The Third Rail: Navigating the Geopolitical Power Grid in 2024

January 23, 2024

Joel Ross, who writes the legendary Wall Street newsletter The Ross Rant, sent me a question after reading Karim Pakravan’s recent guest post on EconVue+. Given all the geopolitical trends and events now underway, what is my conclusion about the state of the world, and what does that mean for people trying to make decisions in the new year? 

I’ve been thinking about this for the past few days, shifting the puzzle pieces around, in order to try to put into a few words what I really think. The quick answer to the second question is that this is a season for caution. Watch out for that third rail that looks like all the rest, but don’t ignore the fast track that always emerges in times of rapid change. Distinguishing between the two requires understanding how the system and the engineering work.

Bigger picture, looking down from a higher altitude, 2024 looks geometric to me, like a power grid with intersecting lines. A world that is divided horizontally and vertically in an electronic tapestry, woof and warp—in fact a kind of spherical chip. My purpose in writing is to suggest a flexible framework to facilitate decisionmaking for anyone trying to deal strategically with this intensely dynamic situation. 

Woof and Warp

I see two vertical groups—China, Russia, Iran, and North Korea — facing the US, EU, Japan, South Korea and the Anglo-sphere. Access to nuclear weapons on both sides. A tectonic chasm that has been widening, due to poor diplomacy, bad policies, and weak leadership, pulled further apart by an earthquake of a pandemic that upended the global economy and trade flows. The horizontal nations are all the rest, trying to exist in this duopoly, navigating dependencies on both sides.

So far, nuclear nations have not engaged in direct conflict which each other, ever. Instead, they are testing and probing each other’s strengths and vulnerabilities by means of proxy wars that impact the horizontal nations. That is the story of Ukraine, Gaza, and the Taiwan Strait. There is of course the risk that these dangerous games spin out of control, and bystanders get hurt. 

For example, it was reported Sunday that the Biden Administration agreed to a Defense Department request for a “gloves off” response to recent attacks on American forces in the Middle East by the Houthis. This might include limited strikes within Iran itself, enlarging the scope for direct conflict between the two countries. That would almost certainly increase Iran’s desire to speed up the development of its nuclear arsenal, making it a full member of that club.

North Korea

Which of the nuclear countries is not like the others? North Korea. It is not equipped with the same set of brakes as the US and China. There is no one to stand up to DPRK leader Kim Jong Un, who appears to be working in tandem with his sister. Lately, there have been a series of actions, no single one of which is alarming, but taken as a whole, signal something much more serious is going on, and that momentum towards conflict is building. The Arch of Reunification built by Kim’s father in 2001 was ordered destroyed this month. Personally I don’t object to this, purely on aesthetic grounds.

Are we seriously underestimating the possibility of a missile lobbed on South Korea or Japan? I urge you to watch the recent PBS documentary Red Princess about Kim Jong Un’s sister Kim Yo Jong as well as this news segment featuring Sung Yoon Lee, author of The Sister. Some call Kim Yo Jong the most dangerous woman in the world. She has her finger on the nuclear trigger, without any clear impediment, and has been issuing statements of her own threatening South Korea with annihilation. 

Mexico

The clear beneficiary of US trade policy countering China, Mexico is now the largest trading partner of the United States. FDI and supply chains have moved south of our border, but they still utilize Chinese parts and technology. This applies equally to drug precursors made in China used to manufacture fentanyl in Mexico that has resulted in a million deaths or more in the US. Mexico is also the chosen route of the millions of migrants that have now become the hottest political issue in our upcoming presidential election. A dispassionate observer from another planet might well think that Mexico, not China, is our biggest adversary. 

Source: US Census Bureau, Axios Visuals

Mexico is emblematic of a horizontal power with ties to both vertical superpower alliances. An underestimated risk to the US is growing instability beyond Mexico and throughout Latin America. Evan Ellis has catalogued the influence of China and Russia in our hemisphere—you can find his writing here. It’s not just debt that binds these countries to China— they also have significant US dollar debt. Poor emerging market countries especially are caught between the two. China has a clear lead in telecommunications infrastructure in both Latin America and Africa, and throughout Eurasia, an invisible web.

Forecasting Assumptions

My working assumptions are that:

US-China relations will muddle along this year 

The Ukraine war will continue painfully without victory

The war in the Middle East will not result in regional conflagration. 

