Chips, Debts and Gaza Bets: Tangled Trade Wars, America’s Gatsby Complex, and Trump’s New Middle East Diplomacy #240

Plus some shameless kid plugging...

Jan 16, 2025

Grüezi!

This week:

China’s eye-watering trillion-dollar trade surplus signals trouble ahead – why both Washington and Beijing are sleepwalking towards economic catastrophe
America’s Gatsby complex: How the world’s largest economy became trapped in an unsustainable performance of prosperity.
The US chips gambit backfires: China’s DeepSeek and the flaws in Washington’s containment strategy
Inside the Gaza deal: Trump’s property developer diplomacy reshapes Middle East negotiations, whilst Netanyahu plays a longer game

Plus: Why Japan’s mere 195,000 STEM graduates keep outperforming Iran’s 335,000, and a dash of indie folk rock in Bermondsey.

1️⃣ The World Cannot Afford a US-China Economic War

But that’s exactly where we’re heading

China’s trade surplus just reached a trillion dollars. Its factories now produce a third of the world’s manufactured goods. China’s exporters faced 160 trade investigations in 2024 alone.

Meanwhile, America clings to an unsustainable role as global consumer of last resort whilst resisting the very economic rebalancing the world desperately needs.

These statistics are warning signs of an impending crisis – and both global superpowers are super-responsible for it.

China’s vast manufacturing overcapacity, fuelled by industrial bank lending that soared from $83 billion in 2019 to $670 billion by 2023, has triggered a price collapse that’s exporting deflation worldwide.

America’s addiction to cheap imports, resistance to domestic adjustment, and unwillingness to boost savings have fed China’s export dependency.

The rest of the world is caught in the crossfire. Either we find a managed path to global rebalancing – one requiring difficult compromises from both Beijing and Washington – or markets will force a chaotic adjustment that serves no one’s interests.

Previous attempts at forcing adjustment through tariffs have foundered on economic reality: exchange rates shift to offset their impact, while higher costs for imported components end up hurting domestic manufacturers.

The tools exist for managed adjustment, but they require sophisticated coordination of trade, monetary, and industrial policies – not just simple barriers.

The mechanisms for coordination exist too. The G20, IMF, and World Bank could provide frameworks for a managed transition. But they require what’s currently lacking: recognition that even bitter rivals share common interests in avoiding disaster.

Both powers are being forced to confront economic reality rather than economic fantasy.

🇨🇳For China, this means acknowledging the difficulties of transitioning from middle-income status.
🇺🇸For America, it means recognising that maintaining economic leadership requires more than just preventing others from “catching up” – it demands genuine renewal and reinvestment.

There is a place for the kind of ‘behind the scenes’ conversations that can act as a prelude to this kind of action: the World Economic Forum’s Annual Meeting in Davos.

I’ll be there next week. Will the right actors be having the right conversations in the snow? Let’s see.

2️⃣ America’s Gatsby Moment

Can it finally grow up and beat its cheap import addiction?

*“Gatsby believed in the green light, the orgastic future that year by year recedes before us…”*

Like Jay Gatsby, America came from nothing, transforming itself through ambition and innovation.

But somewhere along the way, it became trapped in its own performance of prosperity – borrowing heavily to maintain a lifestyle that increasingly resembles Gatsby’s parties: magnificent, ephemeral, and ultimately unsustainable.

Each evening, across the Pacific, a green light blinks. Unlike Gatsby’s beacon, this one isn’t symbolising lost love – its the treasury bills where America’s IOUs are stacking up.

That green light across the Pacific isn’t just about Treasury bills – it’s about factories, supply chains, and industrial capacity. Each time America reaches for that light, it’s not just borrowing money – it’s trading away pieces of its industrial base.

The challenge isn’t just fiscal restraint, it’s rebuilding productive capacity in a world where supply chains and production networks have become almost as unknowable as Gatsby himself.

The solution? In place of Fitzgerald’s dramatic ending – self-destruction – may I propose a more prosaic but palatable four-point plan:

1. Stop living beyond your means

Start saving more (through serious tax reform)
Invest in productive capacity (infrastructure, education, manufacturing)
Reduce wasteful consumption (funded by borrowing)

2. Get serious about jobs

Rebuild your manufacturing capability
Invest in worker skills
Create real productive capacity

3. Fix your finances

Reduce structural deficits
Build national savings
Reform tax system to encourage investment over consumption

4. Plan for the future

Strengthen retirement systems
Invest in new industries
Build a sovereign wealth fund

Yes, China encourages America’s bad habits through cheap loans and exports. But just as Jay Gatsby’s banker wasn’t to blame for his spendthrift habits, America can’t simply point fingers at Beijing.

The good news? Like any trust-funder who finally grows up and takes responsibility, America has immense underlying advantages. The US is not short of the technology, institutions, and human capital needed for a healthy transition to fiscal maturity.

