Dan Lefkovitz (4:24)

Gotcha. Gotcha. I wanted to ask you about the timeline. I found myself as I was reading the book, wondering if you had to alter anything, any changes based on events.

Neil Shearing (4:34)

Well, when I first spoke to the publishers about this, I had several offers from different publishers, and they said, well, we'd quite like to publish this in the second half of 2025. That means getting us a manuscript, believe it or not, by the end of 2024. And I said, well, that's all very well and good, but there's this thing called the U.S. presidential election in November 2024. And that might slightly shift the dynamics. I don't think it's necessarily going to undermine the argument in any fatal way, but it will certainly shift the to the debate. So the election did ultimately shift the tone of the debate. And I think it matters, and it matters in important ways that we can get into. But the timeline itself was pretty compressed. I wrote the book in about five, six months over the summer of 2024. There was a bit of toppling and tailing after the election in November. The whole thing was put to bed at the end of 2024 and now is being published in the summer of 2025.

Dan Lefkovitz (5:30)

Yeah, yeah. Okay. So in terms of the thesis, you do say that the globalization era has ended, but the world is not necessarily de globalizing. Can you sort of parse that distinction for us?

Neil Shearing (5:42)

Yes. So I mean, let's start by what do we mean by globalization?

Dan Lefkovitz (5:47)

Yeah.

Neil Shearing (5:47)

Now obviously it's about the integration of global supply chains. And that was perhaps the most evident way that we saw the world integrate in the 1990s and 2000s. But it's not just about trade, trading goods, it's trad too. Of course there's an expansion of services trade in the 90s and 2000s that now accounts for about one quarter of global trade as services. Importantly, not tariffs of course, but also the integration of global capital markets. That was a really salient feature of the period of globalization that reshaped the world in the 1990s and 2000s. And it wasn't so much a feature of previous waves of globalization. And of course the integration of labor markets. It was as much about immigration and the migration of people as it was the integration of goods markets and through trade and global capital markets through cross border investment flow. So globalization, I think is not just about the fact that we buy iPhones that contain parts from umpteen different countries. It's about the integration of capital markets so we can choose to invest our pensions, our 401ks all over the world. It's about the integration of labor markets too, and of course the cross border sharing of technology. And so that came together in this post cold war era, shaped of course by the Washington Consensus, which promoted openness and created what I call this period of hyper globalization and hyper because a the world integrated at a pace that was never seen previously. But also we saw integration not just of goods markets, but services and of capital markets and of labor markets, as I've just said. So it was a very broad based period of integration that all came together, completely reshaped the global economy in China's rise. But also we saw rapid growth in India, rapid growth in parts of Latin America, in Central and Eastern Europe. None of the rapid growth in places like Poland and Hungary and the Czech Republic to escape middle income and become high income countries. None of that would have been possible without the integration of markets in Europe. And then came the global financial crisis. Of course, that did two things. One is it started to reveal some of the vulnerabilities that had been allowed to build within the global system during the 2000s. And it meant that in the west we had this incredibly painful period of recovery. It took a long time for GDP to get back to its pre crisis levels, and we've never got back to its pre crisis trend. If you look across Europe, if you look across the uk, if you look across the us GDP is still some way short of its pre GFC trend. And alongside that we a period of where China grew rapidly after the GFC and then in 2012, the accession to the Chinese leadership of President Xi. And with it this sense that China was going to start to challenge the US hegemony abroad and also reassert the primacy of the party at home. All of that came together and created this inflection point where the world really stopped integrating. We started to get pushback against globalization in the west on two grounds. One is it became a convenient scapegoat for some of the frailties, vulnerabilities that were made evident by the global financial crisis, but also on geostrategic and geopolitical grounds. Because suddenly, rather than becoming a vehicle for spreading peace and prosperity, globalization had actually brought China into the global fold. And China was saying, actually we're not going to become more Western. We're going to start to challenge US Superpower status and US Hegemony. And so that you've got to push back against integration, certainly in Washington, increasingly in Europe, on the grounds that it was starting to compromise strategic interests. Now, that doesn't necessarily mean though, that the world is de globalizing. I think too often people conflate the idea that globalization has reached perhaps a natural limit with the notion that somehow countries will therefore retrench, turn inwards. That of course is possible. And the tariffs that have been imposed by President Trump are certainly not how I would be advising him to devise US trade policy. However, I don't think it's necessarily the case that the world is going to de globalize either, in other words, that we're going to see big falls in global trade flows, global capital flows, or indeed global migration flows. And that's what the data is telling us as well, by the way, still close to record highs. So I think the key theme that runs through the book is that the idea that the global economy is fracturing, splitting into these two blocks, rather than countries are turning inwards, trade flows are falling, and we're going back to the 1930s.

