Mexican Demographics: Where Are All the Kids?

Most of the developing world has relatively similar demographics…the defining characteristic being a boatload of kids. And until recently, Mexico was no exception to that.

The first chart shows Mexico’s demographics before the new data was released. The only thing of note is the drop-off around age 25, where Mexico starts to move from a pyramid to a column shape. This is essentially a warning sign that if nothing changes, there will be a demographic collapse down the road.

The second chart shows Mexico’s demographics with the new data. Where did all the kids go? Well, a combination of the global financial crisis, COVID, and drug wars made people a tad less interested in raising kids. On top of that, America has shifted to a closed border system, which forced Mexican families to move to the US full-time instead of sending the men over for seasonal work.

This isn’t the nail in the coffin for Mexico, but they must change things up. And for the Americans, they best start treating their Mexican population like the precious resource it has become.


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Why is the Mexican Energy Sector Collapsing?

Coming to you from the edge of Giants Playground in CO’s Lost Wilderness. Today we’re talking about Mexico’s energy sector.

As I was heading out on this trip, a fire broke out in Mexico’s Cantarell oil field, which has long been Mexico’s largest oil-producing asset. However, even before this fire, oil production from this field was already down to but 1/8 of peak production.

The Cantarell field was developed over a century ago and has accounted for most energy production in modern Mexican history. This meant Mexico never had to develop the infrastructure or workforce for a broad-based energy sector.

Even though Mexico has plenty of accessible oil fields, they can’t develop them due to a lack of skill and strict anti-investment laws. So energy production in Mexico is falling off, and there’s no reason to expect that to stop anytime soon. Within a few years, I expect Mexico to become a net energy importer (with most of that being refined product coming from the US).

But it’s not all bad…Mexican energy production might be slowing, but consumption is also rising. And thanks to NAFTA, Mexico is tied at the hip to the US. So even without a strong energy sector, Mexico’s future still looks bright. If government officials would stop lining their pockets and put that money where it should be, Mexico’s future could be even brighter.

Prefer to read the transcript of the video? Click here


Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:
 
First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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TRANSCIPT

Hey everybody. Peter Zeihan here. Coming to you from the edge of the Giants playground in Colorado’s Lost Wilderness. Today, we’re talking about energy in Mexico. Specifically, just before I left on this trip, there was a fire at the Cantarell offshore oil field, which has long been Mexico’s single largest oil producing asset. At its peak, it was producing about 2 million barrels a day. It’s down to less than an eighth of that now. And that was before the fire. Probably talking about about 150 right now as – 150,000 barrels per day that is – as they go through recovery operations.

Now, the Cantarelll was originally developed over a century ago, and it’s unique as formations go in that it’s a giant, basically a volcano with all the pressure building to the top. And so all you have to do is put a few holes in the cap rocket attack offshore and the pressure does the rest. You can see every well that taps the controls to per field from all of the other wells. And it has been the mainstay of Mexican energy production for the entirety of modern Mexico’s history. That means that we’ve got a problem here. The Mexicans never had to develop what you consider a broad based energy sector, and so they never had to really develop the intellectual capacity and the labor force to do broad scale oil production in multiple zones. And so there’s a lot of oil production in Mexico that by global standards would be very easy to develop. But the Mexicans absolutely lack the techniques and the skills and the capital that is necessary to do it themselves. In addition, they have the world’s most draconian anti investment laws. Makes it almost impossible for anyone outside the United States to play. Now, as a country that borders the United States, those laws were set up with the idea of keeping the Americans out because they see that as a geopolitical weakness. I can see that point from them, their point of view. But it does mean that Mexico has seen their energy production drop bit by bit by bit for decades, and there’s really no hope to expect it to reverse anytime soon, even though they do have some super fields, some of which are onshore, they just can’t develop them themselves.

Now, there’s another problem because of the general incompetence of the Mexican state oil company Pemex. Mexico also is one of the world’s largest importers of refined product, even though they’re still technically a exporter of crude. And every drop of that comes from the United States. It’s gotten so bad in recent years that Mexico, at least on paper, is actually using more American refined fuels than they generate for themselves. The current government, under AMLO, that’s Lopez Obrador, is his last name, is building a refinery that honestly, they probably don’t know how to operate. And even if they did, it’s kind of hard to have confidence that it’s going to work because they already have refineries that are doing horribly. So we’ve got a bit of a boondoggle where the money should have been spent on things like, I don’t know, skills development that is estén instead going on white elephant projects that are designed to make Mexico City sound good to itself.

Where this takes us is Mexico is in basically a not so slow motion collapse as an energy producer of any type. And within the next few years, Mexico will certainly be a net energy importer no matter how you’re going to run the math. Now, that’s not as bad as it sounds. It’s not just the production that is falling. It’s also consumption that is rising. Remember that courtesy of NAFTA, NAFTA to Mexico or the United States are bolted together at the hip. And. Whereas, the United States is really good at the high end labor stuff for things like semiconductors and tech design, it’s also really good at the low end stuff would use a shale revolution and turns it into things like precursor materials, plastics. Mexico’s good at everything in the middle, and it’s value add is arguably the best in the world. So it’s not that the Mexicans don’t have skills. They just don’t have energy skills in the state monopoly sector. So it’s perfectly capable for Mexico to have a successful future, even as it becomes more and more vulnerable to anything the United States does in energy. Now, with a country that is literally leaking mechanics and is excellent in middle manufacturing, should we get a change in approach in Mexico City? The idea that Mexico can get back into the energy game is not, it’s not a ridiculous idea. But the current government is definitely more interested in lining its own pockets and making ideological statements than solving any of the endemic, misaligned skills and corruption issues that have plagued the Mexican energy sector for the bulk of the last century.

So at a minimum, we need a change at the top before we can get a change in the energy sector. I don’t see that happening this year. We can talk about it next year or the year after.

Alright. Take care.

Cartels Part 3: The North American Drug War

There are a few reasons the cartels love their cocaine, mainly because it’s easy to smuggle and cheap to make. But what happens when you sell it? You’re left with a boatload of “dirty cash” you can’t do anything with.

The solution is what has enabled the cartels to put down roots in the Mexican and American economies. And yes, we’re talking about everyone’s favorite pastime: money laundering!

So the cartels get involved with high cash flow businesses, think agriculture, real estate, bars, legalized weed, etc. And now we’re not just talking about a disorganized group of dudes carrying backpacks full of blow; we’re talking about multi-million dollar businesses with deep pockets and lots of connections.

Unfortunately, I can’t offer any quick fixes to this problem…other than STOP DOING COCAINE.


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First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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Cartels Part 2: Origins of the Drug Trade

Flashback to the 80s with me for a moment…we can leave out the big hair and leg warmers…but let’s talk drugs. Most of the cartel activity came from one place, Colombia. If you’ve ever seen Miami Vice, you get the idea. But once the US caught onto the cartels’ “distribution strategy,” new ways of getting “product” into the US had to be created.

Money started flowing through Mexico, and the drug trafficking business was the place to be; it wasn’t long before the cartels we know today began to form. It’s important to note that not all of these cartels operated the same.

To most cartels, violence was a necessary aspect of the drug trade. The Sinaloa Cartel worked a bit differently; they treated this like a business, and El Chapo was the “CEO.” They partnered with the community, bribed law enforcement, and crime stayed relatively low while they were around.

Once El Chapo was captured and the Sinaloa Cartel started to fall off, groups like Jalisco New Generation surged back onto the scene. Unfortunately, this new wave of cartels brought back the violence and crime levels we see today.

For the US, carrying out military strikes on these cartels across the border just doesn’t make sense…it would be like shooting a fly with a handgun. However, beefing up border security to prevent these cartels from crossing into the states is probably a good idea.

Prefer to read the transcript of the video? Click here


Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:
 
First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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TRANSCIPT

Hey Peter Zeihan here, still in Vegas, still talking about cartels. The thing to remember is if you go back to the 1980s, most cartel activity was not Mexican, it was Colombian because that’s where the cocaine came from. And it would flow up into the Caribbean. It would avoid Cuba like the plague, because the Cubans would just kill everybody who was associated with the drug trade at that time and would flow into Miami almost exclusively. And this is literally the setting for the show. Miami Vice, all the drug wars, continental in scope, going into a single place. But by the time we got to the 1990s, the United States started to shoot down small planes that were flying ten feet over the water at night with no lights on because those were not scuba divers and the cartels were forced to change the way they shipped. And so they started sending shorter hops not to the United States directly, but into Central America, where they go on land and then go up through Mexico to the U.S. border where there’s a 2000 mile border. And before you say, building a wall will help with drugs. No, no, no, no, no, no. You can put a half a million dollars of product in your backpack. A wall is not going to impede you, especially since a wall requires 50 construction roads going down to the border to build the road in the first place. Which means you have no obviated half of the physical border of a Sonora in the Chihuahuan Desert. So if anything, the road has made it a lot easier for illegal migrants and drugs to get into the country. So remember Donald Trump, most pro narcotic, most pro illegal migration president the United States has ever had. Now, where was I? All right. Okay.

So when the cartels were going on land, that meant that the Colombian cartels had to either find middlemen and or bribe the locals in order to help with transit that generated the money flows that ultimately led to the rise of drug trafficking groups within the Mexican system itself. Now, if you fast forward to about 2012 to 2015, one of these cartels took a fundamentally different view of drugs from the rest. The other saw it as a means to power, and they were basically gangs at scale. But the Sinaloa cartel rose up and thought differently. It saw drugs as a business, and anything that interfered with the core business was something to be ruthlessly rooted out from within the organization. So you don’t steal ladies purses, you don’t shoot up the cops, you buy them off, you make them your friends. Because as long as you can bring drugs through a community, you are making money. And that is your primary reason to be. And that sort of attitude allowed them to put roots deep into Mexican society and expand north of the border fairly easily, where they interfaced with the American gang infrastructure.

If it was a Hispanic gang, you had the choice of joining them or dying. Most died. And if you were a black gang, you were probably just killed. One of the reasons that the murder rate in the United States dropped so precipitously in the 2000s is that the Sinaloa in the United States killed the people who were doing the killing. So use that to inform our general assessment of how much progress we’ve made. Now in the United States this allowed Sinaloa to not just become the largest cartel in Mexico, but in the United States and the largest organized crime group in the world. So the Obama administration worked with the Mexican government to capture the leader of that cartel, El Chapo. And then he got out and we got him again. And this started the disintegration of the Sinaloa cartel. El Chapo’s former accountant has tried to take over a chunk of it. Some of his lieutenants have tried to take a chunk of it. Some of his sons have tried to take a chunk of it. One of his sons is on the process of being extradited to the United States right now, but they all lead their own factions. And so this umbrella organization that was Sinaloa really doesn’t exist anymore in the way that it used to. And whenever you’ve got factions in a system, you’ve got violence. And it’s going to sound weird. But when El Chapo was in charge and when Sinaloa was a top down organization, Mexico was reasonably peaceful because there wasn’t infighting within his own organization and Sinaloa was able to cut a series of deals with the Mexican government to go after the other cartels.

Now, on the other side of the equation, the cartel that suffered the most from that alliance with the Gulf or the Zetas cartel. Two different groups that have kind of interwoven history. One group was the enforcers to the other. But once the government and the Sinaloa both turned on them, they basically shattered. And if you go to the eastern third of Mexico, you’re in a situation which is gang on gang violence, nominally under the name of Gulf and Zetas. And the Americans who disappeared and were kidnaped and killed this past week were people who fell in with the Gulf and the Zetas. So if you want to go with this idea of wanting military strikes south of the border against the Gulf, that’ll do nothing, because that’s basically going after the Crips or the Bloods with military hardware. It will do nothing to change the environment because there is no hierarchical organizational structure to disrupt in the first place. You’d literally be going after street thugs, and that’s just not the right tool for the job. And this group, it’s breakdown. That is the primary reason why Mexican murder rates are so high, because you just have gang on gang action, not just at the regional level or the city level, but the block by block level. And they’re fighting over the income that comes from the drug trade.

Now, in the middle, you have another group that used to be at least partially affiliated with Sinaloa that calls itself a Jalisco New Generation. They were led by a dude named El Mencho. Now, El Mencho does not have the same view of El Chapo. So El Chapo, you could basically sum up his position as don’t shit where you sleep. Well for El Mencho the violence is the point.

We’re a gang that gets money from drug trafficking, not we’re drug traffickers who happen to be a gang. So the first thing he tells his people to do when they move into a town is go shoot up the mayor’s office, the police office and any gang headquarters that you can find. Make it very clear to everyone who’s in charge and who has the guns and what the penalty for noncooperation happens to be. And that has made Jalisco New Generation very hierarchical, very violent, and has contributed massively to the violence south of the border. Now they are in the process of attempting to go north of the border to challenge Sinaloa in basically what is the the great fields of income generation opportunities in the United States. They haven’t succeeded yet and if there is a fight to be had in the United States, it is at the plazas and the border cities to make sure all this go. New generation does not cross in because if they do, wow, we think our murder rate went up because of COVID. Holy crap, Jalisco would go into Phoenix and Dallas and El Paso and Houston and Austin and San Diego and just start killing people to prove to everyone that they can. And if you want a 1930 Chicago level of violence in the United States and every city within 500 miles of the border, that’s exactly what will happen if Jalisco New Generation punches forward.

So military strikes south of the border. This isn’t going to fix anything, but perhaps an increased security presence in the city specifically to prevent Jalisco from crossing north that might be a pretty good idea.

Alright. Next time, we’ll talk about some of the economics of drugs and those things have changed.

Cartels Part 1: Americans Caught in the Crossfire

On March 7th, two of the four US citizens kidnapped shortly after crossing the border into Mexico were found dead. This raises several questions, but perhaps the most significant is how this will change the United States’ policy on Mexican cartels.

The cartels have a long and deep-rooted history of flushing the American system with drugs, laundering money, and other illicit activities. However deserving of the designation as a terrorist group, we have seen in recent history how our actions on terrorist groups have played out…just look at Pakistan.

Any action taken against the cartels would ultimately damage American and Mexican relations. As the US moves away from its ties with the Chinese, that’s the last thing anyone wants. It’s a tricky situation, and the solution isn’t black and white…but maybe everyone should lay off the white stuff for a while.

