China Plays It Cool

Photo: Getty Images

China is the world economy’s elephant in the room. We can’t possibly ignore it, yet many try anyway. Admitting China’s influence forces us to admit the world is changing—and we all must change with it.

This year, China is in the headlines because President Trump wants better trade terms. That’s important, but it’s only one piece of a much larger Chinese story that has been unfolding slowly for decades. Periodically, I check in on the latest developments. Today, we’ll see where we are, with the help of my trusted sources.

One of the great pleasures of my life is reading Gavekal’s outstanding economic research. I can do this thanks only to a long friendship with the firm’s three founders: Charles Gave, Louis Gave, and Anatole Kaletsky. Otherwise, it’s available only to their clients, and the cost is beyond my normal research budget.

One thing I appreciate about the Gavekal analysts and writers is that they are all independent and free to disagree with each other. Even the founders Charles, Louis, and Anatole often differ significantly—both in public and private messages that I get to read. Frankly, that is often when I learn the most.

Last week, Arthur Kroeber of Gavekal Dragonomics sent around a fascinating presentation about US-China strategic rivalry. It broadly matches my own thinking, but also gave me some “a-ha” moments. This is how I learn, by the way. My mind is a big blender into which I toss info from multiple sources. It whirs and rearranges the ingredients into something new, such as the following thoughts on China. They’re a mix of me, Gavekal, and my many other China contacts (I must hat tip Leland Miller and the China Beige Book). I should point out that any wrong conclusions are my own and should not be blamed on my sources. I am perfectly capable of making my own mistakes, thank you very much…

The first point to recognize: Xi Jinping is firmly in charge. You probably heard about the constitutional amendment that makes him effectively president for life. It doesn’t mean Xi is invulnerable or can do whatever he wants. He has constraints, as all national leaders do. But he doesn’t have to worry about reelection, or rivals trying to shift the agenda, or getting congress to approve his policies and budgets. Xi sets the agenda. Everyone else follows it.

I pointed out about two years into Xi’s presidency that it was clear that he was the most important Chinese leader since Deng Xiaoping. That is no longer the case. He is the most important figure in modern Chinese history since Mao and possibly Sun Yat-sen. From my viewpoint, Mao was a disaster for the Chinese people. Millions died under his disastrous economic policies. Since Deng and subsequent Chinese leadership and continuing with Xi, there has been a remarkable turnaround.

Yes, much of China still lives in deep poverty, but the fact that it moved 250 million+ people from subsistence farming into urban middle-class lifestyles, in less than two generations, is an unprecedented economic miracle. The breathtaking picture at the top of this letter is of Shenzhen, whose population went from 30,000 in 1979 to now 10,000,000+. Sixteen Chinese cities have a population over ten million. These are staggering growth stories most Westerners have never heard. The US has only two metro areas of comparable size.

Say what you will, historians will look back 100 years from now and marvel. And Xi seems determined to make life better for those still in poverty.

Arthur pointed out another, less noticed constitutional change that may help. It extended party discipline down to local officials, for both what they do and what they might fail to do. This gives Beijing a more effective enforcement mechanism and should result in more consistent policies.

My first thought on this was that even more centralized control may not be such a wonderful thing for China. It hasn’t worked so well elsewhere. Arthur agrees China could face problems down the road, but for the next few years thinks the new measures will be a net positive. He expects 6.5% GDP growth this year, as does Beijing (which of course gets what it wants). Last year’s shadow banking crackdown has somewhat contained excess leverage, at least for now.

China’s rapidly growing debt, both private and state-sponsored, is going to be a problem at some point. Xi and the leadership are trying to head off the problem, but debt has its own reality. Increasingly easy access to credit makes it hard to control. Chinese “investors” load up on debt to invest in “sure things” only to find them not so sure.

For now, though, short-term stability gives Xi room to focus on long-term economic priorities, of which he has two: The “Made in China 2025” industrial policy and the “Belt and Road” infrastructure initiative. As we’ll see in a minute, both are much more than they seem.

Meanwhile, the US sees China as both partner and rival. Obviously the two economies are intertwined and depend on each other. President Trump observes, correctly, that China doesn’t always reciprocate the trading rights that the US and other governments extend.
China is really quite protectionist—far more so than the other “BRIC” countries, as measured on the OECD foreign direct investment restrictiveness index. Trump is right to press for better trade parity. When China can ship cars to the US for 2.5% tariff, and US cars must pay a 25% to go into China, something is out of balance. There are literally scores of examples like that. And for this, we let them into the WTO and gave China most-favored nation status? (More on that below.)

But at its heart, the US-China rivalry is not really a trade war. This has been unfolding for a long time. Trump’s tariff threats are only the latest move and won’t be the last.

Beijing has two big economic programs, neither of which it considers negotiable.
They are strategic priorities the rest of the world will have to face.

Made in China 2025 is a broad industrial policy with multiple goals:

  • Improve manufacturing productivity

  • Build up technology-intensive sectors

  • Gain 70% self-sufficiency in key materials and components

On the surface, there is really nothing wrong with this policy. Many nations have long done similar, including the United States. But let’s get beyond the surface.

The government, state-owned enterprises and private businesses are all giving Made in China 2025 truly massive funding. Research & development spending was US$232 billion in 2016 alone. Ominously, a new government commission, founded just last year, is overseeing the “integration” of this technology development with possible military use. And let’s make no mistake, this “funding,” whether equity, loans, or grants, ultimately comes from the state or at the urging of the state.

Note that last goal of 70% self-sufficiency in certain markets. Made in China 2025 is, by its nature, an anti-trade program. Favoring domestic producers necessarily disfavors importers. Other governments, including the US, do the same, of course, but rarely on this rather immense scale. So, it’s inevitably going to be a point of argument.

China’s Belt & Road Initiative looks like a giant infrastructure program, and it is, but that’s not all. It is Xi’s mercantilist version of the US-led postwar Marshall Program. Where we carved out leadership via institutions and trade agreements, while at the same time supplying much-needed money, China seeks to do the same by physically connecting itself with the Eurasian continent. I have said from the beginning that this may be one of Xi’s most profoundly disruptive and transformative policies of his career. There was some skepticism when it was first announced as the scope was so massive, but I think everyone is now a true believer. China is committing to putting its hard dollars into completing this project’s multi-decade visión.

As my friend George Friedman often says, China’s main strategic challenge is that the US controls the seas. Geography means China’s imports and exports must traverse coastal bottlenecks the US could easily close if it wished. That’s intolerable if your goal is to be a superpower, and that’s definitely what Xi wants.