Dan Lefkovitz (10:22)

Gotcha. In the book you tell the story of the Chinese company Huawei, sort of emblematic of how globalization has evolved through these different phases. Can you tell talk about why you think the company is a good metaphor?

Neil Shearing (10:35)

Yes, I think it's a great metaphor because when you look into the history of Huawei and lots of really good books have been written on it, I would recommend all listeners to have a read. It's interesting insofar as it charts the course of the Chinese economy in some senses through the 1980s, the period of opening up, then the 1990s, dominance within China in the 1990s, and increasingly expanding overseas in the 2000s to become this symbol really of Chinese openness, openness to the world. And it started in relatively low tech products, switch gears and so on and so forth that we find in our telecoms infrastructure, and then increasingly became this manufacturer of high end, high technology, advanced technology goods. And it was only really in the mid 2010s that we started to get a bit of a pushback in the west to Huawei. Up until that point, it had been the symbol of China's integration into the global economy and indeed its ability to push the limits of the technological frontier. But then we started to get security concerns, in particular, of course, concerns about allowing Huawei products and items produced by Huawei into global telecoms systems and 5G systems in particular. People tend to think it's remembered as the US leading this pushback against Huawei's involvement in 5G networks and compelling other countries to take similar action. But actually it was Australia that first cut Huawei from its 5G networks. Then the US followed suit and then started to put pressure on its kind of traditional allies, if you like, the UK and then countries in Europe, in France and Germany, Italy, to set out timetables to remove components produced by Huawei from their telecoms infrastructure. So I think it neatly charts the idea that both China's rise and integration into the global economy, its preeminence as a global manufacturer through the 1990s, 2000s, and then, and then the early part of the 2000s, and then suddenly these concerns about China's emergence as a geostrategic national security threat, having component parts produced by your potentially your geopolitical rival in your telecoms infrastructure, suddenly Western capitals thinking that's not a good idea. Leading a push to remove them and this new phase of the global economy based around superpower rivalry and NGO strategic interests.

Dan Lefkovitz (13:04)

In talking about the rivalry between the US And China and fracturing, you do say that you're doubtful that China will overtake the US as the world's largest economy. Why?

Neil Shearing (13:15)