Prefer to read the transcript of the video? Click here


Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:
 
First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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TRANSCIPT

Hey everybody. Peter Zeihan here coming to you from Las Vegas. Today is the 7th of March. And if you’ve been following the news, you knew that there were a few Americans who went down to Mexico to get some tummy tuck surgery. And shortly after they crossed the border, they were assaulted, kidnaped. And some of them have now turned up dead. And so the discussion in Washington is whether or not we should designate cartels in Mexico as terrorist groups and start doing cross-border strikes. I’m not saying I’ve got a solution to this problem because I do not. Well, actually, I do. We’ll get to that. But military strikes on Mexico are not not not the solution. It’s not that the cartels are not deserving. I mean, these are people who have basically been preying on civilians now for decades, shoving drugs into our system. First cocaine, now fentanyl. And they’re into any number of criminal enterprises and they’re trying to launder their money through other licit sectors in Mexico, in the United States, which has made the money go deep and go far.

However, we have seen exactly this sort of situation in recent American history. We know exactly where it leads. So during the Afghan war, we discovered that there were militants operating in northwest Pakistan in a place called North-West Frontier Province that were launching assaults against American forces and Afghan forces backed by the United States north of the border in Afghanistan. And then they would retreat back south of the border. And so we ended up carrying out a number of military operations on both sides of the border to chase them down. The problem we rapidly discovered is that Pakistan is a weak state and they do not control North-West Frontier Province. And by launching strikes south of the border we were inflaming local passions of Pakistanis, even if they were not in support of these militant groups. And we ended up weakening the Pakistani state, which made it even easier for these groups to operate.

So in this case, strikes across the border just poured fuel on the fire. If we were to do this in Mexico, two problems. Number one, Mexico is a weaker state than Pakistan. And so anything that inhibits its ability to function would probably make the situation even worse. And second, the most pro-American portion of Mexico are the northern tier of states where we would be likely to launch these strikes. So we’d be taking our regional allies who are not just political allies, but economic partners. Remember that the United States and Mexico are now each other’s largest trading partners, and especially if we decide we want to move away from the Chinese system, we need help with mid-skill, mid-range manufacturing. And that is a sector in which Mexico absolutely excels, is arguably the world leader. And launching military assaults on what is the location of our most important and most tightly integrated supply chain networks would be a disaster for aerospace and automotive and manufacturing in general. So I really would encourage you to think otherwise.

This is a thorny problem. The solution is not to not get tummy tucks in Mexico, although I would argue that maybe common sense would tell you that you don’t need to do that anyway. The solution is to stop using so much goddamn cocaine, because as long as we are providing the financial existence of the system, it’s going to persist.

Now, this is far too big of a topic for me to do in a single video, so I’m going to be breaking this into a few different topics where you talk about some of the individual cartels and the economics of the drug war and how it has evolved in recent years. So think of this as a starter, and in the days to come, we’re going to be turning this into a full on series. So stay tuned. See you soon.

Mexican Cartels: The Fallout of El Chapo

We all know the story of El Chapo’s capture and escape…and capture. But the lesser known – and perhaps more important story – is the disarray he left behind.

The Sinaloa Cartel, once the world’s most powerful organized crime group, owes its success to a business-first approach (violence was just a means to an end). The power struggle caused by El Chapo’s vacancy has changed everything.

The Jalisco New Generation Cartel, emerging as the new big-dog, has settled on a shoot-first-ask-questions-later approach…and while effective, it has garnered some unwanted attention for the cartel’s operations.


Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:
 
First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.
 
Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.
 
And then there’s you.
 
Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

CLICK HERE TO SUPPORT MEDSHARE’S UKRAINE FUND

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The Cutting Room Files

Disclaimer: The following newsletters were originally published in late 2019. As the newsletter continues to grow, I will occasionally re-share some of my older releases for the newer members of the audience.

As a partial thank you to all you who have directly and indirectly supported my efforts, and to perhaps keep some of those of you who are more intellectually ravenous at least partially sated, I present to you the Cutting Room Files. This newsletter will be an open-ended compilation of newsletters cobbled together from various bits that didn’t make it into the final version of Disunited Nations, as well as some embargoed not-quite-pieces of my previous books – The Accidental Superpower and The Absent Superpower.

If any of the following reading sparks an interest to pick up any of my books, feel free to click HERE or learn more at the bottom of the newsletter.

Read the other installments in this series or merely scroll to read them all:
The CRF Files, Introduction
The Cutting Room Files, Part 2: The Future of Mexico
The Cutting Room Files, Part 3: The Future of Canada
The Cutting Room Files, Part 4: The Future of Japan
The Cutting Room Files, Part 5: The Future of the United Kingdom
The Cutting Room Files, Part 6: The Future of China
The Cutting Room Files, Part 7: Europe
The Cutting Room Files, Part 8: American Politics


The Future of Korea

When Donald Trump became president, world leaders fell into two broad buckets. The first thought that if the Americans were going to drop the global mantle of leadership, then perhaps there is some space for us. Russia’s Vladimir Putin became more aggressive throughout the Russian near abroad. France’s Emmanuel Macron tried to become the voice of the West. Canada’s Justin Trudeau became a liberal supermodel.

The second were those leaders who weren’t sure the Americans knew what they were doing in electing an isolationist, and thought the best bet was to not rock the boat. This club included Germany’s Angela Merkel, Australia’s Malcolm Turnbull, and Britain’s Theresa May. All and more bet/hoped that Trump would be little more than a hiccup in normal relations. They kept quiet and aimed to not do anything that might annoy the Americans as a whole, so that when Trump left the stage their relations with America could get back to normal.

There was one exception: South Korean President Moon Jae In. Rather than strike out or hunker down, Moon bluntly asked for the terms of a revised trade deal that Trump would approve of.

Moon’s logic was unassailable. Put simply, Moon recognized that he completely lacked leverage, (correctly) calculating that being an eager first volunteer might allow South Korea to walk away without undue sacrifice as the Trump administration looked for an early win. The revised deal’s technical talks took but a few weeks, and the revised KORUS is already implemented.

Good thing too. “Logic” was about all Moon had going for him. Everything about Korea’s success is exclusively because of the Order.

South Korea imports all its oil and natural gas, and its import/export flows are so large that it is the world’s 5th-largest trading power by value despite having a population of only 51 million. As with many of the world’s developed economies, South Korea cannot look internally for greater economic growth; The country’s population has all but peaked and, again like much the rest of the world, faces a rapidly aging demography supported by an ever-smaller working age population.

South Korea’s largest trading partner today is actually China, but that is the beauty of the Order. South Korea can trade with whomever is willing to buy their goods. For now. It all relies on American guarantees that seem to be crumbling.

That’s the numbers and dollars argument. In strategic terms things are far more complicated.

South Korea sits among Japan, China and North Korea and has adversarial relationships with all of them. The only reason South Korea even exists is because American troops ward off the most salient threat to the north, while preventing Japanese and Chinese imperialism. That security guarantee is not easy to maintain:

North Korea believes the best way to beat a Grand Master at chess is to never let them make a first move. Infamously, North Korea has aimed an untold number of pieces of artillery at Seoul, just across the border and home to nearly half the country’s population. In a real war, by the time the first shell lands in Seoul, tens of thousands of others would already be airborne. But this is only one of its many preparations. Turns out that if you dedicate a country’s entire attention span for 70 years to a seething hatred of what’s on the other side, you can accomplish some pretty impressive things, up to and including an effective nuclear deterrent.

South Korea decided to focus instead on ships and trains and petrochemicals and white goods and electronics and computers and cellular tech. South Korea may be able to prevail against North Korea in a knock-down, drag-out fight, but there is no way the South Koreans can K-Pop themselves out of hideous infrastructure damage and mass civilian casualties. Only American forces – massed in and near Seoul and the DMZ – can provide the hitting power to at least partially preempt and mitigate such carnage.

That’s just North Korea. The South Koreans, accurately reading their history and geography, view China and Japan as even more significant security threats. Japan outpopulates South Korea by well over 2:1, China by over 20:1. The navies of either country could wipe the Korean navy from the seas in days. To the south, east, and west, South Korea is surrounded by waters that either Japan or China could dominate given the right push. South Korea’s second city, Busan, is in a particularly vulnerable spot separated from mainland Japan via the Korea Strait, barely more than 100 miles across. Inchon, the western extremity of the Seoul metro region, isn’t much further away from China. And of course, Korean trade links to the wider world are impossible to maintain without both Japanese and Chinese quiescence.

For decades this has all been moot. South Korea, Japan and China were all members of the U.S.-led global Order. The U.S. Navy has ensured peaceful seas and ample trade. Oil, LNG and raw materials flow in, finished goods flow out, and Korea is one of the world’s largest transshipment and manufacturing nodes. So long as the Americans remain involved, Korea’s economic and security problems remain purely theoretical.

But the Americans – left, right and center – want to slim down America’s global position. The Korean deployment is America’s third-largest (after Japan and Germany), and the one that is by far in the trickiest and riskiest strategic position. And that is what keeps Moon’s administration up at night. The Americans are losing interest, and there is no version of a post-Order world where South Korea continues to survive at all – much less as a wealthy, trading nation – unless Seoul can obtain a powerful, dedicated ally.

So it was all Moon could to do cave in trade talks with the American administration on everything. And not just in trade negotiations. The Trump administration is insisting that South Korea compensate the United States for ongoing troop commitments to the tune of at least $5 billion annually. That’s a lot for a country Korea’s size, but honestly it’s a bargain considering what 26,000 American troops can do when they are suitably motivated.

Is caving to the U.S. on trade and defense reimbursement enough to keep the American troops in-country in this post-Order world? No clue. But Moon, correctly, concluded that without conceding to American terms there was no chance whatsoever. 

That’s hardly the end of the story.

First, in the post-Order world, getting a deal with the Americans on trade or troops or whatever is not the end of the negotiations. It is the beginning. Because the Americans no longer have a global strategy or see a national interest in play aside from getting some better market access, keeping the Americans interested requires giving in not once, but every single time they ask for anything.

If the Yanks are displeased with the Koreans’ response, they will leave and there is no guarantee they can be induced to come back. It’s bad business to allow a homeowner that refused to pay for fire insurance to do so after the house catches fire. The Americans can – and will – watch the neighborhood burn. They won’t feel good about it, but they won’t feel all that bad about it either.

Second, the one item in the neighborhood the Americans really do care about – the North Korean nuclear program – is one that they may have found a way to muddle through. The handshake deal Donald Trump appears to have reached with North Korean dictator Kim Jung Un is that the reclusive country can keep their nuclear program so long as they abandon their ICBM program. The Trump administration seems to think it can live with a localized NorK nuclear threat so long as Pyongyang cannot nuke Seattle and beyond. What North Korea “projectiles” that have been launched since the first Trump-Kim summit are of the decidedly short-range sort, and there are at least some indications that North Korea dismantled a significant portion of their long-range missile testing facilities.

In a world where the Americans are blasé about South Korean issues, in a world where Americans no longer consider North Korea a direct threat, the Americans need a lot fewer forces in-theater. That’s great for the Americans…and the ultimate statement of no-interest in South Korea. The Trump administration appears to have handed off the entire North Korean issue to the local powers. And since North Korea already has the capacity to drop a nuke anywhere in South Korea or Japan or in the parts of China that are home to over 80% of the population, the entire region now has to deal with something that has stymied ten American administrations.

Finally, the Koreans have a hideously distasteful choice to make. They must prepare for a world without the Americans and that means they must find a new security guarantor. The menu of options are not encouraging.

While China is currently Korea’s largest trading partner, China is just as dependent upon the Americans as the Koreans for maintaining its economy and security. With the Americans checked out, China’s future will likely mirror its past; that of a broken, impoverished nation completely unable to maintain its own security or even feed its own people. Culturally, China might be Korea’s closest relation, but a long-term partnership will only bring Korea destitution.

In comparison, the future of Japan is bright. It already maintains the world’s second-most-powerful expeditionary navy and is one of the very few countries that has a chance to maintain its supply lines without active American assistance. The “smart” play for the Koreans would be to find a means of inserting themselves into the Japanese sphere of influence. Unfortunately, the politics of such insertion are wretched. The Koreans charge the Japanese with carrying out a cultural genocide during Japan’s 1905-1945 occupation of the Korean peninsula and, so far, have been unwilling to let the past go. Even then, letting that past go would only be the first step to entering Tokyo’s world. Much kowtowing by the proud Koreans would be required.

The third option is for South Korea to become its own defender. That is impossible with conventional weapons, but it just might work if the Koreans build a few dozen nukes to hold everyone at bay. Technically, the obstacles to South Korea becoming a nuclear power are minimal; it could be done in a few months at most. Operationally, however, it would turn South Korea into a regional pariah of the North Korean type and cut the country off from not just global trade, but regional trade (although post-Order that is unlikely to cause the same problems, as much as it is frowned upon today).

Partnership with China might be somewhat comfortable, but it would end with a starvation diet. Partnership with Japan might preserve the Koreans’ standard of living, but it would be politically toxic. Going nuclear might preserve independence, but it would force mass deindustrialization.

For the South Koreans, the future is a land of fear and want.

But that’s not the case for everyone…


The Future Of Mexico

American-Mexican relations have been…colorful of late. American President Donald Trump has threatened Mexico with a rising tariff system that would constitute the greatest tariff effort in dollar terms by Americans in their history. Mexican President Andres Manuel Lopez Obrador (AMLO) is pushing a change to tax law that would more or less treat businesspeople like money launderers which would throw trade relations into the freezer. Threats and counterthreats on migration and trade and law enforcement and energy and water rights have ratcheted up to near-crisis levels.
 
This is actually… really good. Ever since Mexican independence in the early 19th century, American-Mexican relations have oscillated between cold-shoulders and American invasions. Today, really for the first time in both countries’ histories, the Americans and Mexicans are not talking past one another, but instead speaking with each other. The process is loud and messy, yes, but it is actually a conversation. The United States and Mexico are working out deals, making functional compromises, and finding common ground. What’s been happening the past two years are the sorts of interactions one would expect between two countries who find themselves increasingly intermingled both economically and demographically. We all fight most vociferously with our families.
 
That hardly means it is all well thought out. One of the most frustrating things about working in the geopolitical forecasting space is that sometimes luck plays a role, and that has most certainly been the case of late.
 
Consider the individuals helming both countries.
 