The question is whether it is interested in using them.

3️⃣ America’s AI Supremacy Gamble – The Chips Are Down

Why controlling chips may not control the future.

Talking of preventing others catching up, the US just rolled the dice on what may be the most ambitious tech control regime since the Cold War.

But even as Washington moves to regulate global access to artificial intelligence chips, events in China suggest this high-stakes gamble could backfire.

This week’s sweeping export controls divide the world into three camps:

Privileged inner circle of 18 allies with unfettered access to advanced AI chips,
Roughly 120 nations subjected to strict quotas,
Countries like China and Russia facing comprehensive restrictions.

Departing US Commerce Secretary Gina Raimondo says these measures are essential to maintain American technological primacy.

Yet a remarkable development challenges this strategy’s core premise. DeepSeek, a Chinese AI laboratory, has achieved what many thought impossible: creating a world-class language model whilst operating under existing chip restrictions. More striking still is how they managed it – by being smarter rather than more powerful.

DeepSeek’s latest model improved chip efficiency by 60% in just six months. The cost? Just $6 million. They achieved this through clever mathematics and innovative architecture rather than raw computing muscle. Rather than limiting progress, the constraints appear to have spurred innovation. The company

Geopolitical risks compound the technical ones:

India: its burgeoning tech sector now faces strict quotas despite the country’s status as a crucial counterweight to China.
Poland: set to become a major European tech hub yet relegated to second-tier status whilst Britain and the Netherlands enjoy unlimited access.
The Gulf states: possess both the capital and ambition to seek alternatives rather than accept permanent technological dependence.

This “golden handcuffs” approach – offering controlled access to advanced AI infrastructure whilst maintaining dependency – echoes past attempts at technological containment. Yet history suggests such strategies often accelerate the very developments they aim to prevent.

By focusing on controlling a single technological bottleneck, Washington risks both alienating key allies and inadvertently accelerating the development of parallel and potentially superior approaches among restricted nations.

Sometimes the tighter you grip, the more slips through your fingers.

4️⃣ “America Is Not An Exceptional Country….

It is no longer even a great one.” Who said it?

Full marks if you identified the author as Tolkien-loving tech billionaire Peter Thiel! The German-born, South African raised, American-educated Thiel has bankrolled JD Vance and numerous Trump-affiliated politicos.

That money quote lay buried in a quasi-mystical, conspiracy-laden wortsalat, published by the Financial Times. Less creed more screed, it probably won’t feature approvingly in their next style guide.

It came right before Thiel provided this diagnosis of what’s wrong with America:

the 50-year slowdown in scientific and technological progress in the US, the racket of crescendoing real estate prices, and the explosion of public debt.

These were probably the few lines of sense. Thiel’s solutions are less clear. They seem to involve breaking things and letting things reform. For someone so critical of “muddling through” he hasn’t yet produced a manifesto.

TL;DR You may not want to take Thiel seriously, but he has money and power. So you are obliged to.

5️⃣ The Gaza Deal Is Just the Beginning

The new deal-maker diplomacy.

Putting aside all the death and destruction – as diplomacy somehow must – the emerging Israel/Hamas deal looks surprisingly favourable to Hamas.

Israel would completely withdraw from Gaza, including from the Philadelphi Corridor beside Egypt. Hamas prisoners would return to Gaza and not face exile.

Prime Minister Benjamin Netanyahu has previously rejected similar terms. What changed?

Washington. Donald Trump’s influence is already reshaping diplomacy, and in an unusual departure from protocol, his envoy Steven Witkoff – a property developer – has been aggressively pushing a deal, with the Biden administration stepping aside.

Witkoff’s blunt approach, included – according to Haaretz – demanding a Sabbath meeting with Netanyahu. Welcome to the new diplomacy.

But Netanyahu’s meek acceptance suggests there’s some substance, and something bigger afoot.

The Gaza withdrawal appears to be part of a broader strategic realignment, potentially involving Israeli action against Iran, changes in Lebanon and Syria, and possible West Bank annexation. Netanyahu seems to be betting that Trump’s support for these larger Israeli moves outweighs any immediate concessions in Gaza.

What comes next? Netanyahu needs to justify these concessions to his right-wing base. With Trump’s support, that may come in the form of moves elsewhere in the region.

6️⃣ STEM Your Way to Success?

More STEM grads, more moolah?

Adam Tooze is one of my favourite commentators but even I sputtered at this post.

Quite remarkable how Japan has stumbled into becoming a global technology powerhouse with just 195,000 STEM graduates – fewer than Iran’s 335,000.

Meanwhile, the United States, with its paltry 568,000 graduates (just 12% of China’s 4.7 million), somehow keeps churning out Silicon Valley unicorns.

Perhaps raw graduate numbers don’t tell quite the full story of technological and economic capability…