Bring on the Chinese Investments in LATAM

Photo of the Chinese yen

A lot of you have been worried about all of China’s investments in Latin America. I get that it might sound a little scary, but you need to put these actions into the broader context of China’s circumstances.

China is in terminal decline. Its population is aging, and its resources are dwindling. So, they’re not going to be able to sustain these LATAM investments long-term. And don’t try to bring up the Monroe Doctrine, because recent administrations haven’t been enforcing it anyway.

Places like Peru, Brazil, Colombia, and Argentina are getting a sweet deal, since this is basically a form of subsidizing future industrialization of the region. And the US is only going to benefit from that as well, since we are partners to many of these countries.

So, if China wants to spend their limited resources (and time) laying the groundwork for a brighter future in a region that the US is so closely tied to, why should we stop ’em?

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

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Transcript

Hey everybody. Peter Zeihan here comes to you from Tongariro National Park in New Zealand. This is Taranaki Falls, just about done with the circuit. I thank God my back hurts. Anyway, taking an entry from, the Patreon page specifically. 

Tourists, specifically. It’s. Do I worry at all about China’s investments into Latin America? There’s a big port going into Peru. 

There’s a lot of mineral extraction stuff going into Brazil. There’s a general infrastructure going to Colombia. And then, of course, purchase agreements for everything under the sun to Argentina. What do I worry about? You know, I mean, don’t get me wrong, there’s a Monroe doctrine thing here going on, but, we haven’t had a president in the last 25 years who’s really acted on it. 

Certainly not, Obama or Trump or Biden. So, this is a very bipartisan kind of slouch strategically if if that’s the thing you’re concerned about. But I’m really not concerned about it. Remember that the Chinese are literally dying out. And if they want to throw some of their limited resources into the Western Hemisphere to build physical infrastructure that will help industrialize the Western Hemisphere to prepare for when China’s going to recover after China storm, I say let them, specifically the port in Peru probably isn’t going to get too much activity. 

There isn’t a really good transshipment port anywhere on the west coast of South America, so having one makes sense. And here, lo and behold, the Chinese are building it for everybody. In Argentina it’s more straight up sales issue. Those things can always go somewhere else when the Chinese are no longer the high price bidder. Colombia is a mountainous country where the population. 

Well, it’s unique, usually, like in Mexico, you live on the top of the plateaus to get above the tropics or anywhere else. You live at the bottom of the mountains where it’s cheaper to build. But in Colombia, because it’s right on the equator and the mountains are really steep and there’s jungle. They live on the side of the mountains. 

The top is tundra, the bottom is hard jungle and everyone lives in the middle. And so infrastructure is really hard. And if the Chinese want to pay for that grid because the U.S has a free trade agreement with Colombia, and any Colombian success is one for us as well. And then finally there’s Brazil. The Chinese are spending to build infrastructure from the coast up the skirt mint where Sao Paulo is, and then down into the interior again, expensive geography to develop and the Chinese are paying for it all. 

So if the Chinese want to pay for tomorrow’s world, I say let them. 

The Chinese Cut Off Drone Exports

Image of a drone firing missiles

The Chinese Government has moved toward implementing an export ban on drones and drone components, with an eye toward making supply issues a particular headache for the United States and the Ukrainians.

In regard to the latter group, Kyiv has had particular success in utilizing drones in their war against Russia. From reconnaissance to swarm attacks to providing targeting data for UAVs, the Ukrainian war effort has been building and burning through thousands of drones.

While the design and rebuild activity is happening primarily within Ukraine, several key components: motors, flight controls, and especially the batteries and made in China. China’s massive supply of affordable parts is what drove the Ukrainians to make up for shortages within their arsenals with drones in the first place, and you can bet Moscow has been pushing China heavily to stop the flow of these parts to Ukraine.

As for the Americans, the Chinese are looking to respond to the bevy of tech export restrictions pushed through by the Biden administration, and Beijing is bracing for an onslaught of new Trump tariffs. Things like drone components are one of the few levers Beijing has in this fight.

But what will the ultimate outcomes be? This is an excellent opportunity for the United States and others in the West to start building out their own manufacturing capacity for these components—a win for both strategic and economic reasons. Even if the Chinese were everyone’s best buddies, the current Chinese system is dying. Literally. The Chinese government cannot hold back the impacts of the collapse of the population growth rate, and the Chinese economy is undeniably slowing down. The global economy’s reliance on Chinese overproduction is coming to an end, regardless of whether anyone wants it to or not.

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Trump Tariffs Part 1 – China

An AI generated image of connex boxes with American and Chinese flags on them

The Trump administration is planning to impose some hefty tariffs on China. This isn’t just to reform trade practices and show China “who’s the boss”, but rather to shift industrial production away from China permanently.

Trump’s goal is to wean the US off that $500 billion worth of annual imports. This is going to be a challenging time for everyone involved; China is having their feet swept out from under them, and the US will have to find someone who can replace the Chinese (because we surely can’t do it on our own). And not to mention an unwanted bump in living costs for the Americans.

It’s not all bad news bears though. The US has enough cheap energy to help build all the processing and manufacturing it might need, but it will require significant investments, policy changes, and TIME. Trump has the right idea, but his approach is lacking a bit of the strategic depth that this will require.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey, everybody. Peter Zeihan here, coming to you from Colorado. Today’s the 26th of November, and today we’re going to talk about the incoming Trump administration’s initial plans for trade policy.

Last night, Donald Trump texted out that he plans to levy very sharp tariffs on Mexico, Canada, and China—our three largest trading partners. For this discussion, we’ll focus on the Chinese component.

We’re talking about China first because Mexico and Canada are different issues with different factors at play. First, with China: we don’t like China, and China doesn’t like us very much. The Trump tariffs, if implemented on the Chinese merchandise exports that come to the United States—roughly half a trillion dollars a year—would increase the average cost of living for the average American, every man, woman, and child, by about a thousand U.S. dollars a year.