One Belt, One Road is the answer. It will link the Eurasian land mass into a giant trading bloc with Europe at one end and China at the other. The project will open land routes the US cannot interdict, thereby letting China take what it feels is its rightful place of leadership. The scope is breathtaking, but Beijing is determined to make it happen. Again, I would not bet against Xi on this.

Notice all the smaller Asian countries that the One Road goes through. It will give you access to not only East Asia but Europe as well. China is building a “main pipeline” not unlike Eisenhower’s interstate highway system. And that means all those little countries will access that main road. Ultimately, China wants to pay for all the products it buys in Renminbi and have those small countries make it part of their central bank holdings. That is part of the process of becoming a reserve currency, which is something China covets. The same thing is true for the project’s ocean and seaport aspects.

Whatever your feelings about Chinese leadership, you have to admire a country that can undertake such a huge project that will take decades to fulfill. While Xi and his team may be starting it, it is unlikely anyone currently on top will still be on top in 30 years. That is Vision with a capital V.

This world Beijing envisions is incompatible with Washington’s priorities. Hence the present clash of titans. US leaders are figuring out China is not going to give them what they want. Why that surprises them, I’m not quite sure. China is ruled by the Communist Party. It’s different than Soviet communism or the various socialist groups in the West. It’s vastly different from Maoist communism. It looks like capitalism in some respects, but it is more about mercantilism and empire-building. This idea that China would slowly transition to American-style free enterprise was always fantasy. I think that’s now dawning on people.

That’s not to say we can’t do business with China, just as we do with Russia and other geopolitical opponents. We can and will continue—but it’s their country and we will do it on mutually agreed terms or not at all. Arthur Kroeber said in the Gavekal presentation we can either “co-exist or conflict.” I think that sums it up well. The problem is getting people on our side to accept it.

So, there is right now a grand struggle in Washington to redefine how we interact with China. Multiple wings are jockeying for position. For the moment, President Trump is the most important player. Despite some of his rhetoric, I don’t believe he is ideologically against trade. I think he just wants a US “win” and is flexible on what that means.

Trade ideologues do exist, though. Steve Bannon and Peter Navarro are two top examples, and Navarro still (unfortunately) has the president’s ear. They also want a “win” but have much different ideas on what it should look like. The US would be much the poorer if their vision won. Some of their ideas are complete non-starters to Beijing but, being ideologues, they are not inclined to compromise. Nor is China, so I don’t expect much movement. There are areas in which I believe that China will compromise (like auto tariffs, etc.), but becoming a US vassal state is not in the cards. And shouldn’t be.

Then you have national security hawks, who don’t mind doing business with China as long as we stay dominant in security matters. I think Defense Secretary James Mattis is in this group. He’d like China’s help in solving the North Korea problem and probably knows the US must give something in return. He advised caution on the recent steel and aluminum tariffs, for instance. The problem is where to stop. Doing business with China necessarily gives China access to Western technology, data, and capital. So, it’s very hard to have it both ways.

Finally, you have US companies. They see a huge market in China and they want access to it. Beijing is glad to welcome them, for the right price, which usually entails sharing software code and other intellectual property. They don’t like this, but most have made peace with it. We know this because we see them setting up operations in China. They’d like the US government to extricate them from that bargain but can’t say so too loudly. They’re in a tough spot.

There being no agreed-upon plan, the US side is more or less flailing against China, whose leadership is 100% unified because that is what Xi has dictated. This side has the president threatening tariffs, business allies like my friend Larry Kudlow saying everyone should calm down, Treasury Department and CFIUS trying to stop technology deals, the Pentagon quietly working with China to contain North Korea, and large businesses doing whatever it takes to stay on Beijing’s good side—all at the same time.

China looks at this mess, frankly, and sees its best strategy is to play it cool, try to look generous and wait. The longer we argue, the more time China has to acquire our technology and convert it to their own use. Combine that with their own research, which is progressing rapidly in certain segments (especially artificial intelligence!), and they have a plausible route to superiority in some areas, or at least parity.

I don’t believe we will see any sort of grand deal that sweeps away all this clutter. If Trump and Xi reach some agreement on tariffs, other issues will remain. Lately, China is “magnanimously” offering to allow foreign companies more ownership of local assets. That sounds great, but it is not clear to me that Beijing and US businesses share the same concept of “ownership.” As I said, they’re communists, autocrats, and even more importantly, mercantilists.

And even if you solve all that, the much larger geopolitical rivalry remains. It would be nice to think that China can be our trans-pacific ally like the United Kingdom is in the Atlantic. I don’t see that happening. We don’t have the same kind of cultural and geographic ties with China.

The current situation vis-à-vis China and the US could go many directions. In the worst case, we could slide into a kind of economic Cold War with China, with both sides deploying aggressively protectionist policies. I am afraid that would spark a global recession. I am not being hyperbolic. It is a dark alley we do not want to walk into.

More optimistically, Beijing might grant enough concessions to satisfy Trump and buy a few more years of relative harmony. But as I said, the underlying rivalry will come back unless Xi makes some massive changes he shows no signs of even considering.

So, I think the likely near-term outlook is lots of noise with only mild tariffs or other restrictions. A real trade war serves no one’s interest. But people make mistakes and do irrational things, so someone could miscalculate. 

Let us hope that wiser and cooler heads prevail.

As I travel and talk to old and new friends, I hear many fascinating stories from their own backgrounds. Sometimes I can connect them with other stories from different people, and they become even more fascinating. Here’s one that’s been in my head awhile and is now relevant. I can’t confirm all this, but it’s so interesting I wanted to share. It comes from sources I’ve found highly credible and they were familiar with the situation. Maybe some of you will have further insight.

Back in the 1990s, Robert Rubin, a Secretary of the Treasury under Bill Clinton, was negotiating the terms under which China would be allowed into the World Trade Organization. My sources say he was basically asking for many of the exact same things Trump wants now. Who knew that Trump and Rubin were philosophically on the same trade page?

But in 1998, in the middle of the Monica Lewinsky scandal, Clinton wanted a “win.” (Not unlike the current president.) And Rubin wasn’t delivering, holding firm on his demands for market access and guarantees on intellectual property, etc. Clinton then took the Chinese negotiations away from Rubin and gave it to Secretary of State Madeleine Albright with the instructions to get it done.

Not being a trade expert, Albright didn’t understand the underlying issues. The Chinese recognized she was playing a weak hand and held firm. To make a long story short, my sources say she effectively caved. Clinton got his “win” and we got stuck with a lousy trade deal.