We can all imagine variations on these scenarios, but in order to assign probabilities, we need to understand the transmission mechanisms that could result in wider conflicts.

The China Connection

How does China connect to Russia and North Korea? Kim went to meet Putin this fall in Moscow, and since then it has been widely reported that the DPRK has been selling badly needed arms to Russia. It was announced yesterday that Putin will soon visit Pyongyang. It is popularly assumed that China plays the puppeteer to North Korea, but I do not believe that China has that kind of control. More probably Beijing thinks of the Kims as a royal nuisance. However, China does need Russia, and so the PRC is unlikely to raise objections to cooperation between the two, including weapons sales.

Kim has the adulation of his people, inculcated with fear, control, and isolation. He is thirty years younger than Xi Jinping, who is now widely criticized by ordinary Chinese folks as well as the elite in China for his handling of the economy. He is blamed for the steep loss of personal wealth in both property and the stock market. But how firm is their control on power? Neither appears to be the picture of health.

Xi does not have a clear successor, although Minister Liu Jianchao could be a perfect choice to lead an outward facing China. Kim Jong Un appeared haggard in his most recent public appearances, often in the company of his 11-year-old daughter. His sister appears to be the perfect regent, and the obvious power behind the throne. Although the Kim family does not care a fig about what the rest of the world thinks of them and their absolute monarchy. China does, deeply.

My conclusion is that we should not be too worried about China taking advantage of our other overseas engagements to launch an attack on Taiwan. Perhaps we should be doing the inverse, and use China’s current economic weakness to broker a deal on Taiwan. 

We should however be very worried about the Kim family using asymmetrical force against South Korea and Japan, and US military bases so conveniently close and easily within range of their missiles. That is a clear third rail problem. 

Dangerous Crossings

There are ties that bind, and ties that destroy. I have four key concerns. The first two relate to the ambiguous status of two states in the world community:

Iran, not yet a member of the nuclear club, but a key member of the petroleum club, becomes directly embroiled in a hot war with the United States. There are many in Washington who would like to see this happen, and have wanted this for a very long time. We have not had diplomatic relations with Iran since 1979.

Taiwan, whose diplomatic status is tenuous, but which supplies the chips the rest of the world it cannot live without, is blockaded by China. Taiwan will continuously find itself in an untenable position until its status is clarified rather allowed to remain what it is today. Can we imagine a world in which the Davos consensus is that Taiwan should be treated as a sovereign state, ending this dangerous dilemma? 

North Korea does what it says it is going to do, and attacks South Korea.

US-Mexico relations explode into a full-blown conflict in the new Trump Administration.

Transformers

Dangers and opportunities proliferate on the ground during a period of creative destruction and geopolitical strife. Missing an opportunity is not the same as instant electrocution, but to imagine a few possibilities:

If China exhibits signs of a change of leadership and/or a durable economic policy framework, that would be highly impactful on the global economy. The trouble is for business and investors is that in China that the difference between being too early and too late is approximately 15 minutes.

Technology always wins. The trouble with technology is that often regulators and investors don’t do their homework and don’t really understand it. They are content to repeat cocktail party bromides instead, or react in a knee-jerk fashion to thwart innovation—witness cryptocurrencies and the SEC’s 10-year lag on ETF’s. Our elderly politicians are the worst on this topic.

I believe in the American consumer. If election results are seen as positive for business and markets, and the rest of the world lags behind, where else are investors around the world going to put their money? The US needs to use its economic power and strength more adroitly.

Japan seems to have awakened from its slumber. Its markets have outperformed, and the yen is weak which is good for exports. Highly recommend a new book

on Japan by Rick Katz that is just out. We will be doing a podcast soon on this topic.

Conclusion

The global geopolitical landscape in 2024 is a complex grid of intersecting interests and challenges. The unipolar moment is gone, and we now face two competing alliances that have little in common in terms of values or ideology. We need to refocus on the threats posed by North Korea and our own neighbors to the south, especially Mexico. The potential for positive and transformative changes in both technology and leadership offer a note of hope. No country can be considered on its own, but must be evaluated in relationship to others. Instead of being constantly whipsawed by events, we should develop a flexible framework for decision-making in a dynamic and uncertain world.

Next up

In February, we will be delving into the housing market in the US, and the automotive industry globally. We also plan to hold a Zoom call on China. If you’d like to join, please reply to this email and I will sent the details.