The stuff that comes from China, like I said, is mostly manufactured goods, almost exclusively. The bulk of it falls into the electronics category, which includes computers, cell phones, cellular technology, white goods, consumer goods, and parts that can go into pretty much anything.

The Chinese have a very predatory trade system, so overall support from the U.S. citizenry is likely to be pretty high, despite the cost of this. This is a more traditional tariff goal here. The Trump administration has long wanted to reroute global trade flows, specifically where China is involved.

That means punishing the Chinese until alternatives can be generated. But therein lies the rub. No American trade policy going back to World War II has ever been very good at building that alternative system. We punish countries we think are engaging in unfair trade practices, but those punishments are usually designed to get them to dismantle those trade policies so we can return to something more fair or normal.

That is not the goal this time around. The goal here is to permanently relocate industrial plants. Simply throwing on a tariff and funneling the money to a general fund doesn’t achieve that. You also need to build a complementary industrial policy that takes some of the income and uses it to build a long-term alternative.

Here’s where the challenge and the opportunity lie. First, the challenge: the things China does, it doesn’t do by itself. It has relatively low-cost wages, especially for its mode of production. However, it’s not a very profitable industrial power. It has only managed to get to where it is now and maintain its position through a massive amount of subsidies.

If those subsidies were to go away, you would see mass de-industrialization of China, which would probably lead to the collapse of its political system. The Chinese aren’t even going to consider that, which is ultimately what a normal trade policy would aim for. To overpower that, you’d not only need a fairly steep tariff rate—much higher than the 10-25% that Trump’s team is suggesting—you’d also have to build an alternative.

When it comes to things like electronics assembly and components creation, the United States is not a very competitive player in that market. Our labor, to be perfectly blunt, is too highly skilled. The same goes for Canada and Mexico. You’d need to develop a different model, and doing that quickly is very difficult and expensive.

However, there is some low-hanging fruit. The Chinese dominate not just electronics manufacturing and assembly but also materials processing—turning bauxite into aluminum, cobalt into cobalt metal, and lithium into battery chassis, for example. This is something the U.S. and the rest of the world have largely stepped back from for two reasons:

  1. It takes up space and is environmentally damaging, leading to regulatory challenges.
  2. If the Chinese are willing to pollute their environment, exploit their workers, and subsidize the industry, why compete with them when they can do it cheaper and hand you the end product?

There are problems with that argument. The Chinese have discovered that this gives them leverage in trade talks. However, rebuilding this capacity elsewhere isn’t difficult or even particularly expensive. For example, the U.S., thanks to the shale revolution, produces a huge amount of excess natural gas and has the cheapest natural gas in the world. From that, we’ve developed the cheapest electricity in the world.

Over the last 15 years, the chemicals industry has shifted to run on natural gas rather than oil whenever possible. As of 2024, the United States is by far the largest, highest-quality, and lowest-cost producer of intermediate chemical inputs for modern manufacturing.

But it took the free market 15 years to make that happen. If we want to speed up the process for everything else, it means implementing an industrial policy that uses revenue from Chinese tariffs to help build the supporting infrastructure. This is low-hanging fruit that we need to address anyway. The Chinese won’t be around much longer, and even if they were, we wouldn’t want them to maintain the leverage they currently have.

Building up industrial plants isn’t necessarily expensive. For example, creating capacity for something like aluminum might only cost a few billion dollars. It’s not costly or time-consuming, but “cheap and quick” isn’t the same as “free and immediate.” It requires a policy to make it happen. Otherwise, the market will handle it over the next 15-20 years, but I’d argue we need to start the transition much sooner.

Once that foundation is established, we can begin tackling more difficult pieces like electronics. So far, the Trump administration has not demonstrated an awareness of this level of nuance in tariff policy. The general belief seems to be, “A tariff is good. Do it, and we win.” It’s going to take a lot more effort than that.

That’s the situation with China. The situations with Mexico and Canada are very different, and we’ll tackle those tomorrow.

Things I (Don’t) Worry About – Chinese Investment in Mexico

A photo of mexico city at night

If you’re getting worried about Chinese investments into infrastructure in Mexico, it might be time to switch the TV off and take a walk…because that narrative is a complete fabrication.

This should help ease your mind: China doesn’t even crack the top ten list of foreign investors in Mexico, there are regulations for  the origins of goods outlined in NAFTA 2 that China can’t bypass (and the person who negotiated these rules will likely be in Trump’s cabinet), and any major investments by China would be outed by business leaders in Mexico (so we don’t need to stress about stuff happening beneath our noses).

And if that wasn’t enough, the Chinese system is in decline, and so is their global influence. If they do somehow manage to make investments in the region, it’s only going to help the North American industrial base prepare for the collapse of China. At least this is a good thought experiment to remind us that the US needs to focus on building out its own industrial capacity.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey everybody, Peter Zeihan here, coming to you from Massey Draw above the Denver metroplex. Today we’re gonna talk about something that has been on a lot of people’s minds during my work trips the last couple of weeks.

Two weeks ago, I was in Mexico, and one of the first questions that everybody asked me was what I thought about the Chinese effort to build industrial plants in Mexico to get around NAFTA regulations and ship stuff into the United States.

Last week, I was in Canada, and that same question popped up. I decided to turn on the television for 15 seconds for the first time in a year and wow, wow, wow. It doesn’t matter who you are—left, right, center, economics, socialist, whatever. Whatever you’re watching, this is a hot topic. It pleases me to say, as somebody who just looks at the data, it’s a complete fabrication.

China doesn’t even make the top ten list for foreign direct investment—that’s investment in physical plants—in Mexico. In fact, it doesn’t even show up in government statistics; it’s so low down the scale.

