Geopolitical Update – March ‘24

1. U.S. – China Updates

2. Collateral Damage in Egypt

3. AUKUS + Japan

4. Alliance in the Sahel

Multiple Updates on the U.S.-China Cold War

Somewhat lost amongst the more pressing Russia – Ukraine and Israel – Hamas conflict, is the ongoing and escalating tit-for-tat between the U.S. and China.

In 2022, China released Document 79, a directive passed down by Beijing to its high ranking officials, who, according to the Wall Street Journal, were only allowed to read it but not make any copies due to its sensitive nature.

• In a nutshell, the goal of Document 79 (known by some as ‘Delete A’, for Delete America) is to eliminate the use of Western technology in China by 2027. State owned firms are required to provide quarterly updates on their progress in replacing foreign software with Chinese alternatives.

• While this directive is almost two years old, it’s presumably back in the spotlight as the U.S. grapples with the possibility of forcing TikTok, the digital version of fentanyl that 130+ million Americans use, to either shut down or sell itself to a U.S. based company.

• While the media is just now beginning to cover the Document 79 story, the market impacts are already well underway, the most obvious of which is coming from Apple, where China, which represents ~20% of Apples total sales, banned government officials (some 60 million people) from using iPhones at work back in December 2023.

• Additionally:

  • Microsoft: Chinese sales now account for just 1.5% of the company’s overall sales.

  • HP Enterprise: Market share fell from 14.1% in 2018 to 4% in 2023.

  • Cisco: Market share has halved in the past five years, down to 8%.

  • Chinese customers who were previously buying IBM-powered rack-mount servers are now requesting Chinese-made servers utilizing Huawei chips.

  • Communications platform WeChat is also shifting its hosting and data management from Oracle, IBM, and Microsoft to Chinese companies such as Alibaba and Huawei.

In summary, Western tech companies face significant challenges in China as the country continues to actively promotes its own technology ecosystem. The shift toward consumption and reliance of domestic alternatives may continue to impact Western companies’ presence and influence in the Chinese market.

Trade sanctions are taking their toll and forcing China to diversify its economy away from the U.S. From Semafor:

• "Chinese Foreign Minister Wang Yi said U.S. sanctions on China have reached a “bewildering level of unfathomable absurdity.” The sanctions have pushed Beijing to expand its trade in other regions, where it is finding some success: According to recently released data, Chinese trade with Russia rose by 7.1% in the first two months of the year, far above analysts’ forecast of a 1.9% increase. China’s investment in the Asia-Pacific region has risen sharply too, as Beijing tries to diversify its supply chains. According to a report co-published by Shanghai’s Fudan University, Chinese investment in the region totaled nearly $20 billion last year, up 37% from 2022, Nikkei reported.”

China is reportedly readying a $27 billion fund to accelerate its push into cutting-edge chips. 

• The “Big Fund” aims to pool capital from all levels of government to carry out bigger projects than would be possible at provincial or local levels, Bloomberg reported. The move is the latest in a series of efforts by Beijing to undermine the U.S. push to curb China’s access to cutting-edge semiconductor technology (brought about largely from the passage of the CHIPS Act where Washington has enlisted key allies whose companies supply advanced chip-making equipment). Chinese officials are increasingly developing new public-private partnerships to develop key chip-related technologies, and are “worried about future controls,” a new paper by a China chip expert noted in American Affairs Journal.

Egypt Becomes Collateral Damage of Houthi Attacks

Egypt is the third largest economy in Africa, and while the country hasn’t lost any ships to the Houthi attacks and isn’t engaged in any armed conflict in the region, their economy has been the hardest hit in the world.

• Since the Houthi attacks began, hundreds (potentially in the thousands now) of cargo ships, tankers, bulkers, car carriers, and other vessels have been diverted away from the Suez Canal route to around the Cape of Good Hope on South Africa’s most southern tip. Egypt manages the Suez Canal Authority (SCA) and therefore collects revenue in the form of fees that ships must pay to pass through. In 2023, the Suez brought in almost $10 billion of GDP for Egypt (~2% of total GDP), but according to Egyptian President Abdel-Fattah al-Sisi, that number has now been cut in half.

• Even before the Houthis, the Egyptian economy was already slowing, which forced them to begin bailout negotiations with the IMF. This is the primary reason why Egyptian authorities have been adamant about keeping the Rafah Border Crossing closed (Egypt, not Israel, controls this) – the fiscal health of Egypt was already under tremendous strain, to the point where they do not have the capacity to take in a mass number of refugees.

• The fiscal situation all came to a head on March 6^th , when the Egyptian Central Bank hiked interest rates 600 basis points to 27.25%, while devaluing the Egyptian Pound 40% vs. the US Dollar. These measures were assumed to help facilitate an $8 billion loan from the IMF, which should hopefully stave off Egypt’s worst financial crisis in decades.