Well, I think it's important to understand exactly how the global economy is fracturing and who's aligning and how different countries are aligning on either side of that fracturing divide. In a book, I set out different ways in which this could play out. But I think the central scenario, a reasonable base case, is that that fracturing will be contained to areas that are of great strategic importance to economies. Anything that compromises supply chain security, national security, and technological leadership. I think that's going to be the battleground of fracturing, though, of course, we don't know exactly how this is going to play out. As I say, there's many other ways it could play out, and I chart those in the book. But I think that's a reasonable base case for how things will shape up. And so they're the fault lines. And then the key issue then is to think about, well, how do different countries. Now, my sense is that for all the heated rhetoric between Washington and Western capitals over the past six months or so in the second Trump administration, most European countries and capitals will still align with the US Over China. Indeed, it's striking that we've seen increasing pushback against China from Europe over the past few months. That should not be taken as given. And we can get into how the US Might see some of its advantage in this fractured world by pushing away its allies. I think that's a really big risk. But I think most advanced countries, most Western countries, still align primarily with the US and so when you look at the breakdown of this globalized world you have on the US side, and it comes to economics, you've done some work to back this up with some data on both economic data, but also political data. You have countries in Europe, France, Germany, Italy, the uk, Spain. You have countries in Asia, Japan, Taiwan, Korea, the Philippines, Vietnam. India leans towards the US Although that's perhaps looking a bit more doubtful given recent developments with the U.S. australia, Canada, Mexico. So you get this really diverse group of countries that align with the U.S. now, if you look at China, you really have just China dominates its block to a far greater extent than the US does its block. And most of the countries that tend to align with China, both economically and importantly politically, are either autocracies or commodity producers. Or both. So Russia being the most obvious, but also Iran, North Korea, Venezuela, large parts of sub Saharan Africa, parts of Latin America. That gives China a lead when it comes to the race to secure critical minerals in this fractured world. But when you think about economic growth and technological development, which gets you back to your question about why does China not overtake the U.S. china's really having to do all of that itself. It's having to do a lot of this development of technology itself, particularly if the US starts to cut it out of Western technology. Now China will succeed in some of that is spending, according to our estimates, about 5% of GDP a year on industrial policy and subsidies. And that's helping create these national champions like Huawei BYD Catl, the big battery producer. It's having success at the technological frontier. But that industrial policy, active as it is, is also creating some pretty big downsize and problems for the Chinese economy, manifesting itself in slower productivity growth. So you have soft loans going to companies that are essentially loss making as part of this industrial policy and you're propping up companies that otherwise would go bust and that's bad for productivity growth. So the fact that the US has a more diverse group of countries in its camp, in its block, and the fact that China's having to do this itself and it's having some success, but that success is coming at a cost, I think explains why the US probably still stays ahead of China in terms of GDP on a market exchange rate basis.

Dan Lefkovitz (17:13)

Okay, so you talked about the different scenarios and different directions that fracturing can take us. I'm kind of curious what you've seen so far in the first six months or so of the Trump administration and how it aligns with the different scenarios you envisaged in the book.

Neil Shearing (17:28)

Well, as ever, fracturing is one of those issues, I think, that you think you've just about got it nailed and then something comes along and starts to challenge your assumptions. And of course, sure enough, President Trump is one to challenge one's assumptions. Right? But I think if you take a step back, the broad contours of this fractured world are still evident in the actions of the past six months. In fact, if anything, I think they have strengthened the argument. So if you look, for example, at the tariffs that have been imposed on different countries, China was still facing a far higher tariff rate than almost any other economy at the time that we're speaking. And if you look at the deals that the US has done, for example, with Vietnam, with the uk, with Europe, not only have those locked in at lower tariffs. But they also are reported to include clauses that compel those countries to start to, for example, cut out China from critical supply chains and in the case of Vietnam, curtail rerouting of Chinese exports through the country to the U.S. so it's evident in these deals that the U.S. is trying to push back on China and use some of its leverage to compel allies to do the same. If you also take a step back and look at the level of tariffs that are imposed by the US on countries that align with China, so not just China itself, they tend to be higher than those that it's imposed on its traditional allies, too. So none of that's to say that the US and its allies are going to see eye to eye on all issues over the next four years. They're clearly not. There will be strains in those relationships, but I think the fundamental kind of drivers and causes of this fracturing are still in place, and they're still evident. And they're evident in trade policy, they're evident in investment policy. If you look at the America first investment memorandum that the Trump administration released in the early months of this administration, it's pretty clear they want to cut pushback against Chinese investment in the US and encourage investment from Western allies. So these broad contours of fracturing and drives of fracturing are still there.

Dan Lefkovitz (19:30)

Okay.

Howard Capital Management Announcer (19:30)

Okay.

Dan Lefkovitz (19:32)

Obviously, one of the goals of Trump's terrorist policy is to reshore manufacturing. You call reshoring a populist pipe dream. Why?