And, you know, honestly, folks, let’s be honest here. The soul-searching… this kind of stuff is really hard to hide. I mean, an industrial plant that’s going to be big enough to process—even if it’s just to stamp “Made in Mexico” onto a previously made Chinese product and ship it to the United States—

That’s not small. That’s not quiet. We don’t have stealth fields, and there isn’t a single facility doing this anywhere in the northern Mexican states. The infrastructure into central Mexican states is insufficient for the task anyway.

This is something that we have dreamed up ourselves in our post-truth environment that just happens to have taken on a life of its own.

It reminds me a little bit of when everyone was panicking a couple of years ago about the Chinese purchasing farmland. And again, the Chinese weren’t even in the top ten list. Now, that doesn’t mean there aren’t foreign entities looking to do something like this, but it’s not China—it’s Canada.

Canada is the number one owner of farmland in the United States outside of Americans. It’s also the number one investor into Mexico after the United States. And yes, yes, we should be concerned about Canada, though with the rule of law, their politeness, and their heavy coats… I mean, Canada, I’m watching you.

Anyway, should things change—should this become a real thing—three things to keep in mind.

Number one: NAFTA 2, which was renegotiated by Donald Trump in his first term, has very clear rules of origin laws that say a certain percentage of goods have to be made in the NAFTA states. This hypothetical scenario where the Chinese are trying to get around that is already covered by US law, and the US already has tools within the NAFTA system to deal with it economically, politically, and to block the products should it become a problem.

That authority already exists.

In addition, the most likely person to take over trade policy in a second Trump term is Robert Lighthizer, who is the guy who wrote these clauses and negotiated NAFTA 2 in the first Trump situation. So I have no doubt that if there’s any inkling this is going to go down, Lighthizer will take personal responsibility for this. And he is by far the most competent person who was on Trump’s first team.

And if he accepts Trump’s offer, he’ll be the most competent and capable person on Trump’s team. So put that to the side.

Second concern: If something like this does go up, it will not be quiet. When the Chinese build industrial plants in third countries, they bring in their own workers. They house them on-site, and it generally generates a lot of labor protests for the host country to deal with.

And Mexico now has a healthier press environment than the United States does. Mexican workers will not be shy. Mexican business leaders will not be shy about shining a light on something like this should it go down. Keep in mind that most of the business leaders in northern Mexico are relatively oligarchic—a little bit Elon Musk—and they really don’t like it when things don’t go their way. They’re not going to be quiet.

So we have a really good alarm system built in should this happen.

Third, and finally: The Chinese system is failing due to demographic collapse. Before you consider trade tensions, before you consider the possibility of a conflict in the world that would interrupt raw material supplies, energy supplies, or merchandise exports, we need to prepare for a post-Chinese world.

Which means here in North America, we need to roughly double the size of the industrial plant.

And if the Chinese do decide to come in to build industrial plants in North America, think about what that means. They are spending some of their limited capital resources, technology, and labor in order to help us get ready for a world without them.

So even in the worst-case scenario, where I’m completely wrong and this is about to happen at scale, the worst-case scenario is still pretty good.

TSMC Cuts China’s Access to Advanced Chips

The recent discovery of TSMC chips in Huawei devices has revealed some gaps in the US sanctions on China. As a result, TSMC has decided to no longer even accept Chinese orders for advanced semiconductors.

This move aligns with the Biden administration’s strategy of halting progress in advanced sectors like AI; the US also got some other countries on board as well: Netherlands, Taiwan, Japan, and South Korea.

Now it’ll be up to incoming US President Donald Trump to figure out how to use tech restrictions or tariffs (or some combination of the two) to define US-Chinese relations.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey everybody. Peter Zeihan here. Coming to you from snowy and melty Colorado, where our first three feet of snow is rapidly going away.

Anyway, today we’re talking about something that happened last weekend, the ninth and 10th of November, and then followed up by an event on the 11th. On the ninth and 10th, the Taiwanese semiconductor company TSMC, which is the company that makes all the high-end semiconductors in the world, made a major announcement.

If basically it’s going to go into an EV, a high-end phone, a high-end computer, satellite communications, or artificial intelligence, it comes from TSMC’s foundries. Anyway, they said they are no longer going to even take orders for anything that is seven nanometers or smaller from any Chinese entity whatsoever. The instigating issue was a couple of weeks ago and a Huawei product.

Huawei is a Chinese telecommunications firm. They found some TSMC chips in one of the product lines, indicating that the sanctions, as they currently exist, are not working as well as some people thought they might. Some products are still making it to China and are incorporated into various goods. So, TSMC announced that they’re just not going to take orders from the Chinese for anything that is at seven nanometers or less.

Ten is generally considered to be the line where you get the really high-quality stuff, and all the really good stuff that goes into things like artificial intelligence tends to be four to three nanometers or even less. So, we’re not just talking about the top tier here but even the second tier.

Within 48 hours, the Biden administration announced they would lean heavily on TSMC to make sure no Chinese orders were ever even successfully placed. The Taiwanese announced compliance before the American order even came down, giving you an idea of how willing they are to cooperate on this issue. I’m sure that order was being drafted before TSMC made their decision, but TSMC beat them to the punch.

A couple of things come from this.

  1. Foreign Policy Implications
    We have our first foreign policy crisis for the incoming Trump administration. The Biden administration is setting Trump up for a pretty good success with relations with TSMC. However, we’ve had a difference in style when it comes to Trump versus Biden regarding China.

    • Trump’s approach has been tariffs, tariffs, tariffs, but with little meaningful enforcement. This has allowed China to find creative ways around the tariff structure—like mislabeling, exploiting NAFTA’s rules, or rerouting products through third countries like Vietnam.
    • The Biden administration, by contrast, has taken a surgical approach, identifying specific sectors and building tech walls to prevent tech transfer. This requires much more technocratic oversight to evaluate thousands of supply chain steps and ensure restricted products don’t end up where they shouldn’t.