In the United States, Donald Trump rose to power on a wave unapologetic nativism, which expressly included a harsh campaign against Mexico on economic, political, security and racist grounds. On the other side of the border is AMLO, a guy who combined Trump’s disdain of foreigners, Elizabeth Warren’s enthusiasm for dressing down corporate interests, Ted Cruz’s penchant for blind obedience to ideological dogma, a Clinton-esque love-affair with political corruption, and Bernie Sanders’ pathological refusal to engage in basic mathematics. It’s difficult to imagine a set-up that would be less constructive to functional bilateral relations.
 
And yet, here we are, with the Americans and Mexicans enjoying the most positive bilateral relationship ever.
 
The unexpected outcome largely has to do with an olive branch from AMLO. After his election in mid-2018, but before his inauguration in late-2018, AMLO apparently had an epiphany. He realized that if he and Trump engaged in a binational pissing contest over who was more populist, the bad blood would consume his entire presidency. As he had put together a laundry list of tasks to remake Mexico in his own image, that simply would not do. So he reached out to both his predecessor and Trump, and indicated that if they could complete the renegotiation of NAFTA2 before he took office, he would not seek to reopen talks and would ensure the new deal would be ratified in a timely manner.
 
AMLO has since proven to be a man of his word. Mexican ratification occurred on June 19 of this year.
 
While there are obviously portions of NAFTA2 the Mexicans are less than enthused about and the new deal will disrupt a great many industrial patterns across the length and breadth of Mexico, for the most part the new deal is as much a win for Mexico as it is for the United States.
 
Among the Trump administration’s biggest goals in the NAFTA renegotiations was to make sure goods that benefitted from the low tariffs of the NAFTA system were mostly produced inside of it. These “rules of origin” quotas were increased and ensure that a certain percentage of the product’s value was produced within Mexico, Canada, and the United States rather than outside of it. As Mexican manufacturing capacity is both less expensive and more efficient than most manufacturing in both China and Canada, Mexico will certainly pick up a disproportionate share of whatever relocates to the North American market. Add in the general breakdown of the global Order, and Mexico’s now-even-more-privileged access to the American market, and Mexico’s economic future looks brighter and brighter.
 
Merchandise trade is only one of several aspects of a tightening, more constructive, relationship between the two North American powers.
 

  • One of the many aspects of America’s shale revolution is an accidental, incidental oversupply of natural gas prices in the U.S. market. American natural gas prices are now the lowest (unsubsidized) in the world, and a dozen major pipeline networks have been laid down to connect that supply to Mexican demand. All the pipes are now completed and soon about half of the electricity consumed in Mexico will be sourced from American natural gas.
  • One of AMLO’s less-functional plans is an overhaul of Mexico’s state energy monopoly Pemex, a company so badly run and a process so ill-conceived that it would probably be better for Mexico to burn the entire company to the ground, shoot everyone involved, and start over from scratch. The more dysfunctional Pemex is, the less able Pemex will be able to meet Mexico’s growing energy needs… and so the more reliable a customer Mexico is for American energy product exports.
  • Mexico has rapidly developed since the implementation of the first NAFTA accords back in the early 1990s. That has shifted millions of Mexicans off subsistence farms and into urban environments, even as the standard of living of the average Mexican has surged. Less agricultural production plus more disposable income makes Mexico a premier destination for American agricultural products. In particular, when Mexicans get a bit of extra scratch, the first food product they reach for is beef – American beef.
  • Higher living standards within Mexico have gutted immigration from Mexico to the United States – it has been negative for ten straight years. That gives both countries a vested political interest in regulating Central American migration through Mexico to the United States. One of the dirty secrets of the immigration debate in North America is that Mexicans are even more opposed to Central American migration than Americans. Trump has provided the Mexicans with the perfect excuse to crack down on the through-migration, while enabling the Mexican government to rack up a public relations win.
  • While Mexican migration to the United States peaked years ago, past migration has made Americans of Mexican extraction the second-largest minority in the United States. Even if the economic mingling were not occurring – and it has already surpassed that of any other American co-mingling in history – the demographic co-mingling easily puts Mexican cultural influences in third place behind German and British culture.

 
Taken together, Mexico is now America’s second-largest partner in energy, trade, agriculture and security, and is on the cusp of taking the top spot in all categories.
 
So… that’s the good news.
 
Understanding the bad news requires a bit of a step back.
 
Roughly a decade ago Mexican and American authorities were tracking hundreds of small groups involved in moving cocaine and marijuana through Mexico to America’s southern border. Just as mountainous regions help fracture regions among several competing countries, Mexico’s mountainous geography meant no single drug trafficking organization (DTO) could command all that much territory. A small DTO might control a single stretch of highway, or a single city or a local shake-down racket. Violence between these groups and Mexican law enforcement was horrific, but that carnage was nothing compared the violence among the various drug trafficking groups as they battled to expand their role in the drug trade or defend their patches from one another. In that environment, Mexico’s murder rate soared.

But even then, not all DTOs were created equal because not all DTO leaders were created equal. Today’s story involves a 5’ 6” dude by the name of Joaquín Guzmán, aka El Chapo (which roughly translates as “shorty”), who ran his drug group less like the Sopranos or a street gang, and more like a Korean chaebol.
 
Under his hand, the Sinaloa alliance focused on three general themes:
 

  • First, the bread and butter of drug smuggling to the United States. Violence within the alliance was snuffed out, while the sort of petty violence – assaults, rapes and robberies – that characterized other DTOs was frowned upon. Regular Mexican citizens living in Sinaloa territory were not terrorized by the cartel, so they tended to not resist its efforts.
  • Second, experimentation with new business lines that would enable the Sinaloa to deepen and expand its business. Cocaine never went out of fashion, but the cartel also commercialized heroin and methamphetamines. Selling counterfeit pills to profit from Americans’ opiate addition was an easy add. Cash-heavy businesses found favor as a means of assisting in the drug-money-laundering effort: limes, beef, avocados, real estate, tourism. More business lines mean more and more stable profits.
  • Third, oblique cooperation with the Mexican government to help weaken the competition. Officially, the Sinaloa would provide the Mexican government with scads of intel on their competitors’ operations. Unofficially, the Mexican government would turn a blind eye to the Sinaloa’s operations because Mexico City could only prosecute raids on so many targets at a time. The Gulf and Zeta cartels tended to suffer the most from this de facto alliance.

 
El Chapo’s strategies were so successful the Sinaloa grew to become the most powerful organized crime group not simply in Mexico, but the world. As the Sinaloa alliance expanded and deepened, violence among its constituent components plummeted. After all, they were all on the same side, and El Chapo did not tolerate infighting. Mexico’s murder rate fell.

But nothing happens in a vacuum. Sinaloa’s success meant it also became the most powerful organized crime group in the United States, which earned El Chapo a spot at the top of the Obama administration’s most-wanted list. A joint American-Mexican effort resulted in his arrest in 2014. El Chapo promptly escaped… and was re-arrested in 2015. Mexico extradited him to the United States in 2017, where following his conviction on… lots of charges he is now serving multiple life sentences in an American prison.

Without the business-minded El Chapo to ride herd on the Sinaloa alliance, the relative peace of the Sinaloa era quickly collapsed as the DTO’s various factions fought for control. The biggest and baddest of those factions is known as the Jalisco Cartel Nuevo Generacion, a group run by the Sinaloa’s former enforcers. Whereas the Sinaloa expanded by collaboration and diversification, the Jalisco expands by brute violence.

Four things come from this.

First, the Jalisco is not the Sinaloa v2.0. The Jalisco’s leader – Nemesio Oseguera Cervantes aka El Mencho – first instinct is to kill everyone in every room he enters. He absolutely lacks El Chapo’s charisma and management skills. The Jalisco is expanding, particularly in challenging its former patron, the Sinaloa, but it is most certainly not on course to dominate the drug trade.

Second, between the Sinaloa’s fall and the Jalisco’s rise, Mexico’s murder rate is once against setting record after record. El Mencho has also – repeatedly – broken the cartels’ unwritten rule that one does not engage in open violence in tourist areas.

Third, the Sinaloa is not dead and still supplies the majority of drugs that enter the United States. After a year of chaos and breakdown, elements of El Chapo’s family – most notably his sons – have seized control over what was left of the alliance and thrown up substantial roadblocks to El Mencho’s bloody expansion. Los Chapitos may not be the leaders their father was, but they have proven far from incompetent.

To give an idea of just how potent the Sinaloa remains, consider the events of last week. A government raid October 17 on a suspected sniper in the city of Culiacán accidentally captured one of los Chapitos. Shocked by their unexpected haul, the government stammered a bit. Shocked by the loss of one of their own, the entire Sinaloa alliance descended upon the city in a tsunami of carnage, forcing the unprepared government to release El Chapo’s son. In northwest Mexico, the Sinaloa remains the de facto government. The old man would undoubtedly be proud.

Which brings us to the fourth and arguably most important outcome. El Chapo’s business diversification efforts combined with the breakdown in the “peaceful” nature of the Sinaloa’s management strategy combined with the rapidly deepening economic integration between the American and Mexican markets means that the cartels are now becoming part of the North American economic picture and they are bringing their violence levels with them.

At present this expansion has not penetrated manufacturing – that’s an industry that’s simply too high value-add and too finance-heavy for easy links with DTOs. But nearly everything else is game: transport, trucking, energy, agriculture, construction, tourism, real estate. All these sectors and more now have DTO threads woven throughout, particularly in the Sinaloa heartland of northwest Mexico. And it doesn’t take a big leap to link these Mexican sectors with their American peers. First landfall of Mexican DTOs in these veins will be U.S. regions just across the border from Sinaloa strongholds: Tucson, Phoenix, El Paso, San Diego, Los Angeles and the California Central Valley.

It is worth remembering that while the collapse of the global Order has consequences for everyone, and in many cases those consequences will be the determining factor in a country’s future, regional and local factors don’t simple fade away. Countries’ local geographies and local economic trends and local histories remain relevant. Global shifts are likely to favor Mexico more than any other country, but it can still get tripped up on issues closer to home.

And the same goes for the third NAFTA partner…


The Future of Canada

Canada is… not a normal place.

Everything from its settlement patterns to its defense strategy to its national politics to its economic structure is wildly different not just from the United States, but from every other country on the globe. Until now that has not had an overly negative impact upon Canadian-American relations, but times are changing (and from the Canadian point of view, not for the better). To really understand recent shifts, we need to start not in Canada, but in Mexico.

It comes down to demography.

Mexico has a more-or-less standard demographic profile. Lots of children, a good number of young workers, fewer mature workers and very few retirees. Chart it out, children on the bottom and retirees on the top, and courtesy of simple mortality you get a pyramid.

For purposes of the North American market, there are two big takeaways here. First, Mexico is hungry. All those young workers having lots of kids means the country is a never-ending festive parade of spending on education and food and diapers and homes and cars. Second, Mexico isn’t all that skilled. This is less an indictment of Mexico’s educational system, and simply that people below age 40 don’t have all that much experience in their chosen professions. It makes Mexico excel at relatively low-value-added manufacturing and assembly, but the Mexicans are forced to leave the high-value-added stuff and design to others.

For the Americans, this makes Mexico the perfect complement. Its people are ravenous for American exports, the Mexican work force meshes nicely America’s more high-value-added workers, and for the most part the two countries do not compete head-to head. No wonder that Trump’s rhetoric on Mexico has evolved so strongly over the course of the past two years from issues of trade to issues of identity and migration.

Simply put, from American point of view, the Mexican demography is the demography of the perfect partner.

Canada’s is not.

Canada’s population bulge isn’t among the young workers who complement the American economic structure, but instead among the mature-worker demographic who compete. A demographic bulge in the 40-65 bracket means Canada is super-saturated with high-skill workers. This extra supply depresses the cost of skilled labor within the Canadian system, which has a similar impact upon the price of the goods the country’s skilled labor force produces.

Even worse, the lack of 20- and 30-something Canadians means Canada cannot even consume its own production. It must dump that production on foreign markets, and proximity alone means that some 75% of it goes to the United States. Economically, Canada isn’t a partner. It is a competitor, and that’s before one considers the Canadian tendency to subsidize industries as unrelated as dairy and aerospace and timber and electricity.

In a time when the Americans are pulling back from the global system and rewriting all their trade relationships, this alone would be cause for great concern in the Great White North. But the Canadian-American economic mismatch is only the first problem.

The second problem in Canadian-American relations is the Americans are having a change of heart about their northern neighbor not simply in economic terms, but overall.

When the Trump administration started its whole the-world-is-screwing-us-and-we’re-going-to-forcibly-renegotiate-all-trade-deals campaign, the Canadians took it as an opportunity to make demands of the United States. That clearly didn’t fit with TeamTrump’s understanding of what was supposed to be going on. Why in the world would the Canadians believe they have leverage over the government who controls the only market that matters to Canada, and global finance, energy and sea lanes to boot?

Canada’s confidence dates back to the Cold War. The flight path for the feared Soviet nuclear missile strike on the United States would have been over Canada. There was no version of American security that would not by default also guarantee Canadian security. The Canadians could have been security free-riders if they had chosen to, but to their credit they have fought and died alongside American soldiers in nearly every overseas endeavor the U.S. military has undertaken.

That does not mean the Canadians did not use their leverage, they just used it on issues of trade rather than security, leveraging their strategic position to gain concessions on market access for their products. The Canadians had a strong hand and they played it well. Repeatedly. Those trade victories were all folded into the original NAFTA accord back in the early 1990s.

It all fit with the times. The whole concept of the American-led global Order was that the Americans would create and subsidize a security and trade rubric to induce countries to join them in the fight against the Soviets. Guns-for-butter was the rule of the era. Canada’s position meant it had more to offer, and granting Ottawa some extra trade concessions for its cooperation was a price the Americans were eager to pay.

Times change.

Canadian negotiators resisted the Trump administration’s trade goals, thinking Canada’s leverage still existed. But with the Cold War over, the Americans no longer fear Russian attack. Canada is now just another country. Once the Americans had finalized NAFTA2 with Mexico, they turned to Canada and issued a simple ultimatum:

Mexico’s market is growing. Yours is not. Your market is protected. Mexico’s is not. The Mexican labor force is complementary to ours. Yours is not. We have a deal with the country that matters, and that isn’t you. We are leaving NAFTA. You know our terms. Take them or leave them. We are moving on.

In a single searing moment of revelation, everything that had guaranteed Canada leverage over America, everything that granted Canada a place in the world, everything that had generated any meaningful international influence, had evaporated. Canada capitulated within days and signed on for NAFTA2.