• On the back of all this, the United Arab Emirates announced it has made a $35 billion investment into Egypt to develop some of the last pristine Mediterranean coastline: “The deal with ADQ, the smallest of Abu Dhabi's three main sovereign investment funds, is for the development of the Ras El Hekma peninsula and could eventually attract as much as $150 billion in investments, Egyptian Prime Minister Mostafa Madbouly told a press conference.”

• This investment is the largest foreign investment ever into Egypt – for reference, in all of 2023, total foreign direct investment (FDI) into Egypt was just $10 billion. The initial $35 billion from UAE is slated to be deployed over the course of just two years.

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While NATO Gets all the Attention, AUKUS + Japan is Gaining Relevance

Three points to be made about the importance of Japan and South Korea as Western allies:

1. Local Japanese media outlets are reporting the possibility of Japan joining the Australia-UK-US (‘AUKUS’) security tech pact, though not its nuclear-powered submarines component. There’s speculation this could be announced during Prime Minister Fumio Kishida’s visit to Washington next month.

2. Per the Wall Street Journal, “Over the past five years… U.S. arms exports to Japan increased by 161%.” Additionally, in December, the Japanese government outlined a plan to double its defense budget, which included a 16% increase for 2024 as well as suspending its post-WW2 ban on lethal weapons exports, which points to the countries shift away from its now previous “self defense only” principles. Per the AP, “The moves came as Japan accelerates the deployment of long-range cruise missiles that can hit targets in China or North Korea while Japanese troops increasingly work with allies and take on more offensive roles.”

3. The U.S. Navy announced that it is looking to bring in Japanese and South Korean shipbuilders to help them revive dormant shipyards in the U.S. as China continues to accelerate its Naval buildup.

   • Following his visit [U.S. Navy Secretary Carlos Del Toro] to South Korea last week, Del Toro traveled to Japan, where he toured Mitsubishi's shipyard in Yokohama and discussed efforts to revive the U.S. maritime industry with leading shipbuilding executives, said the Navy in a separate statement.

   • Matthew Funaiole, senior fellow for the China Power Project at the Center for Strategic and International Studies, said these meetings "underscore a strategic effort by the U.S. to bolster alliance and enhance technological and industrial cooperation" with its allies.

   • "China may be the world's largest shipbuilder, but South Korea and Japan are number two and three, respectively," continued Funaiole.

The key takeaway here is that the combined shipbuilding capabilities of the U.S., Japan, and South Korea could not only keep pace but stay ahead of the PRC’s shipbuilding rates, which would be essential for deterrence against China.

Here’s a good article to get you up to speed on Korea’s desire to maintain a shipbuilding edge over the Chinese.

EU Defense Spending May Finally be Coming

• Per Semafor: The EU’s executive body proposed that member states be required to spend at least half their defense budget within Europe in a move to reduce reliance on U.S. weapons. Since Russia’s full-scale invasion of Ukraine, almost 80% of EU states’ military spending has been spent outside the EU, with more than 60% going to the U.S. alone. The move comes as experts have called on France and Germany, Europe’s biggest economies, to ramp up their support for Kyiv. “At a time of multiplying security challenges, the overwhelming message from Europe has been one of disarray and fecklessness,” a senior fellow at the Brookings Institution wrote in the Financial Times. The EU Commission proposal also included a $1.6 billion spending package to boost Europe’s arms industry, an amount one of the commissioners acknowledged was “not a lot.”

• Additionally, Poland has recently made the case and a big push for NATO members standard defense spending to be increased from 2% to 3% of GDP (Poland is currently spending 4% of GDP on defense, the highest of all NATO members).

Niger, Mali and Burkina Faso to Form Joint Force to Fight Jihadists

• “Groups linked to both Islamic State and al-Qaeda have killed thousands of people in the region in the past year.

• The military regimes in the three countries have become increasingly close allies in recent months.

• Last September, they formed a mutual defense pact known as the Alliance of Sahel States (AES), withdrawing from an international force, G5, that was set up to fight Islamists in the region.

• Violence in West Africa's Sahel region has worsened in recent years despite the military governments' promises to deal with the decade-long conflict with jihadist groups.” 

The three countries have all severed their ties with France, the former colonial power, which for years had a strong military presence across the Sahel.” 

Lastly, just this past week, Niger formally announced it is ending its strategic partnership with the U.S. (the U.S. military had 650 troops working in Niger as of December 2023), while Russia is gaining an increased role and presence in the region. Niger had been seen as one of the last nations in the region that Western nations could partner with to beat back growing jihadi insurgencies.

If you want to understand more about the situation in Africa we published deep dive last week that is a must read – Commodities and Great Power Competition in Africa.