Britain, Economic, Government, International trade, Politics, Society, Technology

Wresting opportunity from this geopolitical crisis

GEOPOLITICS

Intro: If Britain is nimble and responsive to this global crisis it can be a winner in an era beset by conflict. Confident governments that circumvent risk will benefit handsomely

Amid the geopolitical storms and instability emanating from Ukraine to the Strait of Hormuz, flickers of light are piercing the gloom. To paraphrase Charles Darwin, it is not the strongest that survive, but those most responsive to change. So too, with nation states. Mid-ranking powers are navigating independent paths to mitigate risks and grasping opportunities lacing the chaos. There are lessons here for Britain.

In Ukraine, necessity has proved the mother of invention. Since Russia’s invasion, Ukraine has revolutionised its industrial-defence base, changing the face of global warfare. In 2024, Ukraine conducted the first fully autonomous drone strikes on Russian targets. The scale of innovation is equally dramatic. Ukraine has reduced its reliance on foreign-supplied military hardware, from 54 per cent to 18 per cent, in three years. Now, Gulf states are queuing up to buy its drones to defend themselves against Iran.

Such rugged self-reliance and determination persuaded the United Arab Emirates (UAE) to leave OPEC, the 12-country cartel that fixes oil prices and supply. “Opexit” will enable the UAE to increase its oil production by around 40 per cent, and help to ease global shortages. In doing so, the UAE has derided regional rivals, deepened ties with the US and Israel, and signed a defence pact with Ukraine. These moves are highly controversial for a mid-sized power under lethal fire – responding with vision and self-confidence.

The trend is not limited to those facing military pressure. When China responded to Australian criticism over Covid in 2020 by imposing tariffs, the government in Canberra reduced its dependency on China. It expanded trade with South-East Asia, and signed Aukus, the defence co-operation pact with Britain and the US.

In the wake of US tariffs, Canada signed a dozen new free trade deals, and launched a sovereign wealth fund to boost critical mineral supply chains with allies. It has ramped up defence spending, and is partnering with innovators in defence tech. 

The emerging trend undermines lazy assumptions that mid-sized nations must choose between or bow to larger powers. Confident governments that manoeuvre nimbly can circumvent risk. By co-operating in clusters with like-minded partners, they can seize the opportunities accompanying geopolitical ructions.

There are clear lessons for Britain. Since 2019, UK trade has increased – measured by volume or as a proportion of GDP. The latest United Nations statistics show that, since its departure from the EU, Britain rose from seventh to fourth place in the global trade rankings, spurred on by trade deals with Australia, India, and the 11 countries of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. As a services-oriented economy, the UK should strike further deals from the Gulf to South America.

UK trade objectives, however, must play to our comparative advantages. London remains the second-largest financial centre in the world, contributing 20 per cent more to the UK economy than it did in 2016. We can build on this by securing greater market access abroad. Reform at home would help, too. With public finances strained, state support should focus on sectors where the UK offers global leadership from life sciences to AI, for example, to make it easier for large funds to invest in data centres and defence procurement.

As the conflict in Iran shows, the global economy is still acutely reliant on traditional maritime supply chains. Britain has a long history as a leading maritime nation, and UK firms – like GB Global – are looking to high-tech logistics and modular methods of shipbuilding to mitigate these risks. The Government can do more to support this strategic sector, in ways that would boost tax revenue.

If Britain aims to lead in innovation, we need a reliable supply of critical minerals. Similarly, Europe-wide efforts to rebuild defence capabilities will fail without a stable supply of heavy rare earths.

While the West lags behind China by around 20 years in the race to mine and refine these commodities, Europeans have been slower to respond than the US, Canada, Japan, and Australia. The UK has some natural resource and refining capacity, but is yet to translate strategic objectives into operational delivery. One option is to help finance projects abroad in return for the off-take needed to service industry.

Likewise, in defence tech there is a UK hub emerging in Swindon, but it needs a technical college to provide the skills, faster procurement decision-making, and a revamp of the electricity grid to attract businesses.

The splintering of the post-1945 international order has sent waves of uncertainty around the world. Yet mid-sized countries can navigate turbulent geopolitical waters, but only if they face the new realities and play to their strengths.