When Trump alleges that we got snookered in a bad trade deal, he is correct—although I wonder if he understands the history. Maybe somebody gave him the background, but it never came out in any of his speeches. That WTO access, which finally happened in 2001, let China begin capturing markets through legal means and access US intellectual property without paying for it. My own personal beef with Chinese trade issues is the theft of intellectual property and the lack of property rights. If they want to sell us underpriced T-shirts and other products, then the US consumer benefits. When they do it with what is essentially US intellectual property, US businesses lose. And that means jobs. The US is not the only country in the developed world complaining about that very problem. It is a common theme in the industrialized West.

Does this make a difference now? Probably not. Neither Xi nor Trump was involved back then. But it gets to the rivalry we discussed above. Is it possible for both the US and China to stay in an organization like WTO? Trump seems to doubt it, as he’s threatened to withdraw from WTO. We may someday look back at this period of a single body governing international trade as an aberration—a nice dream that was never realistic. If so, prepare for some big changes.
Orange County, and Raleigh

I swear, at the beginning of March, my travel schedule looked light for the next two months.
But then opportunities opened up, necessity happens and like Tony Dorsett or Walter Payton, I saw a hole in the line and had to run toward daylight. In my case, that means going to the airport and getting on yet another plane to another opportunity.

I fly to Fort Lauderdale Thursday afternoon, speak on Friday morning at the Pivotal Financial Summit, then fly back to Dallas, come home, switch bags, go back to DFW to fly to London and on to Iceland, where I have been invited at the last minute to a Bitcoin/cryptocurrency summit. I have been somewhat skeptical of the whole Bitcoin phenomenon, but I have so many savvy macro investor and technology friends jumping in with both feet. When long-term successful multi-billion-dollar money managers begin to change their strategies, I have to pay attention. And hopefully get to see Iceland by helicopter. All in all, not a bad way to spend the weekend.

I fly on Monday to New York where I will spend three days meeting with old and new friends, maybe arrange a little last-minute media, and then come back to Dallas. I will be in Chicago the third week of May, then fly to Orange County to speak to the CFA Society on the 17th and fly back home. The next week I go to speak at the spring Investment Institute Forum in Raleigh, North Carolina. At some point, I have to get to Cleveland. I swear right now, my June and July calendars look completely open. We will see what daylight opens up in the meantime.

The next few days finds me a bachelor as Shane has gone to a series of conferences in North Carolina. I think her strategy is to stay away long enough to remind me why I don’t like being a bachelor. My bet is that she will be successful.

But I am going to take Sunday afternoon to spend with my boys and grandsons, have an outdoor lunch at something called the Truck Yard in Dallas, and then go see The Black Panther. I have not seen it and am glad it is still on the big screen. I grew up reading Marvel comics and am still a fan. I’m really looking forward to the new Avengers movie as well. Being immersed in economics is enough reality for me, and I like fantasy when I go to the movies. Although I will say that The Darkest Hour, the story about Winston Churchill at the beginning of World War II, was utterly fascinating and I highly recommend it.

It is time to hit the send button. I’m trying to move my writing days to Thursday rather than Friday—which over the last few years has slipped into Saturday and sometimes Sunday—and get the letter to you early Saturday. And do it in fewer words and pages, as I did for the first ten years. So, I’m basically going old school, which I think (and hope!) everybody will appreciate.

You have a great week. Please note that my staff is now sending me a weekly summary of all the emails I get so that I can read it in one fell swoop. I really do like your comments and ideas, which all go into my blender.

Your worried about protectionism and trade wars everywhere analyst,

John Mauldin

Cool Germany

Germany is becoming more open and diverse

With the right leadership, it could be a model for the West

SINCE the fall of the Berlin Wall the Ampelmännchen, the jaunty, behatted “little traffic-light man” of communist East Germany, has escaped his dictatorial roots to become a kooky icon of Germany’s trendy capital. Tourists pose with life-size models and snap up memorabilia in souvenir shops. The Ampelmännchen’s quirky coolness is an increasingly apt symbol of the country as well as its capital. As our special report in this issue describes, Germany is entering a new era. It is becoming more diverse, open, informal and hip.

At first blush that seems a preposterous suggestion. The Germany of international newspaper headlines is a country with anxious citizens and stagnant politics. Angela Merkel is Europe’s longest-standing political leader, a woman who epitomises traditional German caution. Last September’s election saw a surge in support for the far-right Alternative for Germany (AfD); it took Mrs Merkel six months to cobble together a lacklustre new coalition. To conservative foreign observers Germany is a byword for a reckless refugee policy; to others it is the country that bullied indebted southern Europeans.

But take the long view, and the Ampelmännchen captures how Germany is changing. Post-war German history has moved in cycles of about 25 years. First came the era of reconstruction.

Then, from the late 1960s, the federal republic began to reckon frankly with its war guilt. In its latest phase, from the 1990s, Germany has reunified, become a normal country again and shed some of the fetters of its past. Now the wheels of history are turning once more. The Merkel era is drawing to a close. Many of the country’s defining traits—its ethnic and cultural homogeneity, conformist and conservative society, and unwillingness to punch its weight in international diplomacy—are suddenly in flux.

Promising signals

The biggest change comes from Mrs Merkel’s “open door” policy towards refugees, which brought in 1.2m new migrants in 2015-16. This has confirmed once-homogeneous Germany’s transformation into a melting-pot. A more inclusive identity is emerging—a country that waited until 2000 to extend citizenship to many of those without native ancestors increasingly defines nationality in civic rather than ethnic terms. A patriarchal culture has become more gender-balanced: the share of working-age women with jobs has risen from 58% to 70% in the past 15 years. Germans are divorcing more and marrying less. Even the Mittelstand’s firms are adopting disruptive technologies such as artificial intelligence. And having undertaken no foreign military operations in the half-century to 1999, Germany has sent troops to Mali, Afghanistan and Lithuania.

This is shaking up a society that has long prized stability, opening cultural divides between those who embrace the new Germany and those who hanker for the familiar; between urban and rural voters; between young and old. The emergence of a new generation of more combative lawmakers, the AfD’s arrival in the Bundestag and the battle over the future direction of Mrs Merkel’s Christian Democrats are all stoking debates about the country’s identity.

The outcome will determine the future of Europe’s biggest economy. It will also matter beyond Germany’s borders. The country is grappling with the rise of a more plural society at the same time as many others are doing so. Germans are temperamentally moderate and, thanks to their history, particularly sensitive to the dangers of demagoguery. How they navigate their country’s transition could set an example for others.