Neil Shearing (19:41)

Yes, I mean, partly it's because there's this nostalgia for the 1950s. It seems to me that this idea that it's particularly true in the US but also happens here in Europe. I'm speaking to you from London. There's a sense that these countries are in kind of terminal decline. They've been in decline for the past 50 years, contrary to the economic data, by the way. And the one way to restore our collective prospects is to reinvigorate manufacturing bases, ignoring the fact that, actually, if you ask most people, they don't want to go and work in a steel mill, thanks very much. They're quite happy working in an office where it's a bit more comfortable, you get to sit down all day and you're not operating a blast furnace. But let's leave that to one side. Why is it going to be difficult to reassure jobs in the manufacturing sector? Well, it comes down to basic economics, I think. For one thing, if you look at the composition of. Of demand within most Western economies, there's been a big shift away from goods and towards services over the past 50 years. So we're just consuming more services. So it stands to reason that we need more workers in the service sector rather than in the goods sector. And then to the extent we are still consuming goods, the economics of integrated supply chains means that it's just much more efficient for companies to produce these goods in low cost economies. Now that doesn't necessarily need to be China, China for the US it could be Mexico, it could be India, it could be Vietnam. And indeed what we're seeing is a shift in trade away from China and to wars when it comes to the U.S. those countries. So if you look, for example, in 2015, about 1 in 5 goods imported to the U.S. came from China. That's now down to about 1 in 10. At the same time, there's been a corresponding increase in the share of imports coming from other Asian economies, Vietnam in particular, but also Taiwan and India. So I think we're seeing a shift in global trade flows rather than a collapse in global trade flows that would be associated with reshoring, a big reshoring of manufacturing. Now that's not to say that there won't be any reshoring of manufacturing. I think in some really strategically important sectors, chips, for example, there will be a push to, and a successful push over time to build more chips, manufacture more chips in the US but if you want the kind of poster child for what, why reshoring is so difficult, look at the Foxconn plant in Wisconsin. In 2017 when it was opened, President Trump and at the time Scott Walker, the governor of Wisconsin, said this was the eighth wonder of the world. It was going to produce thousands and thousands, create thousands of thousands of jobs and attract billions and billions of dollars of investment into Wisconsin. Now, in the event those plans have been scaled back dramatically, it's created a few hundred jobs, jobs, it's attracted a few million dollars of investment. But Fox kind of have scaled back their, their plans considerably and it's because the economics of reshoring are difficult and we're seeing instead more production take place in India rather than in China.

Dan Lefkovitz (22:46)

Interesting.

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Dan Lefkovitz (23:37)

You mentioned earlier some historical examples of globalization and it's waxing and waning. I'm curious what you sort of take away from those historical precedents.

Neil Shearing (23:47)

Well, I think the first thing to say is that globalization is not inevitable. Although as I said earlier, there's a lot of commentary about the death of globalization in a period of de globalization. The counter to that often is that globalization is this immutable force. You can't resist it. There's lots of quotes, and I had some in the book, people like Kofi Annan saying trying to defy globalization is like trying to defy gravity. It's impossible. This idea that try and resist globalization if you will, but you won't be successful. And clearly when you look at look at history, that is not the case. We had a period of globalization in the late 19th century, center primarily in Europe and in North America, but also in parts of South America that ended with the First World War and then a period of retrenchment made most infamously with the smooth horny tariffs in the US in the 1930s, where countries turned inward and we saw global trade and production decline. Then we had an attempt to resurrect some form of global integration after the Second World War, and that was successful for a time, but then that stalled in the 1970s. And then after the Cold War and the collapse of the BERLIN WALL In 1989, we had this period, as I say, of hyper globalization, not just integration of trade flows and supply chains, but also capital markets and labor markets. So globalization can take different forms. It's not inevitable. We've had periods where it's waxed and waned before. But when it has waned, when we have had some pullback, it has normally been not for reasons of technology. For example, we've had some technological development that's meant that you can then suddenly do more things at home that you previously were trading overseas, it's been because of policy interventions. So if you think about, for example, the 1930s, what killed globalization then and led to a period of de globalization was a big shift and pushback against globalization. Not in the US with Smoot Hawley, but that was then replicated in The UK and in other parts of Europe too. So it's really technology and policymakers have to create globalization, create integration. It's a combination of new technologies allowing you to do things in different countries and policymakers allowing that. But it tends to be policymakers that kill globalization and lead to a period of de globalization. So it's really, if we're worried about how globalization is changing, think we need to look at the forces generated by policymakers to understand how that's likely to play out.