Standard
China, Digital Economy, Economic, International trade, United States

Essay: Hormuz has exposed flaws in Beijing’s economic model

CHINA’S ECONOMIC MODEL

Intro: As the US president prepares to visit Beijing, he may have ended China’s decades-long growth miracle. Trump’s war on Iran, and especially the closure of the Strait of Hormuz, has China in a chokehold

In the modern era, we have witnessed among many things, a robot that can win a half-marathon, a pilot-less plane, a soap opera made by AI, and an electric supercar with a top speed of 308 miles per hour.

Whenever a new bit of Chinese-made tech goes viral online, it seems to be something that goes further, faster, or smarter than ever before. And every time, it feels like a silicon-made metaphor for China’s coming of age as a global superpower.

As Donald Trump prepares to visit Beijing this month, he confronts a Communist Party regime that, on the face of it, looks on the up. Beijing controls access to critical minerals used by his military, and holds at least $700bn (£517bn) in outstanding loans to his government.

Little wonder that, even as he pours scorn on Sir Keir Starmer, Emmanuel Macron, Friedrich Merz and Mark Carney, Trump deferentially refers to his Chinese counterpart Xi Jinping as “the Highly Respected President of China”.

However, that doesn’t mean Trump is making things easy for Xi.

First he choked off the half-million daily barrels of oil that China was buying from Venezuela.

Now, his attacks on Iran, leading to the closure of the Strait of Hormuz, has squeezed another 40pc of Chinese crude supply.

An oil crunch is never good news, but Beijing was prepared for this. Through price caps, export bans, fuel stockpiles and home-grown alternatives to imported oil and gas, China has managed to stave off the early economic threat from the Iran War.

If the conflict drags on and the Strait of Hormuz remains closed, however, China could start to feel the pinch.  

A global slowdown or recession could cut demand for its exports, which have been almost single-handedly propping up the Chinese economy ever since the country’s great property crash of 2021.

And if that happens, Xi may struggle to keep a lid on three ticking time bombs sitting beneath China’s economy: its reliance on bloated factories churning out exports; its spiralling budget debts; and its alarmingly shrinking population.

Xi hopes to diffuse these problems by winning the global race on artificial intelligence, quantum computing, and robotics. But the Communist Party is also eager to stay in control, so it may struggle to make the most of this disruptive juggernaut.

The war against Iran isn’t going to plan for Trump. Yet whatever his intentions were, he may have triggered the tripwire that will blow up China’s decades-long growth miracle.

And this won’t be the only consequence of the Iran conflict that Xi is currently weighing up.

As ever, his thoughts will have quickly turned to Taiwan – an island whose reunification, he has previously said, is a task for his generation to fulfil.

He might like what he sees. The war in the Gulf may divert America’s attention, money, and resources away from the Pacific. It may strain alliances in which Taiwan has put faith.

If Iran’s asymmetric resistance to superior US forces is a play-book for Taipei, then Beijing can pick up strategies and tactics on how to push past it.

Chatham House, a think tank, says that a world in which the Trump administration is expressing a lot of transactionalism, and with the US maybe diminished by its failure in Iran, all of this opens up possibilities for Beijing vis-à-vis Taiwan.

Perhaps this is why Xi has been relatively quiet on Iran. Since the war began on February 28 he has only once picked up the megaphone, urging a swift reopening of Hormuz. This is likely to remain his top priority – the Chinese economy, and his regime’s legitimacy, may yet depend on it.

Economic shock

On Zhihu, a Reddit-style Chinese social media site, users enjoying a cloak of anonymity are swapping stories on the impact of the US-Iran war.

One user wrote: “My industry uses plastic as a raw material… Since plastic is a derivative of oil, the cost of raw materials has doubled and changes three times a day, with no stable price. As a result, global customers have stopped placing orders because they dare not order.

“Work has stalled, and the long-term high-pressure work is exhausting. I can’t change natural disasters or man-made calamities. Fine, I’ll go relax for a few days. But I realised that air ticket prices have also gone absurdly high, so I can’t go out.

“I have no choice but to squat every day in front of the Longjiang Braised Pork Leg Rice stall downstairs, asking, ‘Is it half price after 8pm?’”