Neither strategy is inherently “correct.” Each has strengths and weaknesses. Biden’s requires more ally cooperation and bureaucratic expertise, while Trump’s is more about making bold statements. A hybrid approach might be the best path forward. Regardless, Trump now has to decide on a course of action.

  1. Technological Thresholds
    The technological barrier TSMC is enforcing is in the seven-nanometer range. To understand why that matters, let’s break it down.

    • How Semiconductors Are Made:

      • The process starts by growing a crystal about the size of a Volkswagen. This is done by placing a seed crystal into melted silicon oxide and drawing it up slowly over days to form a massive ingot.
      • The ingot is then sliced into wafers, which are doped, baked, and etched under lithography machines repeatedly until the final chip is created.

    • Deep Ultraviolet (DUV) vs. Extreme Ultraviolet (EUV):

      • DUV, the older technology, uses UV radiation to etch chips. It can’t achieve atomic precision and involves manual adjustments, leading to inefficiencies and errors.
      • EUV, developed by the Dutch company ASML, uses a much tighter focus and automation to achieve sub-seven-nanometer precision. This results in fewer errors, more consistent chips, and better performance.

DUV can still produce chips between 10 and 90 nanometers, but getting below seven is a stretch. Huawei recently released a phone using a seven-nanometer chip made through brute-forcing DUV. The result was an expensive, inefficient chip with high energy consumption.

This prompted a coalition of nations—including the Dutch, Japanese, Koreans, Americans, and Taiwanese—to draw a hard line at EUV. If China can’t access EUV technology, they’ll be locked out of cutting-edge tech for years to come.

  1. Labor and Machinery
    China lacks the capability to produce or maintain DUV and EUV machines, much less develop them. EUV machines are exclusively made by ASML in the Netherlands. Without these machines or the skilled labor and software to operate them, China can’t produce high-end semiconductors.

The only way China can acquire these chips now is by hijacking shipments meant for someone else. However, doing so at the scale required to meet technological needs is improbable.

So, this situation lands squarely on Trump’s desk. How he chooses to pursue this technological blockade—and whether he combines it with tariffs or another approach—will set the tone for U.S.-China relations moving forward.

And I, for one, am curious to see how it all shakes out.

Photo from Wikimedia Commons

Can China Save Itself From the Mounting Debt Crisis?

Photo of woman holding Chinese Yuan

Beijing has announced a hefty plan to help local Chinese governments refinance their debt. But is this enough to ward off the mounting debt crisis?

Local Chinese governments don’t have many revenue sources, so they’re SOL when there’s no more land to sell. Many have issued local government financing vehicles (LGFVs), but they’re essentially hiding the debt…which is over $8 trillion now….about half of China’s GDP. So, the issuance by the national government will help (maybe for 2 years), but it’s not going to solve the problem long-term.

Once the rest of the world understands what China’s debt load actually looks like, I would expect foreign investors to run for the hills. And with all the other issues China is facing, this will be another notch along the journey towards economic decline.

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Can Immigration Solve China’s People Problem?

Photo of Chinese men and women in a town square

China is facing a demographic crisis, but can immigration be used to counter it?

Countries like Canada and Germany have used immigration to bolster their shrinking workforces…with mixed success. China’s demographic problem is a degree of magnitude worse; the rapid industrialization, urban migration and one-child policy all led them down this path (and that birthrate is getting scary low). Immigration isn’t going to save the Chinese…unless they find a way to bring in 30 million young people annually.

So, China can expect a collapse in their workforce and societal coherence within a decade. Everyone else should get out their pen and paper and take notes on how this plays out, and start to prepare for what is to come.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey, everybody. Peter Zeihan here. Coming to you from a snowy Colorado where we’re in the calm between the storms. Two feet behind us, one foot in front of us. Lots of shoveling yet to be done. Today we’re taking an entry from the Patreon forum. The question specifically is: can China use immigration to solve some of its problems?

The scale of the challenge, of course, is huge. And what China has done isn’t really technically immigration. They send their people out to attend universities and pick up technical skills that they can’t get within China, and then they try to bring them back. That has been at least moderately successful. I’d say probably a third to half of the students they send abroad come back. And considering that’s better than zero, you know, take the win where you can get it.

But moving the demographic pendulum is really hard and takes decades, even with immigration. So let me give you a quick three examples.

Canada decided about 15–17 years ago that they were facing a European-style demographic collapse. And so they opened up the doors and, over the course of the next 15 or 17 years, brought in about 4 million people, mostly under age 40. That did stabilize their tax base and their workforce, but it generated 4 million people who needed a place to live. And if you need a place to live, you’re not very price-sensitive. So it caused a housing shortage across the system in the places where there was actually work.

They’re now dealing with the political outcomes of that, which is part of the reason why the Justin Trudeau government is likely to fall in elections next year.

The second example would be Germany, where the birth rate has been dropping for 130 years, ever since industrialization began. But it really fell off the cliff after reunification in 1990.

Now, you would think that you’d have a big optimistic moment like reunification, and the birth rate would go up. The problem is that the East German territories, former East Germany, were economic basket cases, and the Germans collectively spent over €1 trillion trying to rehabilitate the industrial plant and infrastructure. And it was just a waste of money.

So if you’re in the East German system, you saw all this money coming in to try to make your system better, and it all failed. In the meantime, all your young people left, and so your birth rate almost went to zero.

In the West German system, you were paying and paying and paying and paying and paying, and you basically had a 12-year period with negligible economic growth because you were shoveling money into the furnace. So the birth rate dropped there, too.