Dan Lefkovitz (26:19)

Yeah, interesting. Many of us remember a time when China was not so confrontational, wasn't so authoritarian. Could China change course? You mentioned some of the structural headwinds that it faces.

Neil Shearing (26:32)

I mean, it's possible. There's lots of different ways that the relationship between the US and China could play out. It's possible that China changes course. Of course, Xi is a leader that's well into his 70s. Same is true of Putin. Same is true of China. Trump, he won't be around forever. What comes after Xi? Well, it's notable that after Mao, after the death of Mao, we did get a period of liberalization in China under Dong Xiaoping. Indeed, that laid the groundwork for the period of opening and integration that we saw through the 80s, 90s and 2000s. I'm skeptical, let's not rule that out as a possibility, but I'm skeptical that that's nailed on to happen, happen this time. Because the kind of key. I don't think there's a big push for that type of change and shift in China. Don't forget that the 50s and 60s in China was a pretty grim time economically. Whereas of course, now we've had economic revival in China and a big national push to restore national pride and the primacy of the party. And there's not the same push for change. And of course, the architecture around Xi is still very supportive. Lots of people, institutions that will continue the kind of key tenants of Xi Jinping thought, if you like, long after he's gone. So I'm skeptical that we're going to be period of liberalization. And of course, the economics of this are still that China's emerged as this enormous economy. That just was not the case in the 1970s where we had liberalization underdog. Indeed, it was the fact it had struggled for so long that provided the impetus for change. Whereas China now has developed into this global economic superpower that I think the US will find difficult to accommodate even if. If it liberalizes politically.

Dan Lefkovitz (28:14)

I wanted to ask you about the dollar. The dollar's obviously weakened this year and we're hearing growing concerns about the dollar's position as the world's reserve currency. What's your view and what's the connection between fracturing and the dollar?

Neil Shearing (28:28)

Well, I think it's clear that the dollar and the share of transactions globally that are settled in dollars is going to decline over the next decade or so. The question is, what does that really amount to? I mean, let's start. If you look at the triennial survey conducted by the bis, the last one of those suggested that about just under 90% of cross border transactions, both trade and capital flows were denominated in dollars. So the US is starting from an enormous position of strength. Now I have no doubt that if we wind the clock forward, say 10 years, more trade between, between Saudi and China will be denominated in renminbi. China will be successful in its push for settling trade with countries that are a bit more aligned to it in renminbi. But I don't believe that that's going to seriously challenge the dollar's position. I mean, for one thing, trade within the China bloc only accounts for about 5% of global trade. So there's not much trade to settle in renminbi between China and its allies anyway. Most trade still takes place within the U.S. bloc. And the same is true by the way of global capital flows to an even greater extent. We often hear arguments that while China is going to divest its holdings of U.S. treasuries and $ denominated assets, I don't really find that a compelling argument, to be honest. Partly because if it was to do so in a significant way, it would undermine the value of those assets and therefore hit its own balance sheets. But also there's nowhere else really for China to go. It has about $9 trillion of external assets at the moment. And the dollar is so dominant that it doesn't necessarily have to be Treasuries that those assets are held in, but they're likely to be some dollar denominated assets. And then finally there are huge network effects supporting the dollar's position within the global economy, the global financial system. So if you think about the way the products have evolved to facilitate financing in dollars, if you think of the way that payment systems are set up to facilitate payments in dollars, all of that creates this huge network that supports the dollar's role in the global economy. So yeah, why the clock forward? I'm sure that more trade would be denominated in renminbi. I'm sure that China will have some success in its push to internationalize the renminbi. I don't think that's going to seriously challenge the dollar's position now.

Dan Lefkovitz (30:54)

Okay, Okay. I also wanted to ask you about inflation. You talk about in the book about how inflation might not necessarily be higher, but you do see it becoming more volatile as a result of fracturing. Could you explain?