China is powerfully exposed to the current of high costs rippling out from the closure of the Strait of Hormuz, the vital conduit for oil, gas, petroleum products, and fertiliser. China imports about 70pc of the oil it needs, of which about half comes from the Persian Gulf. Its shipments from there slumped by a third in March from a year earlier, and that number doesn’t even include the illicit Iranian oil.

On the gas front, about half of China’s gas imports come via pipelines from Russia, Myanmar and central Asia, with the rest arriving on LNG tankers. A third of that LNG comes via Hormuz, and imports plunged by 41pc in March.

For now, the damage may be less than these numbers might suggest, because China has spent the past decade building a huge and still growing domestic gas industry.

This insurance policy means home-grown output now satisfies almost two-thirds of China’s gas demand, so the Iran War has disrupted just 5pc of China’s total supply. It looks as if, in some ways, China has been preparing for this type of situation better than anybody else.

The Chinese have been similarly savvy with crude oil. Last year it bought 11.6 million barrels per day (bpd), taking advantage of lower prices to stockpile almost half a million bpd. By the end of 2025, that reserve totalled almost 1.4 billion barrels, vastly more than the rest of the rich world put together.

If China released supplies from this trove of black gold at a rate of 2 million bpd, a level that would largely negate the Hormuz closure, the stockpile would still last until at least the end of next year.

Still, the Chinese aren’t leaving anything to chance. Beijing told its refineries to stop exporting petrol, diesel, and jet fuel – in case supplies run low. But this has rebounded on Beijing. The move irked trading partners such as Vietnam, the Philippines, Singapore and Australia, whose fuel shortfalls have been exacerbated by China’s parsimony.

China appears to have now acknowledged that its stockpiles are almost too big, and that it needs to mend some fences. According to Bloomberg, exporters have now had approval to ship 500,000 tons to regular customers.

China’s biggest vulnerability to Iran, lies in its reliance on oil-based products like naphtha, which is vital to greasing the mighty Chinese industrial machine.

If you go back far enough in the chemical processing chain, or petroleum products, that’s where you’ll see the prices rise. Access to that is a continual problem, and that’s where the greatest fear is.

Producer price inflation, which was at or below zero last year, hit 1pc in March – the highest since the pandemic. Businesses, however, can’t pass these costs on to customers, largely because they are not spending.

Retail sales rose an annually sluggish 1.7pc in March, and in April car sales dropped by more than 25pc. The household savings rate was 37.8pc in the first quarter, the highest recorded (with the exception of the pandemic).

Consequently, if the situation continues to escalate and oil prices keep rising, then there is going to be some damage.

Exports to the rescue?

China’s get-out-of-jail card is its exports. The country’s use of coal, wind, and solar has insulated its producers from the global energy shock, helping to keep export prices competitive.

Export growth slowed to 2.5pc year-on-year in March, but a key indicator of activity at export-oriented firms in April hit 52.2, its highest level in more than five years.

That buoyancy in part reflects Chinese factories’ dominance of the supply chain for wind turbines, solar panels, batteries, and electric cars. The soaring oil price has brought green tech back into worldwide fashion.

Exports of solar cells doubled in March, and were up by more than a third for lithium-ion batteries.

Nonetheless, this tech, together with electric vehicles known in Beijing as “the new three”, still comprises just 7pc of China’s exports. The wider trading picture will be more worrying for China.

If the Strait of Hormuz remains closed for several more months, the blow to the global economy will get exponentially bigger – and the appetite to buy goods from China may wane. Exports to the Middle East are already suffering. On Zhihu, one post related how a toy exporter had seen a 20pc to 40pc drop in demand. “Even Saudi Arabia and the UAE are waiting and watching, afraid of escalating conflicts. No one dares to act recklessly.”

The real pain could come from south-east Asia. It has been a crucial shock absorber for Chinese exporters who have had to drop out of the US market since Trump returned to the White House. But many of these countries are Hormuz-dependent, and the war has hit them hard.

If its trading partners don’t want to buy so much, then China won’t be selling so much either.

This is the tripwire that could set off China’s first time-bomb. Beijing has spent decades subsidising its industries to produce more and more, but China’s massive domestic consumer base simply refuses to spend.