Of course, it’s a heavily industrialized, urbanized country. When you live in condos, there’s no room for the kids, as opposed to when you live on a farm where there’s all kinds of room for them—not to mention their free labor. So the economic case went away, the emotional case went away, and the birth rate in Germany kept falling.

Probably within the next 7–8 years, we’re looking at about a one-third reduction in the size of the German workforce, and it will only shrink thereafter, with all the implications it has for consumption, tax base, and state coherence.

A few years ago, the Germans let in about a million people from Syria—refugees. And people are like, oh, sorry, demographics? No, they just did that because they were trying to do the morally correct thing. Of the million people, something like 850,000 of them were men. That really doesn’t help the demographic situation in the long run, and that’s before you consider things like language, cultural, and skills barriers.

If the Germans really wanted to solve their demographic problem with immigration, they would need to bring in about 2 million people a year under age 25, every year from now on, just to hold the line. After 20 years, it’s not Germany anymore.

If you’re going to use immigration to stave off a demographic problem, you need to do two things. One, you need to start early before you have much of a problem. And two, you have to have some assimilative capacity so you don’t generate big culture clashes. You want it to be a trickle, not a flood.

Which brings us to China.

Chinese data is getting updated bit by bit by bit. They’re trying to get a grip on their demographic problem. With a population of what they thought was 1.3 billion now looking like it’s closer to 1.1 billion, it may even be less than 1 billion. The scale of what they would need to do is immense.

Also, the trajectory of the Chinese is far worse than the Germans. The Germans industrialized over 130 years. The Chinese did it in about 45.

If you just go back to like 1960, the Chinese birth rate was so high that each woman was having 4–6 kids. Mao was concerned that the young generation was going to eat the country alive—perhaps literally.

So they instituted a two-child policy, which shortly thereafter became a one-child policy. Then the country went through the fastest industrialization process ever. So everyone moved off the farm and into condos and stopped having kids.

We’re now in a situation where officially the birth rate is about 1.2 children per woman. The reality is probably below 1. We already know by official data that in most of the major cities, places like Shanghai or Beijing, it’s already below 0.4 or 0.5.

So you’re talking about one-fourth or one-fifth replacement levels. That means we’re looking at a complete demographic collapse of the Chinese system within ten years. The Germans are practically a slow fade-out compared to what’s happening in China.

Numerically, if you wanted to use immigration, you’d probably be talking about needing to get 30 million people under age 25 every year just to sustain the numbers where they are today. I’m not sure there are that many potential migrants in the world at any given time.

We’re looking at a workforce collapse, a financial collapse, and a state coherence collapse in the not-too-distant future.

The real challenge isn’t how do you save China? It’s gone. We’re just basically marking time.

The challenge in the short term is preparing for its fall because when that industrial plant goes away, we’re going to feel it.

The second challenge, a few years from now, is how do you manage a post-China Asia, where China is in degradation and civilization is in chaos?

Then the longer-term challenge for the latter half of this century will be: what do you do when what was the world’s largest ethnic group vanishes from this world?

When you break down the industrial base—and we’re already in a country where there’s more people over age 50 than under age 50—and they age out to the point that they can’t even maintain their infrastructure, we have a sort of international crisis that we have never seen before.

The Chinese are leading the way. Hopefully, in their fall and dissolution, we can find some lessons that will help us manage other parts of the world that are experiencing extreme demographic decline because they’re not alone.

Which BRIC’s Member Will Survive?

The future for most of the BRIC countries is not – as Rihanna so eloquently put it – “shining bright like a diamond.” If I had to choose between Brazil, Russia, India and China, my money is on India outlasting the others.

Most of you know where I stand on China, and its collapse is inevitable. Russia has been shooting itself in the foot for ages, and its recent war on Ukraine is only going to bring them closer to that final bell. Brazil has a better demographic outlook than China and Russia, but geographic constraints and dependence on China will catch up to the Brazilians sooner or later.

Thanks to a stable demographic picture and growing need for self-sufficiency, India stands out as the most resilient. As long as these factors remain, India is set to do very well…even if they have to do everything on their own.

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Transcript

Hey, everybody. Peter Zeihan here. Coming to you from Maine. That’s New Hampshire over there. Because, you know, what? You state. Today I’m taking an entry from the Ask Peter Forum, specifically of the original BRIC countries: which one do I think is going to do the best and stand the test of time and why? And it’s always… there’s no boat.

The waves can’t be good anyway. Well, let’s do a process of elimination. First and foremost, China — let’s dispose of that. Demographically, China is facing national dissolution. The birth rate has now been lower than the United States since the early 1990s, and it’s already at a point where it has about the same number of people over age 50 as under.

So, we are looking at ethnic dissolution of the Han ethnicity before the end of this century. To think that there can be a country that comes out of a place with no people? No. It’s just a question of how China dies. And that’s before you consider that this is a country that imports almost all of its energy, imports almost all the components that allow it to grow its own food, imports almost all of its raw materials, and is completely dependent upon exports to the wider world in order to absorb all of its manufacturing capacity.

It is the country on the planet that is most dependent in absolute terms on globalization, and that means on the U.S. military to make sure that its ships can travel without being molested, no matter where in the world they go. That is a bad business strategy. And we’re going to be seeing the end of the Chinese system and probably of the Chinese state within ten years. So, not them.

Russia second. Very exposed geography: 5,000 miles of external border that really doesn’t have an anchor in any sort of geographic barrier. They have to defend the whole thing. Part of the logic of the Ukraine war is to get closer to the old exterior crustal defense they had during the Soviet period, where they could rely on things like the Tension Mountains or the Carpathians to shorten that external barrier.

So, they’re in a weird situation that if they don’t expand, they can’t actually shorten their external borders. Russia today actually has longer external borders, even just by drawing on a map, than the Soviet system did, despite losing all 14 of the constituent republics. So, geographically, that’s a bad situation. Demographically, we don’t have nearly as good of a picture of Russian demography as we do of the Chinese because the Russians stopped collecting census data 17 years ago and just started making up the data.