All things considered, as emotionally crushing and economically damaging as a forced rejiggering of Canadian-American relations will be, it could be (a lot) worse. Canada is very close to the top of a very short list of countries that the Americans have positive feelings for. Will the Canadian ego and economy suffer under NAFTA2? You betcha. But Canada will still enjoy privileged, security-risk-free access to the American market. In a post-Order world precious few countries can claim the same. Canada may limp, but it will still be able to walk.

Unless the third issue completely overturns the Canadian system from the inside.

Again, Canada is not a normal place. Unlike the United States where the states and federal government exercise roughly equal amounts of power, in Canada the provinces are preeminent and often have the ability to block federal policies they do not like. The country didn’t even get its first comprehensive internal free trade agreement until 2017.

As such, the provinces of Canada function less like components of a common country, and more like a loose clutch of independent countries which compete – oftentimes furiously. That would be problematic enough if the provinces shared a common demographic base. That, they do not.

Quebec is as vitriolically Francophone as the Maritimes are Anglophone. A huge chunk of the population of Toronto is South Asian, while East Asians tend to be overrepresented in Vancouver. The Prairies are as white bread as America’s upper-Midwest. These splits at least partially explain the seemingly never-ending drama of Quebecois separatism, but it is the intersection of demography and economics where the real problems erupt:

The Maritimes’ economies crashed decades ago and its subsequent “recovery” has been anemic at best. Now those provinces have all aged into mass retirement making them de facto wards of the national government. Mighty Quebec is only a few years behind, and is making the transition to demographic basket case right now. Both British Colombia and Ontario are no more than five years behind Quebec. A big piece of the BC economy is serving as the gateway to Asia, and the Trump administration’s trade war is likely to enervate those links. Even worse, the NAFTA-integrated manufacturing and agriculture that makes Ontario and Quebec hum were sectors that specifically benefited from NAFTA1, and which now face far steeper competition from the United States and Mexico under NAFTA2. More specifically, Quebec’s aerospace company, Bombardier, is both one of the most heavily subsidized in the world and is linked into Airbus – a firm that is both the target of extensive American tariffs and one whose fate is locked up in the Brexit drama.

Functionally, that restricts economic dynamism to the demographically young provinces of Alberta and Saskatchewan, a pair of entities whose economies depend upon old-school oil and natural gas production. For years now, funds transfers from the pair – quintuply so from Alberta – to the center is what has enabled Canada to enjoy its much-lauded social welfare state.

That’s not the end of the story, but instead just the beginning.

Canada’s leader is one Justin Trudeau, a scion of a powerful family. Justin’s father, Pierre, was a force of nature. Love him or hate him, everyone acknowledged that Trudeau the Senior was a commensurate politician. Dude could work a room, and it isn’t much of a surprise that he served as Canada’s prime minister for 16 years.

Justin, in comparison, isn’t a particularly smooth operator. His rise to the prime minister’s chair five years ago largely occurred because of circumstance. Many Canadians had tired of a decade of conservative minority rule under the somewhat curmudgeonly Stephen Harper. A coalition of liberal players banded together around the Trudeau name and managed to carry an election.

In that environment, Trudeau the Younger fit the bill. He isn’t very bright, his French is on the weak side, his past work experience was at best mediocre, but he is young and so very very pretty. In a world of social media and an increasing split between modern liberal values and traditional economic sectors, that proved enough.

Under Justin Trudeau’s rule Canada has… gotten by. There have been no disasters, but few serious new policies. Really, Justin Trudeau’s administration has only shifted two things.

First, it has steadily centralized power in Ottawa, making it easier to drain cash from Alberta and Saskatchewan both to balance out the slipping economic performance of the rest of the country, and to push this or that pet policy. Second, the pet policy of the moment is a fairly aggressive environmental program that has proven popular with Justin Trudeau’s base. That program has put ever-more-stringent restrictions on the economies of Alberta and Saskatchewan – specifically on the sectors that make the Canadian national budget possible.

Justin Trudeau’s lackluster performance has cost him. His Liberal Party has been ejected from parliaments in Alberta, Saskatchewan, Ontario and some of the Maritimes in favor of the conservatives; in BC in favor of the left-leaning NDP and Greens; and in Quebec in favor of more nationalist sentiments who are furious with his capitulation to the Americans in NAFTA2.

Within the Liberals, the future isn’t all that bright either. Aside from the Trudeau name, the one characteristic that Justin inherited from his father is the charisma necessary to suck all the air out of the room. Justin is such a big presence that there is no next-generation of young leaders working their way up through the Liberal Party ranks. When Justin falls, so too will the party.

Fast forward to this week.

The Canadians voted in national elections October 21. Justin Trudeau’s Liberals were not exactly gutted, but they lost a lot of seats ending up with just 157, thirteen shy of what’s necessary to form a majority government. That will force the Liberals to rely upon support from the Greens (whose primary concerns are climate change policies) and the NDP (who are like a more math-challenged version of the Greens).

For Canada as a whole, this courts disaster.

Political sentiment in Alberta and Saskatchewan turned sharply anti-Green and anti-Trudeau years ago. The Albertans and Saskatchewanians assert the Greens, the NDP and the Trudeau government are actively conspiring to stymie any and all efforts to get Albertan and Saskatchewan energy exports to the wider world. The Greens and NDP openly say they do, with anti-Albertan policies in the one province they control – British Colombia – having reached the point that BC and Alberta have a hot little inter-provincial trade war going. The Trudeau government attempts to be at least a bit circumspect on the issue, but under Justin Trudeau’s rule construction has yet to begin on a single cross-province pipeline.

Legally, there is an excruciatingly painful route forward. Quebec’s on-again, off-again independence spasms firmly established that Canadian provinces have the right to leave Canada. Paths to secession have been approved – at least in theory – by both the Canadian parliament and the Canadian Supreme Court. We are approaching the witching hour.

There is no modern Canada without Albertan and Saskatchewan financial strength, and there is no Albertan and Saskatchewan financial strength without the two provinces’ energy sectors. Now, with the Liberals needing Green/NDP support to rule, the already-deep political split is taking on more ideological, more hostile overtones.

The vote breakdown is not encouraging. In Monday’s elections the Liberals lost every seat they previously held in both Alberta and Saskatchewan. In an echo of America’s 2016 presidential elections, the opposition Conservatives actually won the popular vote, but because of Canada’s equivalent of America’s electoral college they earned 25 fewer seats than the Liberals. Further mirroring America’s more recent political evolutions, Justin Trudeau claimed a “clear mandate” for stricter climate-change-related policies – an assertion positively Trumpian in its ability to creatively reinterpret the facts on the ground.

We are likely to see two things over the course of 2020.

First, the new federal political alignments are the absolute worst-case scenario for Alberta and Saskatchewan. They have already tried and failed – horribly – to renegotiate their financial relationship with Ottawa, and now they can look forward to ever harsher restrictions on their economic capacity paired with ever more robust siphoning of their wealth to the Canadian center. The formal, open, public debate on secession begins now.

Second, the Americans are likely to take both notice and action.

In the War of 1812 Canadian colonials burned down the American capital. In the war’s aftermath, realizing the Americans would be jonesing for revenge, the Canadians carried out what has arguably been the most successful rebranding effort in history, from trigger-happy arsonists to polite, cuddly socialists.

That effort enabled Canada to avoid American wrath. Later, Canada maintained a bit of protection due to its status as part of the British Empire. In the interwar period the U.S. had bigger fish to fry at home, what with the Great Depression and all. Post-World War II the Americans’ need to maintain the global Order meant that Canada, for all its inconsistencies, was under American protection – which included protection from America.

The Canadian system is splitting along provincial, economic, demographic and ideological lines, and there is no one in the Trump administration who likes Justin Trudeau personally, ideologically or politically. Add in a now-unrestrained America, an America who sees Canada as a competitor, an America who sees the Canadian government as a mix of annoying and ungrateful and self-righteous, and a complete role-reversal is fully in play. Unless the Canadians can get their shit together, it will be eeeeeeasy for Washington to start cutting deals with individual Canadian provinces to hammer preexisting wedges ever-deeper into the Canadian system.

Alberta has the means and motive to destroy Canada. Washington has the means and motive to destroy Canada. And the likely format of the new Trudeau government is providing the opportunity.


The Future of Japan

Japan is … odd.

Most countries have a very clear chunk of reasonably good land that serves as home to a specific ethnicity. That group forms a government to serve the needs of those people in that place, and then that government steadily expands its writ over more territory and peoples. The valleys Nile, Thames, Ganges and Argun for the Egyptians, English, Indians and Chechens; Muscovy for the Russians; the Beauce for French, the Zagros Mountains for Persians, the Tibetans on their namesake plateau, and so on.

Japan doesn’t really have something like that. The Japanese islands are so steep and arable land so hard to come by that even as late as early 1800s, well over a millennium after after of the emergence of the Japanese ethnicity, the Japanese still lacked a common government.

So…what made Japan matter?

First, isolation. In the imperial age Japan was beyond the back of beyond. Between its island nature and its position on the northeastern corner of the Afro-Eurasian continent system, no one simply happened by. Anyone who wanted to reach the Japanese really had to want to reach the Japanese. If the Japanese’s geography wasn’t as good at isolating them from the rest of the world as one another, they would have been conquered ages ago and never emerged as a people of consequence.

Second, industrialization. What Japan could not do with muscle and wood and arrows and horses and manure they could do with steam and gunpowder and rifles and electricity and chemical fertilizers. The industrial suite of technologies enabled the late-19th century Japanese to overcome their horrid internal geography and forge the truly unified economic and political space we know today as Japan.

But that was hardly the end of the story. More the beginning. Because aside from its people, Japan has nothing that enables industrialization. Steel foundries require high quality iron ore, and Japan has none. Power lines require copper ore or bauxite, and Japan has none. Electricity requires coal or uranium or natural gas, and Japan has none. (Japan’s solar and wind potential for greentech energy is similarly pathetic.) Name an industrial input. Japan doesn’t have it.

And so, the only way Japan could industrialize – the only way Japan could reliably unify – was to raise an empire that could funnel the various inputs of the modern world to the Home Islands. To exist in the modern age, Japan had no choice but to expand into empire.

The Japanese know this in their bones, and they know the converse is true as well. The Japanese fought so hard in World War II less out of nationalism or because their emperor ordered them to, and more because they knew failure would mean a return to mutually-warring Balkanized medievalism.

The modern Japanese also know something else in their bones. No matter how powerful they become, no matter how well they anticipate and administer and execute, no matter how potent their navy, they will never be able to challenge the United States. Attempting to do so pisses the Americans off, and that has consequences. Dire, horrific, searing consequences.

With their WWII defeat, the Japanese prepared themselves to vanish from history. Unity required industry required empire, and their attempts at empire had failed.

But the Americans had other ideas. They needed a worldful of allies to contain and beat back the Soviets, and with 1940s-China in the fourth decade of a particularly messy civil war, Beijing was off the menu. So, in Asia, that left Japan. And so, the Americans folded the Japanese into their new global Order.

That meant unrestricted access to the global commodity supply and the ravenous American market, all guaranteed by the American Navy that had just so completely wrecked Imperial Japan. Economically, it was as if the Japanese had won the war. The decades since have been the richest and most secure in Japanese history.

Fast forward to today.

The Americans are leaving. The Order is ending. The happy period of growth and development and security and expansion without needing to invade anyone is nearly over.

Managing the American departure, or even better yet, preventing it, is paramount. Ergo the Japanese Prime Minister was the first world leader to visit the new U.S. president after Trump’s election, and the second to visit after his inauguration. Abe did everything right. He brought his host a set of golden golf clubs. He lost to him (hideously) in 18 holes. Egos were stroked. Groveling was on the menu. Abe went home satisfied that he had bonded with the new guy and the bilateral relationship was firm.

And a few months later the Trump administration slapped steel and aluminum sanctions on the Japanese economy.

Like many leaders Abe had believed some version of a cake-and-eat-it-too deal was on the menu, and if he could forge a personal connection with the new American leader, then Japan could continue on as before. Abe was convinced the tariffs were a negotiating tactic, and that he just needed to hold out and let Trump’s deal-art run its course.

But a few months later, the United States had inked trade deals with the South Koreansthe Mexicans, and the Canadians. Four of Japan’s largest trading partners had already organized themselves into a post-Order system. The remaining really big one was a country the Japanese really didn’t want to be left with: China. So, Abe did the only thing he could do. He followed the example of the Koreans and Canadians and caved. On everything. U.S.-Japan trade talks wrapped up in September.

Awkwardness aside, this transition to a world of Disorder is a transition the Japanese can manage. In the aftermath of Japan’s 1990s financial collapse, the Japanese corporate world relocated much of their industrial capacity to serve markets far more dynamic than their own. Build and employ where you sell. This doesn’t simply put Japan on the safer side of every political, currency and supply chain risk question, it makes their hosts as interested in protecting Japanese investments as the Japanese themselves.

The strategy hasn’t simply worked, it has transformed the Japanese economy from one of the most dependent upon international interconnectivity to one of the least. Add in the world’s second most powerful blue-water navy, and Japan today is the most flexible and insulated country in their region.

There’s more on this topic to be unfurled and explored. A lot more. But unlike South Korea or Mexico or Canada – the countries covered so far in the Cutting Room Files – Japan is a country exceedingly well set up not simply survive in a world without America, but to dominate its neighborhood. What’s above is a light trim from one core chapters of Disunited Nations. Which means that if you want to truly understand Japan’s future, you’re going to have to wait a bit.


The Future of the United Kingdom

I’m not going to more than obliquely address the UK elections coming this Thursday (December 12). Polls at this time point to a strong Conservative showing, largely because British Labour leader Jeremy Corbyn is a sexist, anti-Semitic, anti-Western, authoritarian, unrepentant Stalinesque bigot whose main message to lifelong Labor members is “vote for me because I’m not a Conservative.” Not exactly a winning program, and that’s before you take a look at his economic proposals. Corbyn is also personally for Brexit even if his party is semi-officially opposed.

I’m far more concerned with what will happen in the United Kingdom in the weeks and months to follow. Barring some truly impressive political gymnastics, the UK’s divorce from the European Union has been baked in for some time. And while it has been dizzily entertaining to watch British politics contort in its attempt to alternatively operationalize or deny that basic fact, this particular chapter is almost over and Brexit is about to happen.

As seems to be the case with me these days, looking forward first requires a look back.