This means the only place for factories’ over-production is the world market. But, if demand for exports falters, the cracks in the Communist Party’s model will open wider and wider.

The trouble is, the only way out of this impasse could be a worldwide trade war.

A broken economic model

China’s most well-known company, these days, is probably the electric car giant BYD. In just two decades, it has risen to the pinnacle of the global EV market. Yet, all is not well. Its first-quarter profit is down 55pc, to a three-year low. Its inventory of unsold stock has stacked up by 16pc since the start of the year.

BYD and fellow carmakers are capable of producing more than twice the number of vehicles each year that they can actually sell within China.

At home, this forces BYD and its rivals into a price war, squeezing margins. Domestic sales, though, have still declined for seven straight months.

Meanwhile, exports are booming. BYD’s overseas sales jumped more than 50pc in the first quarter, accounting for 45pc of all sales.

Its market share in Europe might still be only 2.2pc, but aggressive discounting in Germany has helped more than double this figure in the past 12 months.

BYD’s story is a microcosm of the successes, failures, and risks of China’s economic model.

The system builds powerful companies, but relies on the rest of the world to pick up the tab.

China’s trade surplus with the rest of the world hit $1tn last year. This is, in effect, a monetary gauge of the de-industrialisation of the West, and the stymieing of industrial development in poorer countries.

The rest of the world’s tolerance for this is gradually waning. Trump may have stepped back from his tariff war, but many observers suggest it’s only a matter of time before China provokes a wider backlash.

China’s strategy is always outbound, export driven, because they don’t have the demand. So, it’s not going to change. But of course, individual countries could change, the world could change.

The reckoning is already approaching. Countries are realising that they need some economic security. That means maybe not getting the absolute rock bottom price but having to pay something in order to have diversified suppliers.

The only way Beijing can head off the consequences of an export downturn would be to bolster demand at home. However, this is now a deeply entrenched problem.

China’s consumer confidence index stood at 92 points in February. That was a three-year high, but before the property crash the index was never below 100. It appears that the Chinese do not want to buy consumer durables; they buy consumer staples, cheap goods that are consumed every day.

Households face insecurity on every front. Their real incomes grew 4pc in the first quarter, but have been slowing for years from the 6pc-plus rate pre-Covid.

House prices, which plunged after the authorities called time on a property bubble in 2021, are still falling everywhere except Beijing, Shanghai, and a handful of other large cities.

Property is still the biggest asset held by Chinese households. If housing continues shrinking in value, that just works against the authorities’ other efforts to try and stimulate consumption.

The jobs market is also failing to inspire confidence. The unemployment rate of 5.4pc is at a three-year high. The youth jobless rate has been improving, but is still high at 17pc.

Graduates of elite universities are still finding jobs, and some businesses are still hiring, however life is tough for young people further down the ladder.

The government has tried to stimulate consumption, but in a piecemeal fashion. Its signature effort last year was a trade-in scheme for white goods, which delivered at best a mild and temporary boost.

Many hoped that a recent meeting of the Communist Party’s Politburo would recognise that the economic model was unsustainable. Disappointment followed.

There were no concrete measures or targets around anything that would boost household consumption, say analysts at Capital Economics.

Without targets for lower tiers of government, they say, nothing will change.

“A lot of the high-level policies are focused on boosting domestic self-sufficiency, on AI and tech development… It feels like those will continue to be the priorities. That might come at the cost of, or instead of, boosting support for households.”

Beijing has apparently decided that its export-oriented model won’t trigger a trade war, or hobble the profits of its companies.

Some say the regime may see more risk in changing course than in sticking to what it knows, and projecting stability. However, sitting on their hands represents the real risk.

As soon as Western countries start threatening demand, China will be severely hampered. It will mean factory closures. It will mean spiralling deflation, on top of the deflation we’re already seeing because of overcapacity and over investment. This will become catastrophic for the average Chinese household.

Two more time-bombs: No babies, no budget

The deep-seated consumer anxiety may be one reason why many Chinese are choosing not to have children.

A recent Rhodium report noted that the 7.9 million births last year was half the number a decade ago. Births are at 1939 levels – below even the time of the one-child policy (which ended in 2016).

