📈 Biden’s China Ban, Deglobalization, and the 4th Industrial Revolution

The Biden administration released its long-anticipated restriction on investments in Chinese firms.

According to the Wall Street Journal

Why should you care? Because as of today, the proposal applies to private-equity investment in just three high-tech sectors: artificial intelligence, quantum computing, and semiconductors.

In case you’ve been living under a rock for all of 2023, these three categories represent what is essentially the new “World War” for technological supremacy, as the current global superpowers battle to win the 4th Industrial Revolution.

And as a follow-up to our May 27th, 2023 edition of the weekend edition – The debt ceiling, de-dollarization, and gold…

Today’s issue continues the discussion on the globalization Mega Trend driving many of the opportunities we see for investors in the coming years ahead.

Let’s dive in!

-Equifund Publishing

P.S. If you’ve read our article, The debt ceiling, de-dollarization, and gold, one of the things you’ll notice is that our macroeconomic thesis is heavily influenced by a few authors in particular…

Peter Zeihan (author of The End of the World is Just the Beginning: Mapping the Collapse of Globalization) and Dani Rodrik (author of The Globalization Paradox: Democracy and the Future of the World Economy).

While both authors express concerns about certain aspects of globalization, they have different emphases and conclusions:

Both authors acknowledge the challenges posed by the current form of globalization on various aspects of societies and economies – specifically, the potential risks and limitations of pursuing deep economic integration without considering domestic needs.

However, they come to that conclusion through different academic disciplines and professional experiences.

Zeihan – a former VP of analysis at Stratfor, an American strategic intelligence publishing company – focuses on the intersection of geography, demographics, and technology.

Rodrick – currently a professor of International Political Economy at Harvard University’s John F. Kennedy School of Government – focuses more on the relationship between globalization, democratic governance, and national policy autonomy.

And while I disagree with some of the conclusions each author has made – not to mention, I have the benefit of hindsight, reading some of their works 10-20 years after they were written, to see how they were wrong…

I find that both authors have highly useful frameworks for understanding how the Current World Order has formed, and how it’s likely to change in the coming decade(s).

The Changing World Order: A Brief History of Government Systems, Globalization, and Free Trade

Thanks to globalization, America – and the world at large – have seen extraordinary growth over the past 70 years.

In terms of wealth, even the “poorest” people in developed nations have a standard of living better than the richest did just a century ago.

As a percent of the population, fewer people have died in fewer wars, fewer occupations, fewer famines, and fewer disease outbreaks than since the dawn of recorded history.

But now, as we approach what seems to be the most anticipated recession ever (although the AI Hype/FOMO cycle seems to be keeping it at bay), we’re also facing the end of the globalized world as we know it.

To understand why – and what the implications of this shift are – it’s time for the obligatory “backstory” component of this issue.

Rodrik’s central argument is summarized in what he calls the “globalization paradox.” He argues that we cannot have “deep economic integration” (called “hyper-globalization”), national sovereignty (or “nation states”), and democratic politics all at once

We can have, at most, two out of three.

• Global Governance: This requires significant restraint of national self-determination, and therefore regulatory, institutional, and policy diversity.

• Golden Straightjacket: National sovereignty and global trade supersede the democratic policies to minimize impediments to the free-flow of capital and goods. The Gold Standard is the pre-eminent example of this model.
• The Bretton Woods Compromise: Maximize democratic legitimacy and sovereignty through capital controls. However, this is explicitly an incomplete form of globalization.

To put these options into a bit more context – and how these choices are currently playing out in the quickly deglobalizing world – let’s zoom out and take a look at…

The Five Eras of Globalization

According to a recent article from the International Monetary Fund, globalization has gone through five distinct eras.

1. The Industrialization Era was a period when global trade—dominated by Argentina, Australia, Canada, Europe, and the United States—was facilitated by the gold standard. It was largely driven by transportation advances that lowered trade costs and boosted trade volumes.
2. The Interwar Era saw a dramatic reversal of globalization due to international conflicts and the rise of protectionism. Despite the League of Nations push for multilateral cooperation, trade became regionalized amid trade barriers and the breakdown of the gold standard into currency blocs.
3. The Bretton Woods Era saw the United States emerge as the dominant economic power with the dollar, then pegged to gold, underpinning a system with other exchange rates also pegged to the greenback.
4. The Liberalization Era saw the gradual removal of trade barriers in China and other large emerging market economies, and unprecedented international economic cooperation, including the integration of the former Soviet bloc.
5. The “Slowbalization” Era that followed the global financial crisis has been characterized by a prolonged slowdown in the pace of trade reform, and weakening political support for open trade amid rising geopolitical tensions.