Only a century ago, the British Royal Navy was the greatest the world had yet seen. The Brits used that incredible navy and their capable (if small) contingent of land forces to maintain an empire where the sun never set. That isn’t a metaphor, but instead quite literal.

But the ravages of the World Wars shattered the world’s navies and shattered right along with them the British Empire. The British were so desperate at times for war materiel that they signed away to the Americans the rights to many of the bases that made their empire.

What did they get in exchange? Fifty destroyers that were far shy of substandard when they had been built a quarter-century previous, along with a fistful of loans on terms that could best be described as usurious. This was Lend-Lease, the policy discussed in American history textbooks as a gesture of “goodwill.” The near-eradication of British power from the Western Hemisphere and the welding of British fortunes to American strategic desires was the first step in the creation of the American-led international system. Britain didn’t claw its way out from under the debts until the 2000s, and it still hasn’t gotten most of its bases back.

The issue with London from the American perspective is harsh in its simplicity. Only three countries have ever threatened the U.S. mainland directly. The Soviet Union aimed nukes at the United States, and so Washington will typically take steps overt and covert to whittle away at Russian power. Mexico and the United States fought a land war, that ended with the Americans taking half of Mexico’s territory.

The third country to threaten the American mainland is the Americans’ former colonial master, the United Kingdom, and Washington will always – at a minimum – keep an eye open for opportunities to ensure that the balance of power in the bilateral relationship never again tips against the United States. Are the two countries allies and family? Certainly. But as we all know, family drama trumps pretty much everything else. 

Which brings us to the current day: Brexit is providing Americans with the biggest opportunity to lock the Brits into strategic enslavement since Lend-Lease.

The first aspect of the opportunity is institutional:

Big decisions in the European Union require unanimity, and there is no version of a British divorce from the EU that would have satisfied the Irish on border issues and France on nationalist issues and Spain on Gibraltar and the Netherlands on EU rules and Germany on market access and Luxembourg on financial issues and still be able to make it through the British Parliament.

There was never going to be a divorce deal, and in prolonging the Brexit talks from a few weeks to now over three years the Brits have had to sacrifice nearly every bit of financial, political, economic and strategic leverage they could have used to chart an independent path. Strategically and economically, the British are now weak and vulnerable, and their eventual post-EU membership trading partner will be able to pick them clean.

The second aspect of the opportunity is about economic centers of gravity:

Half the UK’s trade portfolio today is with the EU. In perfect conditions it takes the EU over a decade to negotiate a trade deal with countries they like (think Canada). Add in some Brexit-related bad-blood, the never-far-below-the-surface geopolitical competition with the French, the Dutch insistence that anyone who gains access to EU markets also follow EU rules in full, an Irish penchant for knife-twisting, Germany’s iron-clad demand that the UK pay Europe in cash for EU market access, and Spain’s never-ending bitching about Gibraltar, and ten years will barely be enough time to decide the shape of the negotiating table. That flat-out rules out meaningful re-integration with the Continent on the sort of time frame the EU likely has left (which in and of itself will be a topic for later in this series of newsletters).

Turkey is often mooted in the British press as a replacement, but its current imports from the UK are less than 1/30th the amount they would need to be to replace the UK’s exports to the EU. In fact, to replace EU trade, Turkey would have to import from the UK exclusivelyAnd the country has dropped into narcissistic nationalism. So let’s just stop pretending anyone is interested in that deal, shall we?

China is simply too far away to be the Brits dominant trading partner, even if you buy into the “rising China” propaganda. (Incidentally, much China-UK trade today is gateway trade to the EU. Post-Brexit that’ll go pbbbbbt.) The combined Commonwealth is both too scattered and insufficiently wealthy. Even worse, the most significant piece of the Commonwealth – India – is notoriously opposed to free trade deals on principle. Canada is willing, but just isn’t big enough. Nor does Canada boast enough young people to serve as a meaningful sink for British goods.

The only market with the proximity, size, institutional capacity, and complementary needs and capabilities to be a meaningful trade partner is the United States itself.

The third aspect is political:

Like the United States, the UK is experiencing one of its once-a-generation political reshufflings with both the Conservatives and Labour shattering along economic and populist fault lines. Neither Boris Johnson nor Jeremy Corbyn are the sorts of blokes you would introduce to your mom, and the pair are now deliberately, hilariously, tragically mis-running Parliament. Makes it difficult to have a meaningful conversation about the future, much less build consensus, much less get anything done. Post-EU domestic economic regeneration was always a near-impossibility, but with this sort of political chaos the post-Brexit Brits will be desperate for any sort of lifeline. Only an American lifeline will be on offer, but that comes with conditions. Many conditions.

The fourth aspect of the opportunity is strategic:

Post-Order America won’t be in the business of supporting allies that cannot support themselves. To that end Britain has location and hardware arguing for it. Great Britain’s position just off the European mainland has made London the European arbiter for the bulk of the past four centuries. Britain’s geography couldn’t be better designed to drive the French mad. It acts as both effective barrier to large-scale attack while also giving the English a redoubt from which to interfere on the mainland. Close enough to participate in Eurovision, separate enough that armies marching across Europe isn’t reason enough to leave tea early. That’s useful to America.

Just as important, the Brits are in the process of floating two of the four biggest aircraft carriers in history that are not U.S. flagged. That’s useful to America. But in the post-Cold War era the British tried to do three things simultaneously: downsize their military while also building those supercarriers while also increasing the size of their ground forces to assist the Americans in places like Afghanistan and Iraq. As such the British navy was forced to decommission a huge swathe of their ships. As venturing out with a supercarrier that doesn’t have an escort ring is a great way to lose a supercarrier, the only way the British navy can now function is hand-in-hand with the American Navy. Moreover, carriers are crap for defending trade. That takes a lot of smaller ships – smaller ships the Brits currently do not float…but the Americans do.

The Americans are certainly willing to de facto merge navies for Britain’s strategic and economic benefit, but only in exchange for considerations on other things. Lots of other things. Most notably in the bilateral trade deal the Brits so desperately need.

Which brings us to the nitty gritty.

Within British politics there has always been a small but vocal group – most notably but hardly exclusively within Labour – who is annoyed that the United States plays such a loud role in internal British…everything. Of late most of the British political spectrum has come to the conclusion that if there is a future for the UK in the wider world, it will involve a trade deal with Washington. Which means we’re starting to see some linkage between some latent anti-Americanism and some raw-nerve British political issues. This was unavoidable, but that doesn’t mean it is pleasant, much less focused on the right things.

The item that’s getting the most press at present are Jeremy Corbyn’s recent comments on the National Health Service. Most in Europe and Anglo-America look at the NHS as…a bit of a disaster. Middling-quality, high-cost health care permeates the British system, but the Brits adore the NHS and really that’s all that matters. Corbyn has postulated that a trade deal with the Americans will force American-style prices for prescription drugs onto the NHS (apparently the American inclination for pill-popping is something else we got from our cultural parents).

Honestly, it is a perfectly reasonable concern, but it is also almost comically small fry. If one wants to be afraid of getting in bed with the American elephant, one needs to think bigger than drug prices.

Much bigger.

First, agriculture.

It probably comes as no surprise that British food isn’t…good. A big piece of the explanation is geographic. The UK is a short-summer, cool-temperature, low-sun country with mediocre soil quality. Those aren’t the sorts of conditions that generate a wild diversity of high-quality foodstuffs. What improvements to British agriculture and rural prosperity that have occurred during the past four decades are largely due to EU exposure.

On the production side, the few things the Brits do well – certain types of meat, dairy and especially fish – are exported to the EU market, a market that soon will be largely closed. On the financial side, the EU’s agricultural subsidy program is among the world’s most lavish. It has slowed technological uptake and consolidation that has defined global agriculture since the 1970s. With Brexit those subsidies will vanish in a day.

Like it or not, low-cost, high-quality American agriculture is about to swamp the British market, and American trade negotiators will blast away whatever protectionist measures the Brits will want to erect to protect their own farmers. Phytosanitary requirements, hormones, tariffs, quotas, you name it. It will all vanish and 66 million UK consumers will soon be American fed.

Second, manufacturing.

Even after seven decades of integration, most European countries take great pains to protect their manufacturing networks from foreign involvement. The UK included. For the Americans, who have already integrated with Canada and (to a greater extent) Mexico, that won’t fly. The Brits will have to join the American manufacturing supply chain system based on the NAFTA model.

If the Brits thought that tussling with the French over aerospace or the Germans over automotive was a frustrating experience, its nothing compared to dealing with the colossal, tangled networks of North America where mammoth economies of scale can drown the Brits out. What will likely hurt the most is sudden exposure to Mexican manufacturers. US and Canadian manufacturers have had decades to adjust to the ever-more-skilled but always-less-expensive Mexican work force. UK manufacturers will have to do so nearly overnight.

Third, finance.

London has been the world’s second-most important financial center for decades, a position it solidified with its membership in the EU. Put simply, the Brits penchant for low taxes and lower regulations has long encouraged many Europeans to handle their finances in London rather than at home. This is doubly true for any pass-through monies that sought to escape the bloc for greener pastures.

The agony of endless Brextensions has taken the shine off that system. With the specifics of the UK’s future in doubt, the UK is no longer the holder of value it once was, and pass-through money is more likely to skip London altogether. The wildly gyrating pound only underlines both weakenings. U.S. trade talks will end both roles altogether. The Americans will demand the relocation of the bulk of the London financial district to New York City.

(Don’t think for a moment that the Europeans will get more than one-quarter of London. Every time the Continental Europeans float the idea that all euro-clearing must be handled in the eurozone, the Americans remind them that should that occur the U.S. will require that all dollar-clearing would then need to be handled in the United States. As the USD is more important to European trade than the euro, such reminders tend to convince the Europeans to pipe down for a bit.)

Most of the pro-Brexit crowd voted the way they did because they don’t like faceless European bureaucrats deciding issues for Britain. The reality is that Britain’s only way forward post-Brexit is to assign even greater levels of authority to American bureaucrats.

The Brits could always say no. They could try to fly solo against a more insular and prickly America, an unleashed France, a rapidly rearming Germany, a resurgent Turkey, and a desperate Russia in an environment of wildly higher energy prices and food prices. (Spoiler alert: There’s a full chapter in Disunited Nations on each of these countries’ pasts and futures.) The Brits could choose to slip into permanent military irrelevance and strategic vulnerability. They could choose to suffer an economic disconnect as bad as the Great Depression that would include dramatic reductions in standards of living and employment and energy availability and health care. Some countries, when faced with the choice between pride in poverty vs relative wealth and security, go with the former.

But I doubt it. The Brits tend to be pretty pragmatic. Stiff upper lip and all that.

Early in the Order era, the Brits attempted to restart their empire by seizing the Suez Canal from the Egyptians. The Americans gave them a hard f**k-no, started to cut the British economy out of global finance, and made some not-very-veiled threats that they’d eject British troops from Egypt by force of arms. The Brits – shocked and chagrined – made the conscious decision to never again be on the Americans’ bad side. In the 2020s that means strategic subjugation, by doing a deal on America’s terms.

While this forecast may seem as cheery as a London winter morning, it could be a lot worse.

In a post-Order world, these British economic sectors are going crash anyway. At least a deal with the United States holds out the hope for something better down the line. Even more importantly, the Brits have something few others could hope for: the Americans have saved them a seat at the table.

The Americans spent the last seven decades paying the world to be on their side. Those days are over. The only countries that will be able to enjoy U.S. market access and strategic cover are those who either pay the U.S. a lot of money, or bring something exceedingly shiny to trade. Supercarriers, being the gold standard of strategic assets, count. Islands off major continents, being the gold standard of strategic positions, count.

Simply put, the United Kingdom has an in so long as it cow-tows appropriately. Japan is in a strikingly similar position for similar reasons. Mexico gets an invitation because it is an entangled neighbor with a dynamic economy. Canada (barely) squeaks over the threshold largely out of habit. South Korea (so far) is paying its way.

And that’s…everyone.

Those five countries are the only five major countries likely to make the final cut before the end of 2020. They collectively account for nearly half of the American trade portfolio, and they will comprise nearly the entire American Friends & Family plan. With the exception of the UK, everyone else’s deals are already in the can. Whoever wins the election on Thursday will need to seal a deal with the Americans before the Americans lose interest in…everything. Beyond these five countries, everyone else will have to defend their own territory and trade, and there are less than a handful of states that have the strategic and economic capacity to even attempt such a feat.

Dark? Dreary? Even depressing? Sure. But in a world of full American disengagement, having any relationship with the Americans at all is about as good as it gets.


The Future of China

December 16 and 17 all the international news that was fit to print showcased announcements in both China and the United States that after some 18 months of talks, tariffs and recriminations, a Phase1 trade deal had been reached.
 
So we’re out of the woods? Right? The threat to the global trading system is now addressed?
 
Um, no.
 
Trade deals can come in all shapes and sizes but roughly put there are those that restructure industries, those that restructure countries, and those that restructure the world. When it comes to China, Trump is going for the latter. The problem is that you don’t restructure the world without restructuring the Chinese economy and you can’t restructure the Chinese economy without restructuring the political system all the way up to the very tippy top. The people at the tippy top have some say in how that all goes down… the question is how much.  
 
To figure out just how much say they have, let’s revisit what the Trump administration is demanding:

  • An end to industrial subsidies including the end to the Chinese practice of flooding its market with cheap capital. Favored companies today can expect those loans to be rolled over indefinitely. Given that kind of leeway, these companies went after market share rather than profits. In other words: China brims with overcapacity, a factoid which drives product prices down, commodity prices up, forces the Chinese to dump their products into other markets, and drives competitors in other countries out of business.
  • An end to all state-run cybertheft and an end to the systematic practice of joint ventures which require technology transfer. The Americans claim, reasonably, that this harms American companies that go through the effort of research and development. It adds to the cost of securing information and just generally sucks.
  • The immediate opening of nearly all sectors of the Chinese economy to fully-foreign owned firms. In other words: competition from the outside in all sectors. Since Chinese firms are for the most part competitive due to price, and that price competitiveness is due to heavy subsidies, remove those subsidies and allow more efficient foreigners to enter China’s home market and mass bankruptcies are the logical outcome.

From the American perspective, this sounds like a decidedly easy problem to fix.
 
Step one, simply stop massively subsidizing industries and infrastructure that the economy can’t meaningfully absorb. Step two, stop taking intellectual property that isn’t yours. Step three, become a true capitalist society with competition from the outside… ok, that last one sounds like a lot no matter how you say it.
 
