The Most Important Schism Within The U.S. That No One Is Talking About
Author’s Note: I’m not writing to convince anyone of my perspective. I’m writing this because I want my thoughts on the record. This will be the last standalone piece I write related to geopolitics before I write my third and final Assay on Defense Tech investing.
I have been in Brazil for schoolwork and vacation for the past seventeen days—ten days in Sao Paulo and seven in Rio de Janeiro.
During my stay in Sao Paulo, I attended an invite-only talk (organized by Harvard Business School) on how global supply chains are shifting amid geopolitical conflicts in Taiwan, Ukraine, Yemen, and Israel.
The talk was illuminating. It was nice to apply what I’ve learned in my MBA coursework—especially Business, Government, and the International Economy (BGIE)—to current global conflicts.
I asked the presenter one burning question I’ve had on my mind for a while:
Is it possible for the U.S. to reindustrialize in this current era of globalization?
The presenter's response was direct and to the point: “For those who are knowledgeable, the answer is no.”
Their answer was a massive vindication of the article I wrote at the beginning of this year: The $3.5 Trillion ‘Catch 22’ of Re-Globalization.
In that piece, I wrote the following:
“Therein lies America’s ‘Catch-22’: a strong USD undermines the defense industrial base, undermining the DoD’s overall strength and capabilities. Yet, America needs the DoD at full strength and capacity, as the USD remaining the GRC is a positive byproduct of the DoD’s vitality.
This tension must be resolved before any other foreign and domestic issues can be addressed.
There are no easy decisions to make, and there’s no guarantee that America can reindustrialize with the prevailing global macroeconomic and geopolitical conditions.”
It feels great knowing that my instincts were dead on.
If I take my analysis even further with this confirmation in mind, there’s an important schism that very few have noticed.
America’s economic elites are at odds with the country’s national security establishment concerning China.
Sure — from the headlines we can see there’s robust bipartisan support for supporting our allies against China, Russia, Iran (vis-a-vis Hamas), as shown by the $95B aid package to Taiwan, Ukraine, and Israel recently written into law.
But take a closer look under the surface of ostensibile unity, and you’ll find a deeper, irreconcilable division.
On one side of the spectrum, you have Corporate America, best represented by JPMorgan & Chase CEO Jamie Dimon, and on the other side, the U.S. Government, appropriately represented by U.S. Secratary of the Treasury Janet Yellen.
Yellen recently completed a diplomatic visit to China. She’s on record saying the following to the Wall Street Journal about China’s “overcapacity”:
“People like me grew up with the view: If people send you cheap goods, you should send a thank-you note. That’s what standard economics basically says,” she said. “I would never ever again say, ‘Send a thank-you note.’ ”
It’s an incredibly hawkish stance, considering she’s “someone seen as a dovish member of the Biden administration.”
Compare Yellen’s aggressive statement to recent commentary from Dimon on China (JPMorgan Annual Report 2023, Letter to Shareholders):
“While we may always have a complex relationship with China (made all the more complicated and serious by ongoing wars), the country’s vast size and importance to so many other nations requires us to stay engaged — thoughtfully and without fear. At the same time, we need to build and execute our own long-term, comprehensive economic security strategy to keep our position safe and secure. I believe that respectful, strong and consistent engagement would be best for both our countries and the rest of the world.”
Notice how Dimon’s words are more measured, even deferential than Yellen’s.
China has been great for Corporate America, but not so much for the rest of the country. Don’t believe me? China’s President Xi Jinping was welcomed with open arms to California in November 2023 by Governor Gavin Newsom and a slate of Fortune 500 CEOs: “Apple CEO Tim Cook, Tesla chief Elon Musk and Blackstone’s Steve Schwarzman were among the guests,” per CNBC.
Hell, they even gave Xi his own Golden State Warriors jersey! Wall Street is extremely satisfied with its current economic relationship with the CPC and China.
However, Washington, is not. The Biden administration recently took against against China in the form of increased tariffs on the latter’s semiconductors, solar panels, steel and aluminum, and electric vehicles (EVs).
The banking chief’s take on the White House’s tariffs, as reported by Fortune, is that “Dimon said Biden’s recent tariffs will ramp up the tension between the U.S. and China, but the relationship “doesn’t have to be war. It could be tough competition.””
Foreign policy is more important than ever because our nation is entangled in many global conflicts during an election year.
To his credit, Dimon understands the national security issues at stake amid a profitable relationship between Corporate America and China:
“Economic national security is paramount — both for the United States and for our allies.