At home, the new Germany has shed its post-reunification economic woes and is booming, but it is also ageing fast; the largest age group is the 50-to-54s. Preserving its prosperity requires forward-looking reform. Internet access is patchy and slow; roads and classrooms can be surprisingly shabby; a tangle of red tape restricts service industries; and under Mrs Merkel the retirement age has fallen for some and will soon be lower than in France. The flow of newcomers to Germany can help cushion the demographic crunch, especially if immigration procedures are streamlined, education is improved to break the tight link between background and results, and the strictly regulated German professions are made more accessible.

Abroad, the new Germany could also become a different sort of power. It remains frustratingly prone to a small-country outlook: reluctant to spend enough on defence, to confront the imbalances caused by its trade surplus and to accept more burden-sharing in the euro zone. Yet there are signs of movement. Under pressure from France’s president, Emmanuel Macron, it will reluctantly accept some moves towards euro-zone integration, albeit tentative and insufficient ones. Germany’s vulnerability to trade disruption makes it a natural broker in an age of tariff wars. Last month its new economy minister helped to persuade the White House to suspend planned steel and aluminium duties on the EU and other allies.

Meanwhile, the refugee crisis is expanding German horizons. At its peak Mrs Merkel requested a map shaded to highlight Germany’s true borders: North Africa, Ukraine and Turkey. Then at last year’s G20 summit in Hamburg the chancellor advanced a “Compact with Africa” to accelerate development and improve governance on the continent. Though overhyped and underfunded, it gives a hint of the convening and stabilising role a normalised Germany could yet play.

Green for go

All of which makes the character of Mrs Merkel’s successor pivotal. Her uncontentious, reactive style has suited her times. But a new Germany requires a different type of chancellor: proactive at home, ambitious abroad and with the skills to persuade German voters of the case for this ambition.

With the right leadership, there is little doubt about the country’s capability. In its latest historical phase alone it has absorbed the sclerotic, ex-communist east, overcome economic crisis in the early 2000s, taken in over 1m poor, often desperate immigrants—and coped. Now, as in the past, it would be a mistake to underestimate Germany. Like the Ampelmännchen, it has a knack for reinvention.

Ampelmann imagery courtesy of AMPELMANN GmbH

Trump, Syria, and the Threat of Region-Wide War

Fawaz A. Gerges

BEIRUT – The die, it seems, is cast for a rapid end to the United States mission in Syria – and, with it, the chances of a peaceful and sustainable resolution to that country’s brutal seven-year civil war. The chemical attack allegedly carried out last week by President Bashar al-Assad’s forces in Douma, the last rebel-held town in the Eastern Ghouta region, shows just how dangerous that prospect is for Syria and the world.

US President Donald Trump’s bluster in the wake of the chemical attack exposes the incoherence and contradictions of his approach, as well as his lack of any real strategy in Syria. Ordering an attack or two against Assad’s forces, as he might do, would neither alter the balance of power there, nor improve Trump’s position in the war-torn country, let alone the Middle East in general.

To be sure, Trump’s top military advisers have persuaded him to keep in place the 2,000 military personnel currently stationed in Syria. But he has already limited America’s objectives there to eliminating the small remaining Islamic State (ISIS) presence – an effort that should take about six months.

In constraining America’s commitment, Trump has forfeited the opportunity to help shape Syria’s future, reinforcing the widespread perception – which has taken hold among friends and foes alike – that US global leadership is in retreat. He has also disregarded the country’s ongoing humanitarian crisis, the worst since World War II.

Ironically, this narrow approach also undermines the effort to achieve Trump’s sole objective, as a lasting defeat of ISIS and other jihadists will demand a credible political transition that permanently ends the civil war. Such a transition will be possible only through diplomatic engagement by actors with stakes in Syria.

With Trump’s withdrawal implying that the US and its allies have lost the war, Assad already feels emboldened to forge ahead – with Russian and Iranian support – with his plan to recapture the remaining rebel-held territories at all costs. After establishing “facts on the ground,” Assad and his allies would be able to present the world with a fait accompli: Assad remains in power, without making any real concessions to the opposition.
Local and regional actors that placed their faith in America’s commitments will pay a bloody price. In particular, the Kurds – America’s most reliable and effective ally in the fight against ISIS – are likely to be left out in the cold, despite official US assurances about security arrangements after the US withdrawal.

Already, Kurds have criticized the Trump administration for sacrificing them at the altar of America’s strategic relations with Turkey. The US turned a blind eye to Turkey’s recent invasion and occupation of the Kurdish-held city of Afrin in northwest Syria, which led to the slaughter of more than 1,000 Kurds, including scores of civilians.

With a US withdrawal, the Kurds may feel compelled to ally with Assad for protection. Hundreds of Kurdish fighters have already deserted the fight against ISIS in northeast Syria, journeying to Afrin to resist the joint assault by Turkey and a splinter group of Syrian rebels. Some young Kurds have begun to join Assad’s paramilitary units to avenge the loss of Afrin.

But it will be a difficult battle, as America’s departure is likely to strengthen Turkey’s hand further. After all, without the US, the other main foreign powers in the Syrian conflict – Turkey, Russia, and Iran – will be able to consolidate their spheres of influence and divide the spoils of the post-war reconstruction among themselves. While their specific interests may differ, all three countries share a vision of a “soft” partition of Syria that reduces Assad and the rebels to mere proxies.

Russia and Iran will be the two biggest winners. Russian President Vladimir Putin is the kingmaker whose timely military intervention saved Assad’s regime from defeat and turned the war’s tide in his favor. Whereas the US is almost nowhere to be seen in Syria, Russia is everywhere, constantly rearranging the pieces on the conflict’s chessboard.

Russia’s coordination with all major regional powers – including Turkey, a NATO member – attests to the dynamism (and cynicism) of the Kremlin’s foreign policy. As the US pulls up stakes in Syria, Turkey’s military and economic ties to Russia will only deepen.

Like Russia, Iran has invested plenty of blood and treasure to save Assad’s regime – and reaped handsome returns. Iran is now the most influential regional power in Syria, as it is in Iraq and Lebanon. But the rush to fill the vacuum left by the US might provide the spark that ignites a region-wide war. There are legitimate concerns that Israel might use the withdrawal of US troops as a pretext to intensify its attacks on Iran and Hezbollah in Syria – a decision that could escalate into all-out regional conflict, one that draws in the US, Iraq, and Saudi Arabia, Iran’s main rival for regional hegemony.

Even leaving aside Trump’s hostility to the 2015 Iran nuclear agreement – which adds yet another source of risk to an already perilous situation – there is now a real and present danger that Syria will become the site of a conflagration even more destructive than the one raging there since 2011.