But the point is: sure, maybe that means a recession, but such adjustments are part and parcel of being a modern economy. Cultures as diverse as France and Turkey and Korea and Thailand and South Africa and Brazil have mostly managed such transitions ok. Certainly the “mighty” and “eternal” Chinese can pull it off.
 
Yet from the Chinese perspective – that is, from Chinese President Xi Jingping’s and the Chinese Communist Party’s perspectives – this is utterly unfathomable. Giving in to any of these demands wouldn’t simply be perceived in China as an unforgivable loss of face, but each and every one would shatter the Chinese economic model, the Chinese political system, and China as a country. Easy money is, after all, the only way the Party can keep up its end of the bargain with its citizenry: a better life than your recent ancestors in exchange for trust in and power to the Party. It does this by offering widescale employment and keeping the doors open at inefficient companies. For the wealthiest, the tradeoff is even more straightforward. Anytime you have a fire hydrant of money blasting, you can expect interests to become entrenched, corruption to spread. Even dictatorial, statist regimes need a political base.

The Party knows this is an unsustainable system and has been racing against the clock, trying to steer an un-steerable, careening behemoth. It aims to transition the Chinese economy from the wobbly foundations of a heavily subsidized economy that relies on other economies buying their goods to something rarified, something more like what the Americans have: a stable, self-sustaining market where goods are produced and consumed domestically. To do so, it needs to cut back overcapacity in a controlled fashion and boost consumption by the Chinese consumer. Until that goal is achieved, the Chinese remain dependent upon imported technology, energy and raw materials, and upon exported goods to more stable markets. China’s real problem is that this entire sequence requires a global system that is open and safe as guaranteed by the Americans.
 
So far the Party has failed in transitioning the country onto more stable macroeconomic footing, fearing at each step that it will lose one or more of its most important constituencies. Put another way, the Party finds itself unable to transform its economy away from dependence on the Americans. It finds itself at the end of its economy’s ability to take on debt.
 
Which brings us back to the Phase1 deal:
 
The trade talks have followed an almost disturbingly predictable pattern: The Americans make demands the Chinese cannot possibly meet. The Chinese promise to comply. A few weeks later Chinese actions make it clear they have no intention of complying. The Americans levy more trade restrictions. Repeat.
 
All the Phase1 deal is is a bribe to the Trump administration: a promise to purchase a few tens of billions of dollars of American agricultural products and to start implementing protections for intellectual property (some of which were agreed to twenty years ago), in exchange for a slight rollback of the tariffs already in place and a promise to delay a new planned batch for the time being.
 
The next step in the drama is obvious: sometime in late January or February, the Americans will again say the Chinese are not complying, and that new batch of pre-prepared tariffs will slam into place. And incidentally, geopolitics aside, I can’t think of a better international backdrop for a populist president than to run against China in an election year.
 
So it’s time to call it. There isn’t going to be a meaningful trade deal with the United States because agreeing to the Americans’ demands would be the end of the Party. The Americans can afford, if they must, to cut China out. It isn’t “easy,” but it’s more akin to a cold than leukemia. In fact, a combination of cheaper resources like natural gas, advanced technology, highly educated labor, and geopolitical disruption all make relocation to North America easier at the same time that East Asia’s costs – from labor to risk – are going up. Some companies and industries have already moved into the NAFTA marketplace and we’re still in the early stages of all these trends. If the world’s largest, most important consumer market, and the physical guarantor of all Chinese supply chains simply walks away, the Chinese are simply out of options.
 
More likely, it will be (far) worse than that for the Chinese. If the Americans, instead of merely cutting out the Chinese instead get aggressive, things could quickly cascade. Even with a naval deployment policy that’s one-quarter of what it is currently, the Americans could easily – almost lazily – interrupt any trade flow on the planet. In comparison, the Chinese cannot even guarantee their maritime safety within a thousand miles of their own coast, and most of their oil comes from five times that distance along a path littered with threats and rivals. And the size of those oil inflows? Edging up to 12 million barrels a day – greater than what American total imports were at the height of American energy dependency in the early mid-2000s.
 
China’s crash will be much like its rise. Big, bold, brash, loud, all-consuming, and, in hindsight, completely inevitable.
 
For more on what the future holds for China, and the entirety of the East Asian rim, take a look at my new project, Disunited Nations: The Struggle for Power in an Ungoverned Worldnow available for pre-order.


Europe

After three years of drama, on midnight Jan 31 the Brits finally left the European Union. The next piece of the Brexit drama will be a decidedly non-European affair, instead being between a family debate between London and Washington.

Which leaves it to the European Union – now with 27 members – to attend to its own drama.

When discussing the challenges facing the European Union it is…difficult to know where to begin.

I guess it makes the most sense to start at the top. The European common currency – the euro – is a spectacular achievement, but unfortunately it was insufficient to the needs of binding Europe together economically. Because the union has no complimentary tax or banking regime, each country follows its own economic strategies. In most circumstances, the currency cannot adapt to changing economic norms, while for their part the various eurozone members lack the tools to fine-tune their systems with monetary tools.

In simple terms, at any given time some eurozone members are growing gangbusters and for-them-too-low eurowide interest rates spur overheating, inflation and asset bubbles, while others are in recession and for-them-too-high interest rates make growth impossible. On both sides eurozone members are left to experiment with less-than-fully-safe tax and banking policies which generate their own bubbles, recessions and distortions. Twenty years on, the much ballyhooded macroeconomic alignment the euro was supposed to bring about is further away than ever.

This has blown up most spectacularly in Greece. Thirteen years on on from Greece’s debt blowup, the country is still on the hook for over 339 billion euros in state debt, or 185% of GDP. A few horrific points of comparison:

  • In relative terms, this is roughly double the relative American debt load.
  • The total EU annual budget is just under 170 billion euros. The Greek economy is less than 2% of the total EU economy.
  • Nearly all of this debt has been offloaded by financiers, and is now directly held by European institutions or supported by EU payouts. In effect, the entire country is in receivership.
  • Under the best-case scenario assuming no funding crunches, no problems with the euro and no recessions in Greece or Europe, this receivership will run for decades. The European Commission does not expect Greece’s debt to drop below 100% of GDP until 2048.

 
It’s worse than it sounds. The EU’s selective and partial integration enables EU citizens to change residency (and to a degree, citizenship) with ease, so the top 5% of Greeks as regards wealth and educational standards shifted legal status, while less-rich Greeks have kept their legal status to maintain access to Greek transfer payments, but physically relocated to avoid Greek taxes. Greek politics are too complicated to call merely Byzantine, and for the most part have simply collapsed into a Greek tragedy.
 
Greece will never recover. Greece’s agricultural, energy, financial and industrial sectors are for all practical purposes, gone. Greece only continues as a state because the EU shells out money for it to exist. This is the price that must be paid for the euro to have any international credibility whatsoever.
 
As big as a problem as Greece has become, it is peanuts compared to Europe’s banking problems. While not nearly as bad as what passes for banking in China, in the EU banking is a de facto arm of state policy, with loans on preferential terms regularly being handed out to achieve this or that (un)official state goal.
 
In many cases there is at least something sane in mind, such as boosting economic activity or expanding infrastructure. Sometimes sanity gets stretched, such as when EU member states throw money to failing companies or help finance expansion into markets – whether geographic or product type – they probably should have stayed out of. And sometimes the loans simply go to purely political, even partisan, activities. Spin down to the regional and local levels and regional and local banks are regularly used by regional and local politicians of all stripes as personal slush funds.
 
While the details differ from country by country and year to year, it adds up to a banking sector so moribund, so overexposed to unrecoverable risk that EU’s sector-wide assessments of banking health suggest that if the top 300ish EU banks were located in the United States, that the FDIC would have closed down all of them.
 
The Europeans are notoriously squirrely about the specific numbers behind their banking crisis, using myriad statistical models and definitions as to what actually comprises a “bad loan” to make things look less dire than they are. But pretty much everyone with a pulse agrees that by far the worst of the problems are in Italy. Semi-officially, even with over a decade of debt write downs and government funds injections, Italy still holds about half of the total stock of bad loans of the entire eurozone. Officially, the figure peaked – using Italian numbers and definitions – at 360 billion euro in 2016. The real figure, is undoubtedly higher. Double? Triple? More? (My bet is on more, especially if you use American definitions and thresholds.)
 
Remember, the more local the bank, the more likely local politicians are to tap them for personal needs, and the mafia are quintessentially local “politicians.” For comparison, the U.S. subprime real estate market during the 2007-2009 crisis generated bad debt worth $600 billion – a figure that was remediated considerably by the liquidation of housing stock that backed all the bad debt – for an economy seven times as large. Even if you believe completely the Italian data (and, HA!) that makes Italy’s debt crisis at least triple that of US subprime. Use US definitions and we’re easily talking an order-of-magnitude higher.
 
At its core, many of Europe’s chronic problems come down to competitiveness. For all their vaunted educational systems, Europeans have a devil of a time translating high learning into high skills that generate economic activity. In part it is a legal system that strongly favors the old or employed over the young or unemployed. In part it’s an overly-burdened, overly-generous pension system that is a (the?) leading source of the political system’s legitimacy for the middle class. In part it is a tangled thicket of multi-level regulatory burdens. In part it is statism. In part it is protectionism. In part it is a rigormortized labor market. In part it’s an economic system that discriminates against new economic sectors in favor of state support for the largest players of old industries.
 
The competitiveness issue isn’t simply between Europe and the rest of the world, but within Europe as well. Much of this is policy, but much of it also reflects simple geography. Flat, well-rivered northern Europe can easily lay down roadways and railways and canals that quickly knit together major urban centers to achieve economies of scale. That’s simply not possible in the highlands of Scotland, Spain or Sicily. Put them all into the same regulatory space and lots of places get left behind.
 
The bottom line is no part of the competitiveness issue started up recently, and so meaningfully addressing it would be a horrifically painful multi-decade effort.
 
These are all real problems. Mortal threats even. But at least theoretically it would be possible to grow out of these problems. Generate enough economic activity for long enough and even the worst of banking disasters lose their sting, while infrastructure and industrial plant and educational standards in weaker geographies can be brought up to snuff. Buy enough time and maybe, just maybe, Europe can integrate itself to a point where the euro can be part of the solution rather than part of the problem.
 
Or maybe not, for Europe faces additional problems that rob it of the one thing it really, truly needs: time.
 
Birth rates started dropping in some of Europe’s more advanced economies as long as five generations ago, and in most cases slipped below replacement levels in the 1970s. Fewer children then, meant fewer young workers and consumers by the 2000s, means fewer mature workers and taxpayers in the 2020s, with mass retirements – and national economic collapse – coming within the single digits of years.
 
It is worse than it sounds. Europe’s current debt, currency and state spending crises are occurring before the mass retirements generate far larger debt, currency and spending crises. Soon most of Europe will simply be unable to support its ever-aging population while also carrying out other tasks necessary for the existence of modern, functional states whether that issue is education or infrastructure or health care or defense.

Of the EU states, demographics have already turned irrecoverably past terminal in Austria, Luxembourg, Portugal, Belgium, Germany, Italy, Estonia, Latvia, Lithuania, Poland, Malta, Slovakia, the Czech Republic, Hungary, Romania, Bulgaria, Croatia, and Greece. Barring historically unprecedented baby booms, Denmark, Finland, Ireland, Sweden, the Netherlands, the United Kingdom, Spain, Greece and Cyprus are less than 15 years behind (while not EU states, Norway, the UK and Switzerland fall into this second group). Few government policies are good at bolstering birth rates, and even runaway success wouldn’t generate a new crop of consumers for a quarter-century.
 
Obviously, demographic collapse has its own implications for Europe’s competitiveness crisis, but it also makes the Europeans far more vulnerable to global shifts than they otherwise would be. Having a population structure which is heavy on soon-to-be retirees means Europe today is currently heavy on mature workers. Such workers are productive, but they lack European consumers to absorb their production. The EU has in effect aged into an export union, one that is utterly dependent upon exporting its excess output to the rest of the world. Germany in particular is heavily dependent upon sales to China.
 
So long as the Americans are holding up civilization’s ceiling and absorbing scads of output, this works. But the Americans are letting the global system collapse. For the EU this is tragic – it exports upwards of half of its manufacturing output and imports roughly 90% of its oil and natural gas needs, this imminent shift is flat-out disastrous. Sure, fold in Norway and the UK and the North Sea and the numbers get a bit better, but remember, there were energy winners and losers in Europe before the UK left. Now the differences are far more dramatic.
 
There is no European economy without global integration. Europe simply cannot retreat behind the walls of Fortress Europe and wait for the storm to pass, yet neither does Europe have the military capacity, economic reach or political unity required to venture out and shape the world – or even its own neighborhood – to its needs.
 
Securing markets for sales or energy for purchase in a world without Order ultimately requires some sort of security policy. Not only has Europe proven incapable of crafting such a common policy, even if the policy existed on paper the EU couldn’t implement it. Defense spending across Europe as a percentage of GDP is at historical lows for all EU countries who are not on the border of the Russian sphere of influence, and the country who holds the vast majority of the EU’s long-range-deployable forces – the United Kingdom – is now more likely to be a competitor than a partner.
 
In times of economic degradation – in particular the sorts of broad-spectrum economic collapses that are on deck for Europe – governance tends to get dicey. The idea that the EU’s pan-governmental system will survive the economic collapses-to-come is, in a word, hyper-optimistic. Even now, in times of relative wealth and stability, democracy is failing in Poland and Hungary, while the far right is becoming politically respectable in Austria, Italy, the Netherlands and France. The political fringes in Germany – both left and right – have even odds of dominating the next national elections at the expense of the centrist parties which have ruled since the war.
 
This isn’t “just” about democracy, but instead a reminder that when the Continent cracks apart it doesn’t die, but is instead reinvented in ways many find problematic. Germany, France, Italy – just to name the historical experiences most Americans find graspable – have histories rich in, shall we say, creative governance when the economic road gets rough.
 
Put in that light, I’m almost tempted to ignore Europe’s “other” problems. Russia continues to push towards Europe’s eastern frontier while assiduously working to drive wedges between the Europeans and Americans on one hand, and between the various European nations on the other. Not far behind is Turkey, firmly in the hands of its own autocrat.
 
The two have teamed up after a fashion in both in the Levant and North Africa – most aggressively in Syria and Libya – to sow chaos, expunge European influence, threaten European energy supplies, and meter the flow of migrants to the Continent in order to extract concessions from Brussels, Paris and Berlin. It is working. Well.
 