But at the time, they had one of the worst demographic structures in the world, and even by their official fabricated data, they’re in the bottom ten. So yes, Russia is not long for this world. The question is whether it dies this decade, next decade, or the decade after. There are some things they can do to buy themselves more time. They’re not nearly in as poor of a situation as the Chinese are, but they’re certainly not an economic power, and they can’t even maintain their raw materials exports without external help.

Third up: Brazil. Demographic situation is much better. Brazil didn’t really begin industrializing and urbanizing in fervor until the 1990s. Now the birth rate has dropped by almost three-quarters since then. But even if they keep aging at their current rate, they’re not going to face a Chinese or a Russian situation before at least 2070. So there’s still a demographic dividend to be had.

Their problem is more geographic. Think of Brazil as a table that has lost two of its legs, but the two legs that fell off are the ones to the interior. So if you want to start from the coast and get into interior Brazil, you first have to go up an escarpment and then gradually down into the interior. That means it has very, very high infrastructure costs because everything requires going massively uphill from these tiny little flat plains in the cities that are on the coast.

That makes Brazilian cities dramatic and beautiful, but it also means that everyone’s living on a postage stamp in a slum, and the only real city that they have that you would recognize anywhere else in the world is Sao Paulo. Up on top of that escarpment, which is a normal city, and so the economic hub. But it makes its interaction with the rest of the world very, very difficult and expensive.

So it’s not that Brazil is flirting with failed state status like China or Russia, but it’s very difficult for it to operate unless somebody is going to underwrite its development. Now, since roughly 1990, that country has mostly been China because the Chinese are not price-sensitive when it comes to getting raw materials, and so they will basically fund the development of infrastructure in Brazil in order to get to the farms and the mines that are in the interior and bring it out.

But in doing so, they also built joint ventures with a lot of Brazilian companies — joint ventures, which was Chinese for stealing all the technology that the Brazilians had so painstakingly developed over the last 40 years, taking those technologies back to China, mass-producing them, and forcing all the Brazilian companies out of business. So Brazil is actually less advanced now than it was 30 years ago. And that’s a really tough road to hoe.

The final country, of course, is India, and that is the default winner. But they probably would have won on their own anyway. Like Brazil, they had a demographic moment, and they’re now aging. And like Brazil, they didn’t really start to industrialize until after 1990 because they were basically pro-Soviet and didn’t want to participate in something that was U.S.-led, like globalization.

And so they are aging very quickly. But again, like Brazil, this isn’t going to be a real problem till at least 2070. In addition, India has never had a manufacturing pulse like, say, Brazil did. So there’s no place to fall. There was no place for the Chinese really to cannibalize these. What they need to do now, what the Indians need to do now, is more or less the same thing we need to do here in North America.

If they still want stuff in a post-China world, they’re going to have to build up their own industrial plant. And that is a growth story, but it’s going to be a more complicated one than it is here in the United States because the United States has partners in this. We’ve got Mexico and Canada and trade deals with Japan and Colombia and Korea, a solid relationship with Taiwan. And if the Brits can ever figure out what the hell Brexit means, I’m sure the Brits will be brought along for the ride as well.

That means that we have help in building out our supply chains, and we can all specialize in the things that are the best. India doesn’t have that. Every country that India borders hates India, and India hates every country it borders. So India is going to have to do all of this by itself, and that will make it more expensive. And that means it can’t get any help. And that means it has to build up the infrastructure with its own system in a way that we just don’t have to do in the United States.

There’s a pro and a con for that. The con is obvious. The pro is that this is an Indian story. With India doing this for its own reasons, on its own time schedule, in its own way, for its own needs. Yes, it will take longer. Yes, it’ll be a little ugly. Yes, it’ll be a little dirtier than it could have been otherwise. But it means that India will be globally significant even if it’s not globally involved.

And in a globalizing world, that’s just fine.

China Faces Deflation as Economy Stutters

Photo of woman holding Chinese Yuan

China is facing an economic downturn reminiscent of Japan’s struggles in the 90s. Actually, I take that back…China’s outlook is much worse.

The core of China’s problem is declining demographics. This crushes demand and leaves industrial production as the only path forward. Issuing debt and spending more on real estate, bailing out local governments and boosting industrial capacity isn’t going to do much, in fact, it will lead to deflation…a particularly nasty economic phenomenon which occurs when oversupply drives prices down into a reinforcing spiral of dysfunction involving recession, industrial busts, mass unemployment and general mehness.

If the Chinese want to avoid deflation, they’ll need to cut industrial capacity, but that’s not risk-free either. And to round out China’s list of issues, Chairman Xi’s chokehold on Chinese power adds another layer of complexity to successfully navigating this economic headwind.

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Transcript

Hey, everybody. Peter Zeihan here. Coming to you from New Orleans. It’s like 6 a.m., but this is the only time I have today to record, so here we are. The news in the last few days is that the Chinese are doing another, another, another stimulus program. It’s starting to feel a lot like what happened in Japan in the 1990s, where they throw more money into the situation, hoping to generate economic growth.

But it never did, because their problem at its core is demographic. Unless you can get people to spend more, to consume more, all that’s left is industrial development. In the case of Japan, they used that for real estate, and so the bottom fell out of the market, and it took 25 years to recover. You could argue it’s only in the last five years that Japan has gotten back to some version of normal.

In the case of China, the demographic decline is way more advanced than it ever was in Japan 20 years ago. In fact, you could argue that in terms of the collapse of numbers of people under age 50, it’s actually much worse today in China than it is in Japan, even now, even though Japan’s the world’s oldest society.