Fawaz A. Gerges, Professor of International Relations at the London School of Economics and Political Science, is the author of ISIS: A History and Making the Arab World: Nasser, Qutb and the Clash That Shaped the Middle East.

Chip Makers Are Better off Without Crypto Miners

Losing cryptocurrency mining sales allows Nvidia, AMD to focus on more solid opportunities

By Dan Gallagher

Nvidia’s GeForce GTX 1070 graphic processing units sit stacked inside a 'mining rig' computer, used to mine the ethereum cryptocurrency. Photo: Akos Stiller/Bloomberg News 

Miners of cryptocurrencies may soon stop buying chips from Nvidia Corp. NVDA -1.59%▲ and Advanced Micro Devices Inc.. But some businesses are more trouble than they are worth.

The graphics processors that both companies make are designed primarily for rendering videogames, as well as providing artificial intelligence capabilities to data centers and automobiles. But they’ve also proven popular for processing cryptocurrency transactions—an activity otherwise known as mining. The rocketing value of those currencies over the past year has turned such mining into a highly profitable activity. That in turn has sparked a rush on GPU chip cards that boosted sales for Nvidia and AMD both last year as well as the recently ended quarter. 
But that looks likely end soon. A Chinese venture-backed company called Bitmain announced a new chip last week specifically designed for mining ethereum, which is the most popular cryptocurrency mined with GPUs. Several analysts believe that system, which ships in July, is likely to pick up the bulk of demand from cryptocurrency miners due to superior technical performance for that task.


Revenue per year

Source: S&P Capital IQ, FactSet
Note: *projections **Nvidia's fiscal year ends in January

Concerns about the impact of cryptocurrency mining are one of the factors that caused sharp declines in shares of both Nvidia and AMD in the past month. The latter in particular has a smaller revenue base that was likely inflated more by crypto demand. Christopher Rolland of Susquehanna estimates that ethereum-related chip sales accounted for about one-quarter of AMD’s revenue in the first quarter. The expected loss of that business led him to downgrade the chip maker to the equivalent of a sell rating last month.

Most analysts believe the impact of crypto to be much smaller for Nvidia, amounting to single-digit percent of revenue for the company’s fiscal first quarter ending later this month. The company also has a much more robust data center business that is highly prized by investors. And its core gaming business could also be helped by new products expected later this year, as well as pent-up demand from gamers stymied by the recent GPU shortage. Morgan Stanley analyst Joseph Moore cited both in upgrading Nvidia to a buy rating earlier this week, adding that he expects crypto demand to “fall towards zero” by the end of July.

Both companies, it should be noted, have been wisely cautious about banking on crypto demand. The volatile nature of those currencies as well as potential technical changes in how those currencies are mined have long made crypto a dicey prospect for long-term bets. Nvidia and AMD have much less cryptic opportunities to chase.

Signs of a Political Armageddon

By Charles M. Blow

CreditDoug Mills/The New York Times

Donald Trump can feel the breath on the back of his neck. Aggresive federal investigators — in the Russia case and a separate inquiry of his lawyer’s behavior related to women who have alleged consensual sexual relationships with Trump — are taking ever more bold actions.

They are getting closer to knowing things that I am sure Trump thought no one but the parties involved would ever know.

This has frightened and enraged the president.

There are reports that Trump is thinking of ways to thwart or constrict the Robert Mueller investigation, including the possibility of firing and replacing Deputy Attorney General Rod Rosenstein, to whom Mueller reports.

As The New York Times has reported, Trump has at least twice sought to fire Mueller.

The first time was last June “amid the first wave of news media reports that Mr. Mueller was examining a possible obstruction case,” and the most recent was in December when Trump became “furious” over “reports that the subpoenas were for obtaining information about his business dealings with Deutsche Bank.” Those reports about the subpoenas were not correct and Trump backed down.

But there is a pattern here: When the investigation verges into Trump’s areas of vulnerability, he seeks to squash it.

This is not the behavior of an innocent man. This is not the behavior of a “normal” president.

There is no doubt in my mind that a strong case could be made that Trump has consistently sought to obstruct justice. That is as clear as creek water.

Furthermore, no president should be made nervous about his or her financial dealings being made public. Indeed, almost every major party nominee for president in the last 40 years has released his or her tax returns. Trump, however, has refused.

There is clearly something there that he doesn’t want America to know, something damning and catastrophic. He will do anything to keep it from view, including bringing the government to its knees.

And now investigators have raided the room and office of his longtime personal attorney Michael Cohen and will have access to the verboten.

Trump’s worlds may well be about to collide and he will move heaven and earth to prevent that.

There were always things that Trump bragged about, true, but even there he often did so with no proof. They were things that he thought grew his legend as a tycoon, cad and pop culture icon.

The truth always seemed far less glamorous and far dodgier.

That truth, the part that he has kept shoved into the shadows, is his vulnerability. Trump clearly views full knowledge of whatever that truth is as mortally injurious to his own sense of repute and renown.

If Trump has lied to the people who still support him about the most central parts of his character, not just months or years ago, but on a consistent basis, and if those lies can be proved by actual documentary evidence of some sort, the whole house of cards crumbles.

Trump seemed to have great confidence that he could keep the personal separate from the political, not fully considering that the whole life of a president — particularly if that person may somehow have skirted the law or flagrantly flouted it — must be part of the public record and any aberrant activity must eventually be held to account.

Trump’s options for keeping his secrets concealed are shrinking by the day. Therefore, Jeff Sessions is not safe. Rosenstein is not safe. Mueller is not safe. The rule of law is not safe. Our democracy is not safe.

What happens from here will truly test this country. It will test the Constitution, our protocols and our conventions.

Maybe the founders and the hundreds of years of politicians following them should have predicted that a person like Trump could ascend to the presidency, but they didn’t, so they didn’t build in sufficient constraints and strictures.

Trump has spent a lifetime probing the regulations for weaknesses, testing the theory that under sufficient weight any bureaucracy can be broken.

He will not hesitate to apply what he has learned to his present predicament. If America must be damaged for him to escape unscathed, he will take that bargain without batting an eye.

And it is by no means clear that his cowardly Republican accomplices in Congress would do anything to prevent or punish him.

The country is in a perilous position. It is in the hands and under the thumb of a man now motivated by a primal survival instinct, a consuming egotism and a petrifying fear of ignominy.

At this point, nothing is beyond the possible, no matter how ill advised and how ultimately destructive. In Trump’s mind, I can only imagine, he has settled on a strategy in the case of his own administration’s Armageddon: If he’s going down, the whole system is going down with him.