It is a valid point that the Western world — both government and business — essentially underestimated the growing strength and potential threat of China. It’s also true that China has been comprehensively and strategically focused on these economic issues, all while we slept. But let’s not cry over spilled milk — let’s just fix it.
We missed the potential threat from three vantage points. The first is companies’ overreliance on China as the sole link in their supply chain, which can create vulnerabilities and reduces resiliency. But to the extent this involves everyday items, like clothes, sneakers, vaccine compounds and consumer goods, this dependency is not as critical or complex and will eventually be sorted out.
The second is the most critical. The United States cannot rely on any potential adversaries for materials essential to our national security — think rare earths, 5G and semiconductors, penicillin and materials critical to essential pharmaceuticals, among others. We also cannot be sharing vital technologies that can enhance an adversary’s military capabilities. The United States should properly and narrowly define these issues and then act unilaterally, if necessary, to fix them.”
The question is, which interests are more important: America’s economic growth or national security?
Dimon is trying to thread the needle here delicately (note his phrase “economic national security” and how economic comes first!), almost diplomatically, as he doesn’t want the U.S. to overreact against China and kill the golden goose that has enriched Corporate America for years and brought cheap consumer goods to American citizens.
But you can’t have your cake and eat it. America’s economy is too financialized to have both economic growth and national security.
Greg Hayes, CEO of Raytheon, told the Financial Times that the company had “several thousand suppliers in China, and decoupling . . . is impossible.”
“We can de-risk but not decouple…” adding that he believed this to be the case “for everybody.”
“Think about the $500bn of trade that goes from China to the US every year. More than 95 percent of rare earth materials or metals come from or are processed in China. There is no alternative,” said Hayes. “If we had to pull out of China, it would take us many, many years to re-establish that capability either domestically or in other friendly countries.”
The inconvenient truth is that the economic interests of corporations doing business with China will supersede America's national security interests.
It means that the USD will continue to stay strong, making production for key strategic industries unfavorable for domestic producers, which means the continued reliance on Chinese vendors in global supply chains via domestic imports.
The current state of affairs means that if the U.S. were to go to war with China, America would be at a major disadvantage, given how integral China is to our supply chains for key strategic industries. It would not go well for either side.
More immediately, our ability to support our allies in conflicts in Eastern Europe, the Middle East, and Southeast Asia is limited by our lack of a strong defense industrial base. America’s defense industrial base will continue to atrophy as economic growth is deemed more important than national security.
The final thing I want to say here is that despite everything I’ve laid out here, the U.S. is still in a solid position to chart its own destiny amid choppy waters because it has the largest financial markets in the world.
Dimon himself convincingly argues that the U.S. still has significant leverage in the face of China’s rise, as he states, “America still has an enormously strong hand — plenty of food, water and energy; peaceful neighbors; and what remains the most prosperous and dynamic economy the world has ever seen, with a per person GDP of over $80,000 a year. Most important, our nation is blessed with the benefit of true freedom and liberty.”
Everyone depends on America’s primary and secondary markets functioning to ensure stability in global trade and commerce. One could argue that makes America still the “indispensable nation” in global affairs.
However, I’ll leave you with an image, a quote, and a final question:
Image:
Quote:
Joseph Chamberlain, Secretary of State of the Colonies of the British Empire, said, “Banking is not the creator of our prosperity, but is the creation of it. It is not the cause of our wealth, but is the consequence of our wealth; and if the industrial energy and development which has been going on for so many years in this country were to be hindered or relaxed, then finance, and all that finance means, will follow trade to the countries which are more successful than ourselves.”
A parting question:
America offshored its industry, and left finance to fill its void to drive GDP to greater and greater heights.
Finance follows trade, and right now, China is the center of the world when it comes to trade…
What will happen to America if China succeeds in becoming a financial superpower and displaces our nation’s role as the financial center of the world?
It’s become clear to me that there’s very few people within decision-making circles and bodies in the U.S. who understand this tension between economic growth and national security even exists (apparently not all growth is good growth!), let alone have any serious and sober solutions to this emergent dilemma.
What’s the average U.S. citizen supposed to do about this?
Nothing.
There’s nothing that can be done. The best thing to do is to keep your head down and let things play out, as the decisions that led to the current state of affairs were made decades ago. We are only in the early-stages of the consequences of such past actions taken.
It’s too late to change course.
Soda