For now.
 
This is an exceedingly dangerous game which willfully ignores both countries’ histories vis-à-vis Europe. Europeans are near-pacifists…until they snap, at which point they become anything but. Both the Russians and Turks seem hell-bent in recreating the conditions that would rekindle some serious European fire and fury. As locations directly adjacent to the Continent, this seems to me the height of inanity.
 
All of Europe – hell, all the world – should have been worrying about all these issues for years, but instead everyone has been obsessed with Brexit. All these issues existed before the Brits’ referendum in 2016. None have been addressed. All are worse. Perhaps the brightest silver lining from Brexit’s completion is Europe can again at least perceive these issues.
 
And yet there is something new under the sun. America is becoming a problem, and not simply in its fall into narcissistic populism. The UK was by far the most free-market member of the EU, and its presence alone bolstered the European Commission’s efforts to keep many of the EU members from their statist instincts. That’s gone. And since demographic decline has in essence demoted the EU to being an export union, the two trends are putting the EU directly into the Trump administration’s crosshairs.
 
This was probably inevitable. Now that US Trade Representative Robert Lighthizer is done with Korea  and Japan and Mexico  and Canada, and has at least put a pin in China talks for the time being, his attention has turned to the UK and the EU. Considering Lighthizer and Trump’s amply-earned reputation for using America’s command of global trade, transport, finance and energy as cudgels for use in trade talks, it isn’t an experience the Europeans will enjoy.
 
Individually these are all monstrous (lethal?) challenges. Put together, it would take a strong leadership with a strategic vision and popular support to survive them. But not only can I not recall the last time I heard the words “strong leadership” or “strategic vision” or “popular support” used to describe the European Union, the EU doesn’t even have an elected executive who might be able to rule by order in a crisis. Even worse, on anything important, each individual EU member state enjoys full veto power. The EU literally has the worst conceivable organizational structure for dealing with the soon-to-be future.
 
(Incidentally, the same organizational mismash which makes it impossible for the EU to truly address their many issues also makes it impossible for the Europeans to negotiate trade deals on anything shorter than a decade time frame. There will be no US-EU deal at all.)
 
That will leave the future less to the European Union, and more to its individual member states. Two are worthy of call out, with both meriting an entire chapter in Disunited Nations.
 
In most ways that matter, Germany is the poster child for what’s gone so hideously wrong.
 
Absolutely catastrophic demographic structure? Check. A geography woefully in appropriate to greentech? Utter dependence upon energy imports? Check. Almost comical dependence upon global markets for its exports? Check. Reliance upon Russian and Turkish cooperation for its economic and physical security? Check.
 
And that’s not even the big problem. It has always been an open question whether an American-led NATO could defend Europe from the Russians in a real war, but there has never been any doubt that NATO sans the Americans would have much of a chance. Failing to invest in one’s own security in today’s strategic environment is the very definition of blind and arrogant and stupid.
 
The award for most-blind, most-arrogant and most-stupid clearly goes to Germany, who has lectured the US both publicly and privately on how it should deploy its forces in the Middle East despite having a broadly non-functional military that Berlin is squeamish about stationing outside of Bavaria.
 
Of course, this isn’t entirely fair. Germany is squeamish about security issues for good, solid, historical reasons. But honestly that is now besides the point. Newer historical trends are about to wash away everything that makes modern Germany modern Germany. Chancellor Angela Merkel is likely the last meaningful leader of a unified, peaceable, wealthy, democratic Germany. The question for the next decade is, in what order with those adjectives break?
 
In contrast, in most ways that matter, France is the exception to everything that’s gone so hideously wrong in Europe.
 
France’s economy is statist – it defends its local markets from competitions both European and global. During the global Order this was a massive waste, but with the Order breaking down the French have the least distance to fall. France is the only European state not only boasting birth rates above replacement levels, but strongly so; it is the only EU state that can look forward to a meaningful consumer market both in terms of size and growth for decades to come.
 
France’s location at Europe’s western extremities means not only that France isn’t dependent upon anything the Russians or Turks control, but its proximity to North and West Africa even grant it a high degree of energy security. And with the Brits now gone from the EU, France is the only EU member boasting a military capable of independent, expeditionary action. It isn’t anywhere near enough to help Europe, but it roughly right-sized for the sorts of issues France will face.
 
While French voters are as fickle as their American counterparts, President Emmanuel Macron could well be the first leader of a post-European France. But regardless, he certainly will not be the last.
 
Need more? Disunited Nations publishers on March 3. Both France and Germany sport full, fat chapters about how they will – and won’t – fit into a future much messier than that of the past seven decades.


American Politics

I try to avoid US domestic politics in most of my work. In part because domestic politics are a loud and busy space, and it is easy to have your work get lost in the noise and rage. In part because – especially at the primary level – it is mostly fluff that doesn’t move the national needle. In part because Americans are wildly fickle in their views of political leaders and we’re just too early in the process for it to normally be worth my time. In part because I attempt to keep my personal views out of my work as a matter of course, and, as an American and a political independent, the sound and fury seems committed to drowning me. 

But mostly it is because US foreign policy since World War II has been nearly lock-step bipartisan. The Americans crafted a global Order to fight the Soviets, and preventing global thermonuclear war tends to encourage unity.

This election cycle is different. 

For one, US foreign policy is – for the first time in the life of everyone aged 75 or under – in flux. The Soviet Union collapsed in the early 1990s and America’s long-lived, Order-driven, bipartisan foreign policy overnight became a lot less relevant. America’s subsequent presidents never updated the policy for the post-Cold War age and global structures fell into disrepair. Now, a generation on, it is the American policy of forcing global stability which is collapsing, and it is taking the entire global Order with it. For the first time in decades, an American debate over foreign policy isn’t simply relevant and necessary, it is inevitable. Simply put, for the first time in most of our lives, foreign policy is political.

For two, the United States is utterly incapable at the institutional or national level of having that debate. For the moment, America’s two-party system is off-line. Every generation or two the factions that make up America’s parties shuffle around. Some get stronger. Some get weaker. Some get exiled into the wilderness where they become swing voters. Some factions of swing voters come in from the wilderness and join a party. In previous periods of American political reincarnation the populists of Trumpian extraction used to be Democrats, while African Americans used to be Republicans. 

From one point of view this is normal and even healthy. Technology and social mores and economic patterns and security trends all shift with time, and American politics evolve with them – in ways both substantial and unpredictable. 

But from another point of view this transition is anything but normal or healthy. While this rejiggering is in progress, the Americans effectively lack functional parties which means the capacity of the US to internally discuss issues of import more or less collapses. That’s triply true for topics – like foreign policy – for which the average American citizen lacks day-to-day exposure. During periods such as this, what passes as foreign policy comes down to the personal charisma, connections and diplomatic skill of the president. Last time around that was one of the American greats: FDR. This time around it has been a pair of men who are somewhat less…great: Barack Obama and Donald Trump.

So with that disclosure and backdrop, let’s dive in:

Over this past weekend the Americans held their third pre-contest for who will get the right to run on the Democratic ticket in November’s presidential elections versus Donald Trump. 

Now I have (somewhat strong) opinions about all six of the remaining major candidates, but let me sum the relevant bits in as nonpartisan language as I can manage. (Remember, I’m an independent. I’m an equal opportunity bubble-popper.)

  • Former Vice President Joe Biden continues to underperform. The leader in national polls should not be doing so badly. His rankings so far in the primaries are fifth, fourth and a very distant second. Biden’s debate performances have been nothing short of awful and IMO he not going to make it, particularly in an environment where the party radicals are the ones who show up to primaries and caucuses.
  • Mayor Pete Buttigieg is an interesting character who is likely to do well…in 2032 and beyond. He’s just too young and too inexperienced and isn’t nearly radical enough to attract the sorts of people who actually show up to these primary votes.
  • Senator Amy Klobuchar is another moderate attempting to come from behind, but ultimately she is competing with Biden and Buttigieg for the same limited pool of votes.
  • Senators Bernie Sanders and Elizabeth Warren are utterly, hideously, hilariously unelectable in a general election. Sanders isn’t even a Democrat. He only fills out the paperwork to say-so when he’s running for president. It isn’t simply that the pair espouse policies that most Democrats (to say nothing of independents or Republicans) are uncomfortable with. Warren made the mistake of issuing dozens of policy papers in which her apparent non-command of math was made eminently obvious. Sanders never pretended that his policies are bound by the laws of math. (This is the guy who turned what he joked was his honeymoon to the Soviet Union during the Cold War into an anti-US propaganda piece.) But since their politics are the sort that appeal to the sorts of people who show up for primaries, both continue to do well in the polls. Expect one to endorse the other in time (likely Warren backing Sanders) or even a joint ticket.
  • Billionaire former New York City Mayor Michael Bloomberg spent more on advertising in the past few weeks than all other presidential hopefuls have on all media markets for the past year. A candidate debate last week was his first appearance in the mix of things. Bloomberg didn’t exactly shine, but since he wasn’t actually on the ballot in Nevada we don’t have any reasonable data to tell us how well (or badly) he is doing nationwide. His latest advertising campaign involves anti-Trump billboards scattered throughout Trump Country saying things like “Trump eats burnt steak (Mike Bloomberg likes his medium-rare)” or “Trump cheats at golf (Mike Bloomberg knows this from playing golf with Donald Trump)”. While the watch-it-all-burn part of me thoroughly enjoys this rhetorical billionaire slap-fight, the key takeaway is not only does Bloomberg have a functionally unlimited budget for the race, but he’s already positioning himself as running against Trump rather than other Democrats.

With Nevada in the rear-view mirror, I feel reasonably confident to make a squishy forecast. 

I expect this to go one of two directions, neither of which are good for the mainline Democrats. Both scenarios hinge on Super Tuesday. On March 3, Alabama, Arkansas, California, Colorado, Maine, Massachusetts, Minnesota, North Carolina, Oklahoma, Tennessee, Texas, Utah, Vermont, and Virginia hold simultaneous electoral contests. That’s our pivot.

In scenario 1, the centrists align to prevent a Sanders from gaining the nomination.
 
This scenario may well be a long shot. Klobuchar continually demonstrates her utter disdain for Buttigieg despite their ideological similarities. Joe Biden repeatedly showcases he is no longer capable, but refuses to step aside. You have to be an egomaniac to run for president, but the degree of disunity among what American independents have taken to calling the “sane” Democratic candidates is striking. Asking them to pull together in a touch over a week is a tall order.
 
But let’s assume the moderates agree to pool resources or even run some sort of joint ticket. They will face off against Bernie Sanders, and when we reach the party convention in July, we’ll all live through a rehash of the 2016 conventions when Sanders faced off against moderate Democrats…and lost.
 
But this time it’s different. No matter how intriguing you find the concept of a President Amy or Pete, they lack the force-of-nature and political-machine qualities of Hilary Clinton. More likeable? Certainly. More electable? Perhaps. But absolutely less recognizable or powerful. They would cut far weaker figures in July.
 
Perhaps more importantly, this time Bernie isn’t alone. The general breakdown of the Democratic Party in recent years has spilled into Congress, with Sanders now having a plethora of high-visibility allies. Between a weaker moderate wing and a stronger radical wing, the party will split down the middle no matter who receives the nomination.
 
In scenario 2, Bloomberg does well enough on Super Tuesday to eclipse the Buttigieg/Klobuchar/Biden crowd and proceeds to the convention as one of the top two candidates. We then have a face-off between Sanders, who rallies against money in politics and institutional interests committed to “stealing” the nomination, and Bloomberg, who is only a contender because of the money he’s put into politics and who in essence is looking to steal the nomination. Once again, the party splits down the middle. This time with folks like Biden or Klobuchar or Buttigieg – you know, the “normal” people who we have all thought of as “Democrats” for the past several decades – barely part of the conversation.
 
In either scenario, either Sanders loses the nomination and attempts to sink the party, or Sanders wins the nomination and political independents (and a not insignificant number of moderate Democrats) hold their noses and vote for Trump (assuming they show up at the ballot box at all).
 
The point is not that Trump is the odds-on favorite to win the election (although if I were a betting man, that’s what I’d put my money on). The point is that this primary process is the end of the Democratic Party as we know it. How long will it take to reform with a new set of factional alliances? History suggests 8-12 years.
 
For those of you reading this who consider yourself Republicans, curb your enthusiasm. Your party died over three years ago with the nomination of Donald Trump, a then-candidate who considered three of the core Republican factions to be ideological foes: fiscal conservatives, national security conservatives and business conservatives. If you consider yourself a member of one of those sub-groups, your party is gone – reduced to being a sort of personal vehicle for the sitting president. I’d argue the most significant outcome of the 2018 mid-term elections was those factions’ near-wholesale ejection from the House of Representatives and their replacement with TeamTrump members.
 
Both parties are now nonfunctional. The Democrats are shattering along jagged, ideological lines. The Republicans have been hijacked by their equivalent of Bernie Sanders. We’ve been here before. We’ll get through it. It just takes a roughly decade-long transition period. The Democrats are starting now. The Republicans started three years ago.
 
But there’s something else going on right now that we’ve been through before that is likely to make this transition to our new normal even messier, and to have far more dangerous international implications.
 
It has to do with how we manage and transmit information.
 
Before the 1980s every American newspaper of even moderate size maintained a series of offices around the world to investigate, report and generate news as a matter of course. These foreign bureaus were the backbone of the American media presence globally.
 
But in the 1980s the fax machine, and in the 1990s email, gutted those bureaus. No longer were editing or copy-editing or research staff required on site. Instead a handful of reporters (still stationed at the bureaus) could simply communicate with the home office for support work.
 
Then came file attachments. Suddenly the bureaus were not needed at all and the reporters became de facto freelancers with no foreign office support. If you had a dial-up modem, you were the bureau.
 
Then came algorithms and the Internet. At home such advances jacked up productivity, and so necessitated fewer staff to handle tasks like editing. Fewer people by default meant a poorer collective memory which both made for thinner stories and less capacity to call “bullshit” on bad or inaccurate ideas. Abroad such technologies started scraping foreign news stories from foreign sites directly; stringers went away.
 
The new face of media is one of fewer and fewer bureaus with fewer and fewer staff at higher and higher cost. Not exactly a recipe for deep, quality-driven, context-heavy, investigative work. Newer algorithms and early-AI are now even writing a few stories here and there, slimming down the already rail-thin institutions that remain. From 1975 to 1995 network coverage of foreign news fell by two-thirds. Since then it has more or less fallen off a cliff.
 