Neil Shearing (31:07)

Yes. So when we talk about global integration, globalization and inflation, I think the common view, if you like, the consensus view, is that globalization was a key driver of the period of low inflation that we had through the 1990s and the 2000s. And I think we just need to check that argument a bit. Globalization was important and the reduction in kind of successive disinflation in goods prices was important, an important contributor to low inflation in the 1990s. But it was by far and away not the only one. Indeed, it wasn't even the most important one. I think the most important one was the rise of independent central banks, more credible monetary policy, and indeed the diminution of labor bargaining power through labor market reforms in the 1980s, 1990s and increased flexibility of labor markets and product markets. So I don't think globalization was quite as important a contributor to the period of low inflation in the 1990s and 2000s as many would believe. Now, when we think about what happens next, in order to get a period of much higher inflation caused by shifts in global trade, you would need to believe that reshoring was going to happen to a large extent and production of large amounts of goods were going to get shifted back to high income countries with a much higher cost base. And that was going to impose costs on firms that would get passed on to consumers. Now, as I said earlier, I don't find that to be particularly likely. I think it's more likely that trade flows to shift and production is shifted to other low cost centers. I do think it's possible that we get more volatile inflation though. And to explain why, let's consider the example of some of China's controls on access to rare earths. What that has done is led to contraction in supply globally of these rare earths. And as you might expect, an increase in the price of those rare earths. There was a story in the Wall Street Journal that some firms were facing 6, 10, 15 times price increase increases. And some of these rare earths that are now used, for example, 80,000 products used by the US military contain Chinese rare earths. And if the price of those goes up by 10, 15 times, then that will have a knock on effect and feed through into inflation. Quite small. But the point is, prices go up, that creates a period of higher inflation. Now what does that do? The fact that the price of those rare earths has increased in markets incentivizes new supply. And that's exactly what we're seeing happen, happening. You see new mines, for example, opening up across the US to mine some of these rare earths. And once that supply comes on stream, supply goes up, price comes down. So we end up with a period of much lower inflation, perhaps even deflation, in some of these goods that are currently seeing higher rates of inflation. So that's one example of how we start to see more volatile rates of inflation. It's not necessarily higher. You get a restriction in supply, it pushes up price. The increase in prices then incentivizes new supply, which pushes back down the price. So you end up with a more volatile part of inflation rather than necessarily a higher part of inflation.

Dan Lefkovitz (34:20)

Well, I can't believe we made it this far without mentioning AI, But I did want to ask you about AI and what you see its impact on productivity as being and how it kind of ties into fracturing.

Neil Shearing (34:32)

Yes. So I think in general, I would characterize myself as an AI optimist. We've done a large amount of trying to work at capital economics, looking at the economics of AI, and all of that points to AI having the characteristics of what we might call a general purpose technology. These are technologies with broad applications in different sectors. And importantly, they tend to be technologies that deliver large increases in productivity. So think about steam power, think about electricity, think about the Internet. Those are all classic GPTs, general purpose technologies. And I think this latest breed of large language models that has been the vanguard of the AI revolution, but by no means the only part of it. I think these can be considered to be general purpose technologies. So in general, that therefore means we should be expecting this to deliver a boost in productivity growth globally. The question is, when does that productivity growth arrive? How big might that productivity growth be? And how, as you say, might that be affected the dissemination of that be affected by these forces of fracturing that we've just been discussing now, when does it arrive? We're starting to see some evidence, if you dig deep enough in the US Data, of it having an impact on the US economy. But it's still pretty small at this stage. So I think it's still mainly a story for the second half of this decade, in the early 2000-30s. How big could it be? Well, I think could be pretty big, actually. It could increase productivity growth by about one to one and a half percentage points, points a year in the decade after widespread adoption, according to some of our estimates. So potentially pretty big. How does fracturing play into this? This is the really critical part. When you look at the countries that are best placed to benefit from AI, you need to think about three things. The first is their ability to develop the technology. The second is their ability to diffuse the technology. And the third is their ability to adapt, adapt to the technology because this is going to be incredibly disruptive. It's going to create new jobs that we can't even conceive of right now. It's going to destroy entire sectors, but also lead new sectors to thrive. So you need to have incredibly flexible adaptive economy to reap those benefits. Now, why do I labor all these points? The point is that on all of those fronts, the US Is the leader. Its abilities to develop the technology. Well, it's US firms that are developing the large language models, but also firms in countries that align with the US using US technology that are producing the hardware and the technologies to support those, not just chips, but also other computing power in data centers. If you think about their ability to diffuse the technology, we're seeing increases in investment around AI, primarily in the US To a far greater extent than we are in other countries. And the US has perhaps the most adaptable economy in the world, incredibly adaptable labor market and product market. Now, there are two issues as it comes to fracturing. I think the first is that we start to see the US Curtail China's access to some of the US technology in the AI space, therefore forcing China to develop its own technology. We've seen that with Deepseek. It will get there. I think it will do that, but it would perhaps take longer than would otherwise be the case if it had access to technology. And the fact is, getting there is also now starting to generate this discussion in the US about, well, actually, should the US just accept the technology controls are porous, they don't work, and allow China access to its technology and therefore generate some strategic leverage by getting US Technology into the Chinese ecosystem. So I think that's a really important debate to pay attention to. And the second important issue is the extent to which some of the policies being pushed by the Trump administration frankly diminished the adaptability, the flexibility of the US economy. If you think about labor market reforms, the immigration clampdown that makes it harder for the US labor market to adapt to some of the challenges posed by AI. If you think about some of the incoherent, inconsistent, we might say approach to different industrial policies and tariffs. That makes it hard, harder for U.S. firms to invest around some of this technology. So two big risks there, I think.