It’s that lopsided. Anyway, back to the topic. The Chinese indicate that they’re going to issue a lot of debt, which is something they’ve never really done before, with the numbers being floated somewhere in the low hundreds of billions to the mid hundreds of billions. So by any measure, even for an economy China’s size, this is potentially a huge amount of capital.

So the question, though, is what are you going to put it towards? Three things have been floated. Number one, buying up property that hasn’t been finished so it can be finished. Well, that will exacerbate the oversupply of condos, which is already more than enough to house over a million and a half people, so that does nothing except for maybe generate a little bit more public goodwill because that’s where 70% of private savings is.

So that’d be a political decision, not an economic one. The second one is to bail out the debt of local governments. Local governments can sell land and issue bonds, but they can’t raise taxes, so they have no way of really generating an income. And once they issue debt, they have really no way of paying it back.

So that’s like a $4 trillion asset class that’s completely bunked. And while, you know, we throw half a billion at it, that’s not nothing, but it really doesn’t move the needle in any appreciable way. And the third idea that the Chinese have floated is, shocker, building more industrial capacity. So we’re in this weird situation where the Chinese are kind of damned if they do and damned if they don’t.

I mean, if they do nothing and consumption continues to wither and tariffs against them for their overproduction continue, then their industrial case fails and the population basically falls into impoverishment. This new idea of throwing a lot more money against industrial output actually generates potentially a worse outcome called deflation. Now deflation sounds nice, but it is not. We’re all familiar with inflation, when prices rise, either because there’s an insufficient supply or too much demand.

Eventually, you get spiraling prices that hurt everybody and eventually eat away at the value of economic assets. Based on who you are, that’s different levels of disastrous. But deflation in many ways is significantly worse. Deflation comes from a similar imbalance between supply and demand, but it’s when there’s too much supply compared to demand. In those circumstances, prices start dropping because there’s too much stuff.

People can’t possibly consume it all. And eventually, people become used to the prices going down, so they put off their purchases, which increases the disparity between supply and demand even more. Eventually, it gets so bad, and the oversupply becomes so much relative to demand that the industrial base starts to collapse and people start to lose their jobs because nothing is profitable anymore.

And then all of a sudden you’re hitting it on the demand side as well. The demand is collapsing because people have lost their jobs. Some version of this, in a persistent but mild form, happened in Japan starting in the late 1990s and continued all through the 2000s and through most of the 2010s. We also had a version of this in the Great Depression.

The problem we have in dealing with deflation is, ultimately, you have to get supply and demand back into whack so that they’re actually aligned with one another again. The two ways to do that are to increase demand or decrease supply. In China, it’s difficult to imagine being able to increase demand because there are now more people over age 50 in China than there are under age 50 in China.

And generally, it’s people under age 40 that are doing most of the consumption, and that is the class that has been completely gutted by the one-child policy, in addition to the world’s fastest industrialization process. It’s only been a generation since Chinese folks were having, on average, five and six kids, to now having one. In fact, in the metros where the majority of Chinese now live, we’re now looking at the birth rate being one quarter or less of replacement levels.

We’re talking about 0.5 children per woman. There aren’t enough people to even think about a meaningful consumption rebound. Well, that leaves destroying supply. And in this, the Chinese face two problems. Number one, oversupply has been the state mantra for the last 40 years, and that is the Chinese development model. You look around the world, you figure out something that’s in demand.

You produce it. You use subsidies, you use cheap labor. You produce, produce, produce, produce, produce—not for your domestic market, for the foreign market. You export it. And over the last 40 years, this has moved from product to product to product, from steel to cement and now increasingly electronics products. Now they’re trying to get into electric vehicles.

And it’s just on and on and on and on. Well, in a world where those who are experiencing breakneck economic and demographic growth, there’s some strength to that model. And especially in the 1990s, in the 2000s, we had the developing world kind of getting in the act of industrialization and urbanization. But a couple things to keep in mind. Number one, you only urbanize once, and once you do that, your demand for those sorts of products drops.

Second, when you urbanize, your birth rate collapses. And if you’re, say, Brazil, that means you had a demographic moment in the 90s and the 2000s, but now you’re actually aging faster than the European countries, and your demand has kind of hit a plateau. And you’re also looking at the Chinese, who are basically doing product dumping at scale. You’re like, you know what? I don’t want to play this game. And so it’s not just the United States and the European Union and Japan and Canada that have put all these tariffs on things like electric vehicles from China. It’s also Indonesia. It’s also Brazil. It’s also Turkey. Most recently, Russia. The Chinese have produced all this stuff with the intent of swamping markets to save their social model.

And in doing so, they basically encouraged everyone to block the markets of Chinese products. So if the Chinese were to add more industrial capacity now as part of a stimulus program, all that’s going to do is exacerbate the oversupply. And now there’s nowhere for it to go. So I would argue that a year ago, before this really got serious, the Chinese probably had about twice the industrial plant that they needed because so much of it was geared to service the foreign market.

Well, now a lot of that is being shut out of foreign markets, and the Chinese are having to deal with it at home. Any stimulus will be on top of that. So the only way that the Chinese can avoid deflation at this point is to basically gut half or more of their industrial plant, and then you’ve destroyed the employment program for the entire country.

And if there’s one thing the Chinese government is obsessed about, it’s making sure that people have jobs so they don’t get together in large groups and go on long walks together. So there are any number of reasons how the Chinese economy can ultimately collapse. Demographics are at the heart of most of it, but it could be a trade war.

It could be a deflationary spiral, or it could be any sort of resource restriction. That’s not a short list, but we’re now in a situation where they could theoretically make it all about internal miscalculations and trying to rationalize their economic model for a world that can no longer support it. So this has become very real, very fast, and the Chinese are struggling mightily.

The question is whether or not they can come up with enough policy creativity to try something new. And since Chairman Xi has basically gutted the entire system of all decision makers but himself, I don’t think the chances of that are very high. All right, you guys take care.