And there’s the not-so-minor issue of time. Magazines had a production cycle of a week or more. Newspapers a day or more. The 6-o-clock news at least a day. There was time to peer under rocks and tease out details. Online media publishes the heartbeat the quick-take is completed, and no one reads the retractions (in part because no one can find them).
 
If there are few to no employees living abroad, and if computers are doing the heavy lifting, and if there is no context or institutionalized knowledge, then most of what remains is opinion. Shrill, screamed, uninformed, opinion. Add in social media and much of our information feeds today are distilled with a hatchet down to a Facebook post or something that can be transmitted in fewer than 289 characters.
 
It is nearly blasé to now say that social media has become a problem in American politics. By reducing the cost of not simply contributing to, but initiating, a political conversation to zero, we are now subject to an onslaught of voices ranging from the crazy cousin we all avoid to Russian propaganda as a matter of course. This is wretched for institutional parties who can no longer control fundraising and messaging. This is fantastic for folks in the political wilderness who now face few barriers to entry (e.g. Donald Trump and Bernie Sanders).
 
This isn’t an American phenomenon, but is instead global. Arguably the United Kingdom’s BBC has gone furthest down this road and is now a pitiful shell of its former glory. Canada’s CBC isn’t far behind and IMO ranks slightly below the American majors in terms of (lack of) quality. France24 is probably the Western institution that has fought off these trends most effectively, although even there the drop in excellence is obvious. Of the global news services Al Jazeera is the company making the best effort at providing what we used to think of as good global reporting (which is hardly to say AJ has no biases).
 
Now, like I said, we’ve been here before.
 
The last time the world wrestled with a new technology that reduced the costs of information flow, it was the telegraph and telephone. Then, like now, we had no legal tools for regulating what people could and could not say in the public domain. Slander became omnipresent, particularly in politics. Congress was of questionable effectiveness, and ultimately it fell to the Supreme Court to force a nationwide standard for libel. Media became responsible for the accuracy of what they printed.
 
Something like that is inevitable for today’s social media too. We’ll get through this. The question is, how long will that take? And, what will we break between here and there?
 
Last time, the Supreme Court didn’t act until it became clear Congress wouldn’t: 1964. I have some confidence it will be quicker this time around because the holes in our system are so obvious and what’s left of both parties agree on the core issue (even if they define the problem differently). Not to mention faster information flow works on the Supreme Court just as effectively as it does on the rest of us.
 
As to breakage, I’m far more concerned. The last time around the shift from road to rail reduced travel times by an order of magnitude while the telegraph and telephone enabled immediate communication. Journalists were able to report in near real time, putting a premium on sensationalism. Journalists of the yellow sort simply made stuff up. One of those fabrications charged the Spanish with blowing up the USS Maine, which led directly to the United States declaring war on the Spanish Empire.
 
Back then, the United States had a functional political system, was a military laggard in an imperial world, and really, seriously cared about international blowback from its actions. Today, the Americans’ foreign policy is a one-man show, its navy is more powerful than everyone else’s combined, the world is dependent upon the American security position, and Americans lack the institutional capacity both in politics and the media to even have basic awareness about the world.
 
This could well be imminent. This worries me. Greatly.
 
For a look at what is possible and probable with US foreign policy in the next two decades or so, I refer you to something else that is imminent: the release of my new book – Disunited Nations: The Scramble for Power in an Ungoverned World. I’ve got a whole chapter for you on how the Americans’ political rewiring collides with a global collapse to make for something fundamentally new.
 
Disunited’s release is on, heh, Super Tuesday.


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Where in the World: The Turner Headwall and…Walls

As long as I’m slaying sacred cows, let’s make sure I don’t miss anything: the border wall has been the biggest boon of the last 50 years to illegal migrants, COVID has made large-scale immigration an economic necessity, and Trump/Biden policies towards immigration are one of the three largest sources of inflation today.

Yeah, that should piss some people off.


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[mk_button dimension=”outline” corner_style=”rounded” size=”large” letter_spacing=”1″ url=”https://zeihan.com/purchase-the-accidental-superpower/” align=”center” fullwidth=”true” margin_top=”25″ margin_bottom=”25″ outline_skin=”custom” outline_active_color=”#ef5c31″ outline_active_text_color=”#ef5c31″ outline_hover_bg_color=”#8ef5c31″ outline_hover_color=”#ffffff”]THE ACCIDENTAL SUPERPOWER[/mk_button]

[mk_button dimension=”outline” corner_style=”rounded” size=”large” letter_spacing=”1″ url=”https://zeihan.com/purchase-the-absent-superpower/” align=”center” fullwidth=”true” margin_top=”25″ margin_bottom=”25″ outline_skin=”custom” outline_active_color=”#ef5c31″ outline_active_text_color=”#ef5c31″ outline_hover_bg_color=”#ef5c31″ outline_hover_color=”#ffffff”]THE ABSENT SUPERPOWER[/mk_button]

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Having difficulty keeping up with the chaotic and quickly-changing landscape of Russia sanctions and commodities markets or inflation?

We have been offering a series of in-depth presentations on various industries. 

So far, we’ve tackled the challenges facing energy, agriculture, industrial materials and inflation. You can purchase access to the recordings of both of these webinars via the buttons below:

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Immigration at the End of the World

My fourth book, The End of the World Is Just the Beginning: Mapping the Collapse of Globalization is scheduled for release NEXT WEEK (!) on June 14. Immigrants and in-migration are always touchy topics. Allow me to present an excerpt from my upcoming book that is certain to make all Americans – and Mexicans – wince at least once.

In-migration to the United States hit a relative historical low in the 1970s—the decade in which America’s Boomers came of age. For Boomers—an overwhelmingly white demographic—their primary experience with interracial politics was the civil rights movement, a movement that involved people who were already here at a time when the Boomers were young and politically liberal.

In-migration then rose steadily until reaching a near-historical high (again, in relative terms) in the 2010s, at which point the Boomers were nearing retirement and in doing so becoming politically . . . stodgy. In each and every decade as the Boomers aged, the largest single immigrant group was always Mexican. In the minds of many Boomers, Mexicans have long been not simply the “other,” but the “other” that has arrived in ever-larger numbers. A big reason why so many Boomers have been so supportive of nativist politicians such as Donald Trump is that their feelings of shock at the pace of change in American society is not a collective hallucination. It is firmly backed up by reality. This is one piece of the kaleidoscope of why American politics has turned so sharply insular in the 2010s and early 2020s.

But regardless of what you think about Boomers or Mexicans or race or trade or assimilation or borders, there are a couple of thoughts to keep in mind:

First, Mexicans are already in the United States. Whether you’re concerned with what American culture feels like or what the labor market looks like, the great Mexican wave has not only come, it is over. Net migration of Mexicans to the United States peaked in the early 2000s and it has been negative for twelve of the thirteen years since 2008. Just as industrialization and urbanization pushed down birth rates in the developed world, the same process has begun in Mexico, just a few decades later. Today’s Mexican demographic structure suggests it will never again be a net large-scale contributor to American migration. Most of the big migrant flows into the United States since 2014 have instead been from the near-failed Central American states of Honduras, El Salvador, and Guatemala.

Second, even among the most nativist strains of American political thinking, room has been found for Mexicans. In just two years, none other than Donald Trump went from openly condemning Mexican migrants as rapists and “bad hombres” to embracing Mexico in trade and security deals that took bilateral relations to their friendliest and most productive in the history of both republics. Part and parcel of Trump’s renegotiation of the NAFTA accords were clauses that expressly aim to bring manufacturing back to North America. Not to the United States specifically, but to any signatory of the accords. Team Trump added those clauses with Mexico expressly in mind.

On the other side of the equation, Mexican-Americans are turning nativist. The demographic in the United States that consistently polls the most anti-migration is not white Americans, but instead (non-first-generation) Mexican-Americans. They want family reunification, but only for their own families. Never forget that anti-migrant, build-the-wall Donald Trump carried nearly every county on the southern border when running for reelection in 2020.


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Having difficulty keeping up with the chaotic and quickly-changing landscape of Russia sanctions and commodities markets or inflation?

We have been offering a series of in-depth presentations on various industries. 

So far, we’ve tackled the challenges facing energy, agriculture, industrial materials and inflation. You can purchase access to the recordings of both of these webinars via the buttons below:

[mk_button dimension=”outline” corner_style=”rounded” size=”large” letter_spacing=”1″ url=”https://zeihan-on-geopolitics.myshopify.com/products/webinar-inflation-navigating-the-new-normal” align=”center” fullwidth=”true” margin_top=”65″ margin_bottom=”25″ outline_skin=”custom” outline_active_color=”#ef5c31″ outline_active_text_color=”#ef5c31″ outline_hover_bg_color=”#ef5c31″ outline_hover_color=”#ffffff”]PURCHASE ACCESS FOR “INFLATION: NAVIGATING THE NEW NORMAL”[/mk_button]

[mk_button dimension=”outline” corner_style=”rounded” size=”large” letter_spacing=”1″ url=”https://zeihan-on-geopolitics.myshopify.com/products/webinar-the-ukraine-war-industrial-materials-edition” align=”center” fullwidth=”true” margin_top=”25″ margin_bottom=”25″ outline_skin=”custom” outline_active_color=”#ef5c31″ outline_active_text_color=”#ef5c31″ outline_hover_bg_color=”#ef5c31″ outline_hover_color=”#ffffff”]PURCHASE ACCESS FOR “THE UKRAINE WAR: INDUSTRIAL MATERIALS EDITION”[/mk_button]

[mk_button dimension=”outline” corner_style=”rounded” size=”large” letter_spacing=”1″ url=”https://zeihan-on-geopolitics.myshopify.com/products/webinar-the-ukraine-war-agriculture-edition” align=”center” fullwidth=”true” margin_top=”25″ margin_bottom=”25″ outline_skin=”custom” outline_active_color=”#ef5c31″ outline_active_text_color=”#ef5c31″ outline_hover_bg_color=”#ef5c31″ outline_hover_color=”#ffffff”]PURCHASE ACCESS FOR “THE UKRAINE WAR: AGRICULTURE EDITION”[/mk_button]

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We will continue to post our analysis and updates on this and other topics related to the Ukraine War. This newsletter and its affiliated videologues are, and always will be, free. New subscribers can sign up here.
 
Finally, a reminder:
 
Russia’s strategic shift from thunder runs to a civilian obliteration has already forced ten million Ukrainians from their homes, with nearly four million now living in limbo in foreign lands. All proceeds from all formats of all of our previous books are being donated to the Afya Foundation, a charity which provides medical assistance to refugees from the Ukraine War. The buttons below will direct you to our purchase pages where you can both find out a bit more about each book, as well as select purchase options ranging from e-services to your local bookstore.

[mk_button dimension=”outline” corner_style=”rounded” size=”large” letter_spacing=”1″ url=”https://smile.amazon.com/hz/wishlist/ls/1PRC3Y6QMPST8/ref=nav_wishlist_lists_2?sa-no-redirect=1″ align=”center” fullwidth=”true” margin_top=”25″ margin_bottom=”25″ outline_skin=”custom” outline_active_color=”#ef5c31″ outline_active_text_color=”#ef5c31″ outline_hover_bg_color=”#ef5c31″ outline_hover_color=”#ffffff”]CLICK HERE TO VIEW THE AFYA FOUNDATION’S AMAZON WISHLIST[/mk_button]

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[mk_button dimension=”outline” corner_style=”rounded” size=”large” letter_spacing=”1″ url=”https://zeihan.com/purchase-the-absent-superpower/” align=”center” fullwidth=”true” margin_top=”25″ margin_bottom=”25″ outline_skin=”custom” outline_active_color=”#ef5c31″ outline_active_text_color=”#ef5c31″ outline_hover_bg_color=”#ef5c31″ outline_hover_color=”#ffffff”]THE ABSENT SUPERPOWER[/mk_button]

[mk_button dimension=”outline” corner_style=”rounded” size=”large” letter_spacing=”1″ url=”https://zeihan.com/disunited-nations/” align=”center” fullwidth=”true” margin_top=”25″ margin_bottom=”25″ outline_skin=”custom” outline_active_color=”#ef5c31″ outline_active_text_color=”#ef5c31″ outline_hover_bg_color=”#ef5c31″ outline_hover_color=”#ffffff”]DISUNITED NATIONS[/mk_button]

Boomers, Mexicans, and Trucking

Demographics are at the core of what we do here at Zeihan on Geopolitics. More than just a count of population, demographic data–often expressed as a pyramid-shaped graph–can deliver a wealth of information about a society. Is the country in question rapidly aging? Are they going to experience a labor or tax revenue shortage, or a windfall? Coupled with other information, a firm grasp of a demographic profile can help you easily start to put together a country’s geopolitical reality. 

Here in the United States, our demographic realities have long been dominated by the Baby Boomers. The largest generation in American history, they have had an outsized impact on the rapid social and economic transformation of the American post-War era. And as the Boomers enter mass retirement, their exit from the labor force is going to have a similar impact on the American economy.

But these impacts won’t be felt equally across the board. Cultural and generational differences mean that in certain fields–such as the trades–American Boomers occupy an outsized percentage of jobs. Society pushed Gen X and millennials toward higher education and away from things like blue-collar work. The United States was able to lean on immigrant labor, chiefly from Mexico, to fill gaps. But it was still mainly Mexican Boomers coming to do the work.

With the Baby Boomers aging out of the labor pool en masse, and with immigrant flows from Mexico unlikely to ever reach their heyday of the late 1990s and early aughts, significant pressures on the US labor market are here to stay. One of the industries most impacted? Trucking. And the reverberations of that reality are being felt across the entire US supply chain.


If you enjoy our free newsletters, the team at Zeihan on Geopolitics asks you to consider donating to Feeding America.

The economic lockdowns in the wake of COVID-19 left many without jobs and additional tens of millions of people, including children, without reliable food. Feeding America works with food manufacturers and suppliers to provide meals for those in need and provides direct support to America’s food banks.

Food pantries are facing declining donations from grocery stores with stretched supply chains. At the same time, they are doing what they can to quickly scale their operations to meet demand. But they need donations – they need cash – to do so now.

Feeding America is a great way to help in difficult times.

The team at Zeihan on Geopolitics thanks you and hopes you continue to enjoy our work.

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