Dan Lefkovitz (38:58)

For the U.S. okay, you mentioned earlier that the tariffs have really been focused on goods and not so much services and not so much capital flows. I'm curious, so many of our listeners are involved in investing and portfolio allocation. I'm curious what you see as the impact of fracturing on global capital flows.

Neil Shearing (39:20)

Yes, well, I think the first point to say is that an overwhelming majority of flows in the global capital markets take place within the U.S. bloc between the U.S. and Europe. That's the key nexus for global capital markets. And so by and large, I think that's going to remain unaffected by this fracturing. Likewise, China's inbuilt tendency to run a trade surplus, current account surplus, because it has these high domestic savings rates means that it will continue to accumulate external assets that's just a function of the balance of payments. If you run a current account surplus, you must therefore be accumulating foreign assets. And the degree to which it's doing that, because it's now the world's second largest economy at market exchange rates, means that that will naturally lead it to have to accumulate dollar based assets because the dollar is just so important, it's just so dominant, as we've just been discussing. So I don't really see a big fracturing, if you like, of the global kind. And I still think that China will continue to invest in dollar based assets because it has another option. And I still think that most of these capital flows between the US and Europe will continue where I do think that there will be greater restrictions and some change will potentially be in some private market flows. I think we're already starting to see US Investors becoming more reluctant to invest in private markets. In China, of course, the rules and regulations governing those investments are a bit more opaque. They're not regulated to the same extent as publicly listed and investments. And I think we'll start to see pushback in the west and in the US in particular against investment by China in strategically important sectors. Chips, electric vehicles. Interestingly, we started to see some pushback against any dual use goods, anything that has an application in both civilian and military life. I think we'll see pushback against investment in those sectors, pharmaceuticals, biomedicine and so on and so forth. Those are going to be the areas where I think that we'll start to see see some pushback against Chinese investments.

Dan Lefkovitz (41:24)

Okay, you have a whole chapter of the book devoted to Taiwan. I'm curious if you can talk about why you think Taiwan is so important and what you see as the most likely scenario there.