China, Navy, Nukes, Tech, and Politics

Photo of a submarine emerging out of the water

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Our focus turns toward China today, specifically at the technological struggles facing the Chinese military and manufacturing industry. And yes, we’re starting with the nuclear submarine that sank in port…

The Chinese have been looking to make some upgrades to their technological capabilities across the board, but they’re not gaining much traction. As evidenced by the nuclear submarine that sank near Wuhan, China’s nuclear deterrent system is one area that could use some love. Unlike the US nuclear triad that provides redundancy and security, the Chinese really only have ICBMs to bail them out of nuclear troubles.

While the sinking of that sub is embarrassing, it’s far from the only area that the Chinese could use some help in. China is a manufacturing hub for low-tech stuff, including less advanced semiconductors. However, China has struggled to make much (if any) progress on the chip front, because they lack the expertise and access to operate the necessary machinery.

And things aren’t likely to improve anytime soon. US-China trade tensions are on the rise, and the coming US election isn’t likely to change that…regardless of who wins. With sanctions, tariffs and technological controls limiting China’s capabilities, it will be difficult for them to achieve technological parity with the US.

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Transcript

Hey, everybody. Peter Zeihan here, coming to you from Salt Creek Beach, just outside of L.A., in California. Today, we’re going to talk about beacon policy, technology, China, and the U.S. elections. Yeah, that’s going to get me in trouble pretty much everywhere.

Okay, so the new news that leaked out over the last few days is that back sometime in the spring, the Chinese new nuclear attack submarine sank at a dock via Wuhan. It was a first-in-class ship, and first-in-class ships are notoriously buggy, but they usually don’t just, you know, sink. They had to fish it out of the river with a bunch of floating cranes.

Now, I don’t want to suggest that submarine engineering is easy, especially nuclear submarine engineering, but I gotta say, like, the definition of a submarine is something that doesn’t sink unless there’s a torpedo in it. So getting the basics wrong on this sort of thing is beyond embarrassing. And if you can kind of put this in context, imagine if in San Diego, a nuclear-powered vessel sank in harbor and the government tried to hide it from everyone. That’s basically what’s gone down here.

So, very, very sloppy engineering work, a sloppy propaganda campaign. But from a strategic point of view, I think it’s really important to understand what the Chinese do and do not have when it comes to nuclear deterrence. They have silos—ICBMs that would launch mostly from western China. They don’t have a functional sub arc, and they certainly don’t have a bomber arc.

So we’re talking about one type of deterrence, not the three that the United States has for redundancy. Now, whether that’s good, bad, or indifferent depends on what you care about, but the whole reason the United States maintains the triad is so that no matter what flavor of attack hits the United States, it always has at least one, probably two, backup plans. That sort of deterrence means countries aren’t going to nuke the United States, even before you consider things like missile defense. China is nowhere close to that, not in number of warheads, and certainly not in delivery methods.

This brings us to the general topological issues that the Chinese are trying to crack here. China has a lot of ambitions, and they say they’re planning on going into this, that, or the other thing. But desire is not the same as performance. So, consider, for example, semiconductors. The Chinese have something called deep ultraviolet technology that they’re pretty decent at, and chips that are in the 80-90 nanometer range or dumber, they can make themselves. But when the chips get more advanced—and that’s like what you put into most automotives, for example—they need not just foreign equipment, but foreign staff and foreign software.

Most of the chips being made today—things that are, as a rule, 20 nanometers and smaller—don’t use that technology unless you want to be wildly inefficient with it. Instead, they use something called extreme ultraviolet lithography, which is a technology basically completely controlled by the Dutch company ASML. Even if the Chinese were able to get their hands on some of those more advanced machines, it’s not like they could operate them. There are staffing issues, experience issues, and software issues. Plus, the Dutch have built their machines with remote kill switches, so they have to be involved in the process.

I don’t mean to say this to insult the Chinese. I mean to say this to insult everyone. No country controls enough of the semiconductor supply chain for anything that’s mid- or high-tier chips to do it themselves. You’re talking about a constellation of thousands of companies and dozens of countries, and it really does take a village. So, the Chinese desire to do all of this in-house? It’s just not going to happen, or at least not without a significant shift in how this technology works. It’s more likely to get more complicated in the future rather than less, which means we pretty much know what’s going to happen with U.S. politics and trade relations, because the parameters of what can and cannot be done with the technology are already known.

So, regardless of who wins the American presidential election—and we all have our own ideas on that—we’re looking at a situation where, on the Trump side, we know that tariffs are the plan. But the Biden administration has never repealed any of the tariffs that Trump put into place. On the Harris side of the equation, we know that technological controls are the preferred tool. But I can’t imagine a President Trump ever repealing those.

So, we’re looking at a tightening technological noose as the United States does something that China just can’t call on other countries for. Because, even at the depths of the Trump administration, when relations with allies were at their lowest, you still had countries that needed the United States for this, that, or the other thing. And so the United States was able to do technological sanctions on things like lithography that basically stalled the entire Chinese technological push.

They were able to use older technology like that deep ultraviolet I mentioned in order to brute force through some relatively low-quality chips that hit a couple of technological markers but were huge energy hogs, took up a lot more space, and generated a lot more heat. Not the kind of thing you’re going to use to reset the technological tables, especially when you start talking about some of the newer things ASML is trying to work on, like high numerical aperture, getting down to a one-nanometer chip. The Chinese don’t even have a finger in that world yet.

It takes everyone, played out across the economy, and there’s only so much the Chinese can do. They just don’t do the high-end stuff at all. They do the low end; they do the assembly. And that’s a multi-trillion-dollar operation—that’s not something to be scoffed at. But that’s not the same thing as parity, nuclear or otherwise.