As the death rate creeps up, the country will lose nearly 60m people in the next decade – a population almost the size of France.

Beijing has offered a 3,600-yuan (£390) subsidy per child for three years, starting last year. But government policy seldom reverses a demographic decline.

The population loss is going to make the problem of domestic under-consumption much, much worse.

That’s going to present a massive headwind to China’s economy, and that’s why they will be hoping to gain productivity benefits from new technology like AI, to offset that.

Rhodium says this will create a massive budget headache for Beijing, as the government is forced to support an older population with fewer taxpaying workers.

However, Beijing is already fiscally neuralgic. Government revenue is now almost static, with tax income flatlining and land sales declining.

The public debt-to-GDP ratio is about the same as Britain’s. The budget deficit was 9pc of GDP last year, and could widen further. By 2030 this would be entering crisis-level territory.

Meanwhile, the public and private lending that washes through the Chinese economy, putting China “in a league of its own”, according to Capital Economics, is “a signal that all is not well”.

Rhodium’s warning is even more stark: “The era of fiscal trade-offs has already arrived, and the stress is deepening . . . This is what fiscal and financial decay looks like.”

Searching for a prop

Beijing hopes that AI and robots will defuse these time-bombs. Tech-fuelled productivity growth could prop up the economy if China’s population is falling and the world is turning away from its export wares.

China has one big advantage. In a command-and-control economy, the Communist Party can get businesses to adopt AI, and can build out the infrastructure to support it.

The Chinese also seem to be taking to it very quickly, to a greater extent than the average consumer in the US or in Europe. AI is being directly embedded into the commercial stacks that people use on a daily basis, the e-commerce or content platforms that the Chinese use.

The government is also on board. Technology isn’t just an economic panacea; it’s a must-have in Beijing’s relentless quest for self-reliance.

Just days ago, Ding Xuexiang, the vice-premier, said: “China’s AI must take the path of independent innovation, to have the confidence to withstand any containment or suppression”.

And yet, the Communist Party may also be its own worst enemy. Beijing’s refusal to rely on America for chips – instead pushing companies to use domestic Huawei alternatives – is holding back development.

Officials will also be fretting that AI might destroy more jobs than it creates – an outcome the regime wouldn’t be able to stomach.

What you might see is a lot of companies adopting AI, seeing productivity improve, but then not being able to follow through with the kind of lay offs that would result from that in most other economies. And, then, you don’t actually see a boost to labour productivity.

Beijing also has a broader insecurity about technology: it must rely for innovation on the private sector, which the leadership simply doesn’t trust.

The feeling is mutual. Xi’s 2020 attack on Jack Ma, founder of the fintech firm Ant, left lasting scars on China’s entrepreneurial class.

Such fears have been renewed with Beijing kyboshed Facebook owner Meta’s proposed merger with Singapore-based AI firm Manus. Manus’s Chinese founders had moved the company to Singapore, but not beyond the reach of the Communist regime. Some say that if you’re a private entrepreneur in China, what incentives do you have in trying to go global, if this can always happen, and the Party can just come in and say, ‘All of your work, it’s ours now’?

Other analysts are of the opinion that the Xi regime’s innate fear of losing control will be its undoing, and hobble its tech push. The signature feature of Xi Jinping and his administration is how conservative it is. It is not a radical, progressive, transformative regime. In the back of their mind, they’re always thinking, ‘We can’t change too fast’.

China has built a robot that can win a marathon. The question, though, is whether it can build an economic model that can keep the country competitive.

Trump’s war in Iran, if it lasts well into the year, may force out an answer.

Standard
Britain, Business, Economic, Financial Markets, Government, International trade, United States

The US dollar: down but not out

ECONOMIC

Intro: Reports of the declining status of the US currency have been greatly exaggerated

For economists, the impact of a falling US dollar and how that impacts Britain will be observed and monitored closely. Of interest will be why the dollar has fallen of late, what President Trump’s attitude is towards the US currency, and how that impact will be felt.

The dollar lost around 2pc during January against a basket of major currencies (as measured by the DXY index). At the time of writing, the DXY is close to a four-year low of 96.79 – a staggering 10.7pc lower than this time last year. This significant weakening of the dollar has been driven by US policy shifts, tariff uncertainties, and geopolitical tensions. It also, to a lesser extent, reflects global effort to “de-dollarise” led by China and other large emerging markets.