Neil Shearing (41:35)

Yes, Taiwan is important for many reasons, but most obviously because if we're starting to think about ways in which this could go seriously wrong, then the biggest economic costs are generated by something going wrong, some conflict over Taiwan. Now, the central scenario, as I just laid out at the start of this podcast, is one of a kind of fractured global economy that is contained to areas of strategic importance and one where the US and China, they pull apart in those areas, but they continue to trade in others. They don't come into conflict. If they do come into conflict, and there's plenty of ways in which you can imagine that that could happen. The most obvious way, though, that this could happen, I think, is a conflict over Taiwan. Now, I'm not a military expert, I'm not even a geopolitical expert. I'm a lowly economist. So the question really is to think through what form might any conflict over Taiwan take and what might the economic costs of that be. Now, I think when we think about conflict over Taiwan, certainly when I think about conflict over Taiwan, it stirs up these images of kind of almost like a D day invasion by the PLA on Taiwanese territory. And. But actually, most serious people say that's incredibly difficult to do and that you might instead get different forms of Chinese interference in Taiwan blockades, for example, of shipping lanes, you might start to see them take one or two outer islands, but not necessarily launch a full scale invasion of Taiwan itself. So lots of different ways it could happen. The key thing from the point of view of the global economy, though, is the extent to which the US feels compelled to try and push back against any Chinese invasion in Taiwan. And then what happens to global chip production? Because this is the, if you like, if Russia and its production of energy, that was the main transmission mechanism, Russian energy was the main transmission mechanism through which Russia's invasion of Ukraine affected the global economy. Disruption to those supplies, it would be disruption to chips. That would be the main impact on the global economy from any the Chinese intervention in Taiwan. And that could be enormous. It would affect all of our daily lives. It would affect the production of cars, it would affect the production of smartphones, it would affect the production of any number of goods that we use in our everyday lives. And the economic cost of that would be huge. I've got some estimates in the book, potentially as much as 10% of GDP.

Dan Lefkovitz (44:06)

Neil, by way of a final question I wanted to ask you alluded to earlier how supply chains are realigning as a result of fracturing. I wonder who you see as some regional winners and losers.

Neil Shearing (44:18)

Well, a lot depends upon how the political process of fracturing plays out. We're already starting to see and saw through the first Trump administration and the Biden administration winners in Asia. We've started to see Vietnam export an enormous number of goods to the U.S. its exports to the U.S. have surged, and we started to see Western firms settle up production in Vietnam. The same is true of India. Apple, for example, suggested in response to Trump's tariffs on China that it was going to move more production to India and parts of the supply chain are going with it as well. And Mexico has been a big winner in all of this too. And by and large, I think if this contained form of fracturing continues to play out and the Trump administration successfully renegotiates, USMCA keeps in place tariff free access to the US for manufacturers in Mexico that are USMCA compliance, continues to push back against Chinese rerouting of goods exports through Vietnam and can somehow repair relationships with India, then I think those are the kind of key contours of the winners in this fracturing world. I might also add to that in Eastern Europe we might see countries like Poland benefit from some reconfiguration of supply chain chains in Europe away from China. So I think they're the key winners, but it really depends upon the ability of those governments, I think, to maintain cordial relationships with Washington. And of course that's going to be strained through the Trump administration.

Dan Lefkovitz (45:54)

Well Neil, this has been fascinating. Many congrats on the book and thanks so much for joining us in the long view.

Neil Shearing (45:59)

Thanks very much for having me.

Dan Lefkovitz (46:06)

Thank you for joining us on the Longview. If you could please take a moment to subscribe to and rate the podcast on Apple, Spotify or wherever you get your podcasts. You can follow on socials, dan Lefkovitz on LinkedIn, George Cassidy is our engineer for the podcast and Cary Greshik produces the Show Notes each week. Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at thelongvue@morningstar.com until next time. Thanks for joining us.

Podcast Disclaimer Narrator (46:35)

This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording and are subject to change without notice. The views and opinions of guests on this program are not necessarily those of Morningstar Inc. And its affiliates, which together we refer to as Morningstar Morningstar is affiliated with guests or their business affiliates. Unless otherwise stated, Morningstar does not guarantee the accuracy or the completeness of the data presented herein. This recording is for informational purposes only, and the information, data analysis or opinion it includes or their use should not be considered investment or tax advice and therefore is not an offer to buy or sell a security. Morningstar shall not be responsible for any trading decision, damages or other losses resulting from or related to the information, data analyses or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives, and risk factors profile. Before making any investment decision, please consult a tax and or financial professional for advice specific to your individual circumstances.

Neil Shearing (48:13)

Sam.