a given product was produced locally – and is requiring some sellers to provide that information. Not to mention the massive reforms India undertook in its agricultural sector that we wrote about in early June, taking advantage of COVID-19 disruptions to pass measures aimed to make India self-reliant in food production for decades to come.

The U.S.-China relationship, the future of the EU, and India’s rise are just the biggest issues. Think of what else is happening:

  • Ethiopia began filling the Grand Ethiopian Renaissance Dam without Egyptian and Sudanese approval. It is the first time in the history of human civilization that an upstream Nile River country controls the fate of the downstream countries – and could result in conflict in and around the Suez Canal, still one of the most important trade choke points in the world.
  • The Libyan Civil War, the inheritance of NATO’s botched Libya Intervention, continues to rage. Russia and Turkey are on opposite sides; France is complaining to NATO that Turkish ships are locking missiles onto their ships.
  • India and China fought their worst border spat in almost half a century and though both sides have taken tangible steps towards de-escalation in recent weeks, there is still disagreement about when and how de-escalation will occur around Pangong Lake.
  • Armenia and Azerbaijan are fighting again – and not even over the disputed Nagorno-Karabakh territory. 16 are dead as of writing and again, Russia and Turkey find themselves on opposite sides.
  • The United States rejected Chinese territorial claims in the South China Sea and Japan’s Department of Defense released a report claiming that the balance of power in the region was shifting towards China. While the world looks on as China asserts its authority over Hong Kong, the fate of Taiwan – now at the center of the U.S.-China trade war due to its prowess in semiconductor manufacturing – is more uncertain than ever.
  • The security situation in Mexico is deteriorating, such that Mexican President Andrés Manuel López Obrador has asked the Mexican Army and Navy to man all Mexican borders to keep drugs out. This while Mexico’s drug cartels are now unafraid of attempting to assassinate Mexican police chiefs in Mexico City – not at the border or in Mexico’s harsh geography, but in the set of power itself.

No doubt we are missing a few important developments (like how climate change is leading to locusts plague, or how COVID-19 isn’t the only disease out there wreaking havoc right now), but hopefully you get the picture at this point. The level and scale of change happening in the world right now is astounding. There is an overall sense of dread, as individuals and companies alike ask themselves, “well what else could possibly go wrong?” It is tempting to throw up one’s hands and bemoan our collective fates as only Cormac McCarthy could: “there are no absolutes in human misery and things can always get worse.”

There is a silver lining, however, as hard as it may be to see now. We are not powerless. Yes, things are uncertain right now. The state of our world is crazy. But that does not mean that we are defined by the crazy around us. That, in a nutshell, is why we founded Perch Perspectives – and why we moved up our launch even during the middle of a global pandemic. We were tired of defeatist and determinist political risk analysis that offered doom and gloom and little else. Eventually, this time will pass, and another period of deceptive calm will descend, and those that will succeed in that future are those who refused to shy away from the challenges posed by the present. To paraphrase the immortal words of Al Swearengen, “stand it from your perch – and give some back.”

If we can help do so, you know where to find us.

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