China’s navy to conduct live-fire drills in Taiwan Strait

Naval exercise billed as largest ever underscores rising tension in western Pacific

Charles Clover in Beijing and Edward White in Hong Kong

Xi Jinping, China's president, makes a speech on board the destroyer Changsha on April 12 © AP

China’s navy announced it would hold live-fire military drills in the Taiwan Strait next Wednesday amid a worsening of tension in the western Pacific region.

On Thursday night the defence ministry carried a statement from the Maritime Safety Administration of Fujian province, bordering Taiwan, warning shipping from entering the area of the exercises on April 18.

They will be the first naval manoeuvres by China in the sensitive waters since 2015, and are sure to infuriate Taiwan. They also come as Washington and Beijing engage in a tit-for-tat military build-up in the disputed South China Sea, with China installing communications jamming gear on one of its artificial island bases and the US sailing two aircraft carriers through the sea in the past two months.

The defence ministry announcement followed a large exercise by the People’s Liberation Army Navy on Thursday and a speech by Xi Jinping, China’s president, from the deck of a destroyer announcing the need for China would build the world’s leading naval force.

This "has never been more pressing than today" Mr Xi told officers on the deck of the Changsha, in a nationally televised speech. He then watched through binoculars as four J-15 fighter jets took off from the Liaoning, China's first and only operational aircraft carrier.

The exercise was billed by state media as the largest Chinese naval drill ever, involving 10,000 personnel, 48 ships and submarines and 76 fighter jets.

“There is a good possibility that these military drills were planned many months ago, but they serve as a useful warning to Taiwan and the US not to cross Chinese red lines,” said Bonnie Glaser, director of the China power project at the Center for Strategic and International Studies, a US think-tank. “Taipei should remain calm, and not look for ways to retaliate that would ratchet up tension.”

Ian Easton, a research fellow at the Project 2049 Institute, a US security think-tank, and the author of a book on the threat of a Chinese invasion of Taiwan, said the drills did not amount to a major escalation.

“It is a PLA attempt to use the media to inflame a sense of insecurity in Taiwan, classic political warfare,” he said. “Nonetheless, you can bet US and Taiwanese military intelligence will be monitoring this exercise closely, just in case there is more than meets the eye.”

Taiwan’s president, Tsai Ing-wen, was on Friday scheduled to inspect a naval base at Su’ao on the island’s north-east coast. While the visit was not directly linked to China’s drills on Thursday, a senior official told the Financial Times that Ms Tsai “has instructed government agencies to enhance the efficiency and effectiveness of crisis management” due to the “growth of China's military activities” and other regional security threats.

“The Tsai administration is resolutely determined to accelerate the modernisation of the armed forces,” the official said.

The US Navy has been steadily building its presence in the western Pacific this year. On April 10 the US aircraft carrier Theodore Roosevelt sailed through the South China Sea, which China claims as its territorial waters. Another aircraft carrier, the Carl Vinson, made a similar passage in February, angering Beijing.

In response, China late last month held the then largest-ever military exercises in the South China Sea with 40 ships, including the Liaoning. On April 10, US officials said China had installed communications-jamming equipment on Mischief Reef, one of the artificial islands it has built in the sea, despite repeated promises not to militarise the islands.

In another step which angered Beijing, Taiwan on April 9 announced the US had agreed to grant it a licence to buy sensitive technology so it could build its own submarines. That came just weeks after US president Donald Trump signed new legislation promoting higher level visits between Taiwan and the US.

Some commentators have also connected the timing of the Taiwan Strait exercises next week to increasing tension over Syria, and Chinese support for Russia, which has troops fighting alongside Syrian government forces there. The US has threatened to bomb Syria in response to the recent chemical weapons attack on civilians.

China’s defence ministry has been particularly vocal about its support for Russia. On April 3, defence minister Wei Fenghe visited Moscow for a security conference and was quoted by Russian state news agency Itar-Tass as saying “the Chinese side has come to show Americans the close ties between the armed forces of China and Russia, especially in this situation.”

Alexander Gabuev, an expert on Russia-China relations at the Carnegie Moscow Centre, tweeted in response: “This is the 1st time in many years that a senior Chinese military leader says [something] like that publicly.”

Additional reporting by Ben Bland in Hong Kong

What Happened to the Oil Glut?

Stored oil is at its lowest level in more than three years, partly due to OPEC and Russia’s output cuts

By Benoit Faucon, Summer Said and Anant Vijay Kala

Oil storage tanks stand as snow falls at the Novokuibyshevsk oil plant, operated by Rosneft, in Samara, Russia. Photo: Andrey Rudakov/Bloomberg News 

A glut of stored oil that helped keep prices low for years is almost gone, thanks to production cuts by OPEC and Russia, a humming global economy and a series of small but meaningful supply disruptions.

Excess inventories of stored oil by the world’s industrialized economies are now at their lowest level in more than three years, based on a five-year running average, according to data released Thursday by the Organization of the Petroleum Exporting Countries. After months of steepening declines, the cartel said commercial inventory levels shrunk a further 17.4 million barrels in February, to about 2.85 billion barrels. 
That represents a surplus of just 43 million barrels, based on the five-year average. Two years ago, the storage surplus hit 400 million barrels.

The drain on storage is partly a consequence of a concerted effort by Saudi Arabia, its OPEC colleagues, and Russia, to throttle back output to bolster prices.

The world's glut of stored oil has quickly disappeared.

Total oil inventories in OECD countries compared with their five-year averages

*Source: Organization of the Petroleum Exporting Countries

“The rebalancing process is well under way,” OPEC Secretary General Mohammed Barkindo told an energy summit in New Delhi on Wednesday.

The quickening depletion of excess stored oil has analysts throwing around a word they haven’t had to use that often in the past few years: shortages. Without much cushion in storage, the threat of supply outages can more quickly drain inventories—and boost prices.

Venezuelan crude output has been hobbled by political and economic instability there, and rising tensions between the U.S. and Russia over Syria have also contributed to worry over supply. President Donald Trump has threatened a missile attack against Syria, in retaliation for an alleged chemical attack by Syria’s government, which Moscow has backed during the country’s long civil war.

Syria doesn’t pump much oil itself, but the new tensions have raised the specter of bigger production outages across the oil-rich Middle East, should military action escalate. Many similar supply-shock worries have had only muted impact on oil prices in the recent past, thanks to the glut of oil in storage. With that cushion gone, analysts say geopolitics may again start playing an outsize role in oil markets.