For those who are old enough to have lived through a few of these eras, you might remember the promise of globalization that never really came true.

According to Rodrik:

There are a variety of reasons why this was the case, but for the purposes of today’s issue, let’s focus on the fact that China was the undisputed winner of globalization, once President Nixon basically bribed them to join the Bretton Woods regime.

But what made this era of globalization possible? Three things:

1. New technologies in the form of steamships, railroads, canals, and the telegraph revolutionized international transport and communications and greatly reduced trade costs starting in the early part of the nineteenth century.
2. The economic narrative changed as the ideas of free market economists like Adam Smith and David Ricardo finally got some traction. This led governments of the world’s major economies to substantially relax the restrictions they placed on trade in the form of import taxes (tariffs) and explicit prohibitions.
3. From the 1870s on, the widespread adoption of the gold standard enabled capital to move internationally, without fear of arbitrary changes in currency values or other financial hiccups.

And this ability to move capital across borders, creates one of the more interesting issues in the broader globalized financial system…

The Trade Deficit and the Balance of Payments

As a quick recap, Money is a tool designed to record credits and debits for the transfer of goods and services (broadly called gross domestic product or GDP).

In economics, the ledger of trade between countries is known as the Balance of Payments (BOP) and is divided into three main categories:

• The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account
• The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets (i.e., a physical asset such as land) and non-produced assets, which are needed for production, but have not been produced (i.e., a mine used for the extraction of diamonds)
• The financial account tracks reserve assets from monetary authorities. This means international monetary flows related to investments in business, real estate, bonds, and stocks are documented

Think of the BOP as the balance sheet for a nation. Like all double-entry accounting systems, the debits and credits in the BOP should theoretically balance out.

Here’s how this balancing act worked in practice…

Suppose that a technological innovation brought about faster real economic growth in the United States compared to other countries.

As per the economic assumptions of supply and demand, increasing demand relative to supply pushes prices up, while increasing supply relative to demand pushes prices down.

With regards to international trade, this means if the exportable supply of goods and services from the United States increases, relative to the importable demand for goods and services from its trading partners, one of two things needs to happen:

• Prices of exports would need to fall relative to the price of imports
• A balancing mechanism is needed to account for the growing deficit between countries. Under the gold standard, this was gold. Today, it’s U.S. Dollars

For reference, here is the current U.S. Trade Deficit (which, according to Triffin Dilemma, is the problem with a reserve currency – ever-increasing deficits that undermine faith in the system).

But remember, the BOP isn’t solved with more currency. It is solved with goods and services that another country needs.

Russia and China represent a shocking amount of global trade.

Russia is one of the largest net exporters of energy and food inputs, while China is the world’s biggest importer of basically everything.

Both countries need America in order to survive…

But America needs neither to continue to be the world superpower.

Not only does America have – by far – the best geography, both from proximity to the nearest enemy, integration with nearby allies, and our sheer abundance of natural resources…

The U.S. is also one of the few developed nations that aren’t experiencing a complete demographic collapse that threatens to erase its existence – which both Russia and China currently face.

And it is this decline that makes both Russia and China particularly worrisome, in the sense that this decade could be their last stand against American supremacy.

How will this next “World War” be fought and won?

In my opinion, it will require a massive increase in GDP that can only be achieved through winning the so-called Fourth Industrial Revolution.

The next era of technology that unlocks the magical future of smart grids, smart cities, smart buildings, self-driving cars…

Wildly better healthcare, plenty of affordable housing, and better education…

And all the technology needed to satisfy the “Net Zero” agenda and a decarbonized world.

The winner of the 4th Industrial Revolution will become the de-facto global superpower for the next era of civilization.

And for this reason, it’s no surprise to see the Biden Administration escalate regulatory measures to prevent China from gaining access to American investment dollars, and the technology we are producing here at home.

Final Thoughts: A Potential Renaissance in Materials, Manufacturing, and Industrialization

While there will likely be short-term pain felt by every nation over the next few years, the end result will be the same as it has always been.

Thanks to a combination of superior geography, technology, demographics, and capital markets… the United States will not only remain the de facto world hegemon, it will likely enter a second “Golden Age,” should it win the 4th Industrial Revolution.

For the entrepreneurs and investors willing to provide the resources, labor, capital, and leadership during this transition, the opportunity could be enormous.

And it is my opinion that in order to win the 4th Industrial Revolution, it means massive regulatory reforms that allow us to unleash our vast treasure trove of natural resources, and rebuild the American manufacturing infrastructure that made us the superpower we are today.