“Global oil supply and demand are quickly approaching a balanced position after spending several years in an excessively high inventory mode,” said Dominick Chirichella, co-president of New York-based Energy Management Institute, in a report Wednesday. “Geopolitical risk is bubbling up in the oil pits.”

Saudi Arabia has indicated little appetite for opening up the spigots. In its report Thursday, OPEC said its collective production fell by an average 201,000 barrels a day. Part of the decline came from fresh, voluntary cuts by Saudi Arabia. Earlier this week, the kingdom said it would keep its overall crude-oil exports below 7 million barrels a day next month.

Saudi Oil Minister Khalid al-Falih told the New Delhi conference this week that “we will not sit by and let another glut resurface in the coming years and bring the market through the roller coaster that we have seen.”

Thinning inventories isn’t just down to OPEC-led cuts. Oil demand has been growing amid a rare, synchronized economic expansion by the world’s biggest economies. OPEC said it now sees demand for this year growing by about 30,000 barrels a day more than it had previously forecast. That growth is now expected to come to an average 1.63 million barrels a day for the year.

Amid that new appetite, a series of production outages are already sapping supply. Last month, OPEC says it lost about 100,000 barrels a day because of the crisis in Venezuela and disputes by rival political groups in Libya and Iraq.

All that has translated into higher oil prices. Brent, the international oil benchmark, has been hovering above $70 a barrel—levels not seen in three years.

The big question for markets now is whether, amid the tightening market, North American shale producers swing back into action. These smaller, nimbler producers have in previous periods of oil-price strength, ramped up output to take advantage of the higher prices.

That new production typically boosts supply, and eases prices back down again. In its report, OPEC upgraded its non-OPEC oil supply forecast for the year, saying Canada and the U.S. will pump about 90,000 barrels a day more than expected.

Measures of US Power

By Xander Snyder

The Russian ruble, Turkish lira and Iranian rial are all falling in value. What do they have in common? The United States is in some way involved in their decline. It’s a sign of U.S. power: Even as its military becomes more limited and it threatens to pull back from the Middle East and other parts of the world, the U.S. can still put pressure on the economies of countries that are working against U.S. interests and impact global conflicts without resorting to military force.
Sanctions Pressure in Russia
For Russia, recently imposed sanctions and the threat of new sanctions are proving to be a drain on its economy and the ruble. Last week, the U.S. announced a new round of sanctions that target Russian oligarchs and their businesses. Rusal, a metals conglomerate and one of the world’s largest aluminum producers, was hit particularly hard, with its shares declining by nearly 35 percent in two days. But Rusal wasn’t the only company with ties to the Russian government to experience a rapid sell-off: Sberbank and VTB, two major Russian banks, saw their share prices decline by nearly 20 percent and 10 percent, respectively, after the sanctions were announced. Some financial analysts have estimated that up to $16 billion in wealth owned by Russian oligarchs was wiped out in just a couple of hours.
Through the use of so-called secondary sanctions, which target both U.S. and non-U.S. companies that do business with sanctioned Russian companies and individuals, the U.S. is restricting Russia’s access to dollars. This limits Russian companies’ ability to conduct transactions globally in dollars and their access to foreign investment. For example, Rusal has been forced to ask its customers to fulfill contracts in euros rather than dollars. The declining ruble also makes foreign machinery and equipment – which are among Russia’s top imports and which Russia needs to modernize its economy – costlier.
Attracting investment is crucial for Moscow as it tries to reform its economy to decrease its dependence on oil and other natural resources. Yet, capital outflow from Russia increased by 60 percent in 2017 compared to 2016 and totaled $13.4 billion in the first quarter of 2018. Cutting off this outflow is no small feat.
By imposing sanctions, the U.S. wants to make Russia’s domestic problems strong enough to force Moscow to turn its focus inward and limit its foreign adventures. And more sanctions might be on the way. A bill introduced in Congress last week would restrict investment in Russia’s sovereign debt, putting further pressure on the ruble. Washington is thus signaling that it is by no means out of ammunition.
Treasury Secretary Steven Mnuchin said the sanctions introduced this month are a response to Russia’s occupation of Crimea and its ongoing support of the Assad regime in Syria. The recent poisoning of a former Russian spy in the United Kingdom also undoubtedly played a role. But the sanctions shouldn’t be seen solely as a reaction to these events. The U.S. is trying to send Russia a broader message: If Moscow keeps asserting itself in places like Ukraine, Syria and Georgia, it will face consequences. In a way, it’s a proactive move intended to keep the Russians in check and prevent further Russian incursions elsewhere.
Uncertainty in Iran
Another adversary that the U.S. faces in Syria is Iran. While the U.S. was busy cobbling together a weak coalition of moderate rebels to fight Bashar Assad and the Islamic State, Iran was solidifying its position there. The U.S. now needs a way to limit Iran’s expansion, and encouraging the devaluation of the rial – by, say, threatening to scrap the Iran nuclear deal – is one way to do it. The uncertainty surrounding the deal makes it more difficult for foreign companies to conduct business in Iran, limiting its foreign investment potential. The U.S. doesn’t need to actually abandon the deal to make an impact – it just needs to threaten to do so.
That the rial has so sharply declined as a result of this uncertainty is a sign that Iran’s economy remains vulnerable and its security tenuous, regardless of its rising clout in Syria and Iraq. Like Russia, Iran is now forced to turn its attention to domestic issues rather than its efforts at external expansion. For example, the government this week introduced its own exchange rate of 42,000 rials to the dollar – far better than the market rate, which currently hoovers around 60,000 rials to the dollar – to try to stem the currency’s decline. The large-scale protests in January and the more localized ones in Khuzestan and Isfahan provinces this week indicate that there is consistent and widespread dissatisfaction with the regime. This dissatisfaction isn’t restricted to students or those living in cities. In Isfahan, farmers are again protesting the government’s poor handling of water shortages during a severe, nationwide drought, which has made it difficult if not impossible for farmers to make a living. As a result, fewer crops are being grown domestically, increasing Iran’s need to import food. But with a weaker rial, food imports become more expensive.
One of the catalysts of the January protests was a spike in the price of food staples. Following those protests, Iran – under growing budgetary pressure as it allocates ever more funds to fighting wars – was forced to walk back planned subsidy cuts to appease the public. This forced Iran’s supreme leader, Ayatollah Ali Khamenei, to dip into Iran’s reserve fund to ensure funding for the military wouldn’t be slashed. But a weaker rial will certainly make the Iranians think twice about their military funding and could impact Iran’s ability to continue waging war at the scale that it has in the past couple of years. If high food prices were to again spark large-scale uprisings, Iran would need to divert funds to domestic needs to ensure social stability.

Debt-Fueled Growth in Turkey
In contrast to Russia and Iran, Turkey isn’t a direct target of the United States.

Nevertheless, Turkey faces serious risks due to U.S. monetary policy. In response to a tight U.S. labor market and consistent economic growth, the Federal Reserve has been raising interest rates since 2015 and will almost certainly continue to do so throughout 2018. This encourages capital inflow to the U.S. as investors seek higher returns. It also creates higher demand for the dollar, increasing the dollar’s value relative to other currencies, including the lira.
A weaker lira is a problem because, although Turkey’s economy has seen high levels of growth, it has been supported with external debt (that is, debt denominated in foreign currencies). Accompanying this debt-fueled growth has been rising rates of inflation, which devalues the lira. A weaker lira makes it harder for Turkish businesses to pay back foreign debt. In March, ratings agency Moody’s downgraded Turkey’s sovereign debt, citing a combination of factors including inflation, a weak lira and the risk of external financing being tabled.
Higher U.S. interest rates, therefore, are a threat to Turkey’s growing economy and thus its ability to expand its reach to places where it might challenge U.S. interests. A weak economy that must dedicate more and more funds to servicing debt will find it progressively more difficult to support the costs of war. And these costs are only going to increase as Turkey faces the challenges of governing the parts of Syria it has conquered and looks to move farther east.
To be clear, the U.S. isn’t intentionally weakening the Turkish economy through its own monetary policy. Rather, the U.S. economy is so large and pervasive that it has far-reaching consequences for countries around the world. That said, the U.S. and Turkey have been at odds over the situation in northern Syria, and Washington wouldn’t mind indirectly curtailing Turkey’s ability to expand its operations against Kurdish forces there.
The decline of U.S. power has become a trope in discussions of global affairs. But its ability to contribute to the domestic problems of its adversaries – and an ally with which it is increasingly at odds – is a sign that the U.S. can still exercise substantial soft power, even as its military is overcommitted and limited in its ability to deploy force to new theaters.

US-China rivalry will shape the 21st century

Beijing’s rising economic and political power poses great challenges to the west

Martin Wolf

China is an emerging superpower. The US is the incumbent. The potential for destructive clashes between the two giants seems potentially unbounded. Yet the two are also intimately intertwined. If they fail to maintain reasonably co-operative relationships they have the capacity to wreak havoc not only upon each other, but upon the entire world.

China is a rival of the US on two dimensions: power and ideology. This combination of attributes might remind one of the clash with the Axis powers during the second world war or the cold war against the Soviet Union. China is of course very different. But it is also potentially far more potent.

China’s rising power, economic and political, is evident. According to the IMF, its gross domestic product per head in 2017 was 14 per cent of US levels at market prices and 28 per cent at purchasing power parity, up from 3 per cent and 8 per cent, respectively, in 2000.

Yet, since China’s population is more than four times as big as that of the US, its GDP in 2017 was 62 per cent of US levels at market prices and 119 per cent at PPP.

Assume that by 2040, China achieves a relative GDP per head of 34 per cent at market prices and 50 per cent at PPP. This would imply a dramatic slowdown of the rate it is catching up (a fall of around 70 per cent from the rate since 2000, starting in 2023). China’s economy would then be almost twice as big as that of the US at PPP and almost 30 per cent larger at market prices. (See charts.)

The 34 per cent benchmark I have chosen is that of today’s Portugal. It is hard to imagine that China, with its vast savings, motivated population, huge markets and sheer determination could not achieve the relative prosperity of Portugal. This would still leave it far poorer, relative to the US, than Japan or South Korea — the fast-growing east Asian economies of the past.

Size matters. It is quite unlikely that China’s overall economy will not end up far bigger than that of the US, even if, on average, individual Americans remain far more prosperous than individual Chinese. China is also already a more important export market than the US for many significant countries, particularly in east Asia.

Moreover, China is spending almost as big a share of GDP on research and development as leading high-income countries. This is a driver of Chinese innovation, which I recently saw at a visit to Alibaba’s headquarters in Hangzhou. Moreover, the combination of economic size with improving technology is making China an increasingly formidable military power. The US may complain about this. But it has no moral right to do so. Self-defence is a universally accepted right of nations.

So is the right to develop. The US can huff and puff about Chinese theft of intellectual property. But every catch-up nation, very much including the US in the 19th century, seized the ideas of others and built upon them.

The idea that intellectual property is sacrosanct is also wrong. It is innovation that is sacrosanct. Intellectual property rights both help and hurt that effort. A balance has to be struck between rights that are too tight and too loose. The US can try to protect its intellectual property. But any idea that it is entitled (or indeed able) to prevent China from innovating its way to prosperity is mad.

China is also an ideological challenger of the US, on two dimensions. It has what might be called a planned market economy. It also has an undemocratic political system. Unfortunately, recent failures of free market high-income economies have increased the lustre of the former.

The election of Donald Trump, an admirer of despotism, has strengthened the appeal of the latter.

The US, one would once have said, also has the benefit of powerful and committed allies.

Unfortunately, Mr Trump is waging economic war upon them. If a decision to attack North Korea led to the devastation of Seoul and Tokyo, US military alliances would be over. An alliance cannot also be a suicide pact.

Managing the competition between these two superpowers is going to be difficult. Graham Allison of Harvard is fatalistic in his Destined For War: conflict between the incumbent and rising power is almost inevitable. A hot war among nuclear powers might seem relatively unlikely.

But large-scale friction and so an end to necessary co-operation over economic relations seems probable. It is unclear how to resolve today’s conflicts over trade. Co-operation over managing the global commons has already collapsed, given the Trump administration’s rejection of the very idea of climate change.

China’s future is up to China. But the west’s relations with China are up to it. The US is right to insist that China abide by its commitments. But then so must the US and the rest of the west. China is not going to feel compelled to abide by agreed rules when pressed by any country that treats these rules with contempt. China is, in any case, not the real threat. That relationship can surely be managed.

The threat is the decadence of the west, very much including the US — the prevalence of rent extraction as a way of economic life, the indifference to the fate of much of its citizenry, the corrupting role of money in politics, the indifference to the truth, and the sacrifice of long-term investment to private and public consumption.

It is indeed a tragedy that the best way we could find to escape from a financial crisis was via monetary policies that risked promoting new bubbles. We could be better than this.

The west can and must live with a rising China. But it should do so by being true to the better angels of its own nature. If it is to manage this turn of the wheel of history, it has to look within.