Just days ago, the Federal Reserve held its main policy rate at 3.5-3.75pc. But the US central bank previously cut rates by 25 basis points at three consecutive meetings – in September, October, and December 2025. Lower rates typically weaken the dollar by reducing its appeal to yield-seeking investors, prompting capital flight to higher-return assets elsewhere. Financial markets are anticipating one or two more US rate cuts in 2026, putting further downward pressure on the dollar.

Since Trump took office last January, Fed boss Jerome Powell has come under intense pressure to cut rates faster and further, with the President eager to stimulate investment.

Nominated by Trump during his first term and reappointed four years later by President Biden, Powell has resisted. He has warned of the dangers of US inflation – 3pc as recently as September and still up at 2.7pc, above the 2pc target. Trump’s announcement that he wants Kevin Warsh as the next Fed boss when Powell’s term ends in May has seen the dollar strengthen, given Warsh’s reputation as an inflation-fighting hawk. Warsh, however, is also son-in-law of Trump’s long-standing friend and billionaire donor Ron Lauder. It is doubtful whether he’d be the president’s pick without having pledged to nudge the Fed’s policy committee towards lower borrowing costs – so the pace of rate cuts could quicken, putting more pressure on the dollar.

In theory, Trump’s tariffs should have bolstered the US currency by reducing imports and improving the US trade balance. But the scale of the measures announced on “Liberation Day” in April 2025 instead contributed heavily to the dollar’s fall in value.

The president’s measures – initially hiking average effective tariffs from 2.5pc to 27pc within a month – sparked market turmoil, including an asset sell-off that pressured the US currency. Direct retaliation from major trading powers including China and the EU further eroded investor confidence and prompted US capital outflows. Trump’s tariffs, while they are less punitive than first announced, have combined with broader macroeconomic concerns – including the rise of America’s debt from 100pc to 125pc of GDP over the last decade – to drive considerable “sell America” outflows to other major currencies.

While the related dollar weakening has aggravated US inflation, a cheaper currency helps US exporters, not least “rust belt” manufacturers that are a priority among Trump’s “Make America Great Again” (MAGA) movement. That’s why many are inclined to think the president wants the dollar to keep on falling.

Trump has fuelled these concerns, pointing to the “great valuation” of the sharply depreciated US currency. There are suspicions the White House initially made its maximalist tariff demands not only as a bargaining ploy, but to strategically devalue the currency. The president’s dollar stance is nuanced – and often contradictory. He values “reserve currency status”, which sees the dollar demanded around the world both for payment transactions and a store of value. That supports the US currency, allowing America to run looser monetary policy without the inflationary impact of a dangerously weak dollar. Nonetheless, Trump has also shown willingness to tolerate and even encourage dollar depreciation for export gains (given his emphasis on appealing to blue-collar workers). Talk of the dollar’s demise, and its loss of reserve currency status, is, without doubt, overdone. The US currency still accounts for about 60pc of global foreign exchange reserves and almost 90pc of global transactions by value, underscoring its entrenched role.

Quite clearly, as the dollar has weakened, certain “safe haven” currencies have gained, with the Swiss franc up 13pc against the dollar during 2025. And despite its recent volatility, gold has soared from around $3,100 to over $4,900 an ounce since April 2025, such has been the impact of Trump’s “shock and awe” tariff announcement and the escalation of geopolitical tensions ever since.

When it comes to pound sterling, and the broader UK economy, a weaker dollar delivers a mixed offering. Benefits in lower import costs and inflation are offset by challenges for exporters, investors, and multinational firms. Since Trump’s second term, the pound has strengthened around 12pc against the dollar, from roughly $1.23 to $1.37. This makes dollar-denominated imports cheaper, reducing costs for US goods and dollar-priced commodities like oil.

And while the UK remains an inflation outlier, with a headline rate of 3.4pc in December, up from 3.2pc the previous month and higher than other G7 nations, domestic price pressure would have been even worse were it not for a falling US currency. Tourists and businesses travelling to, or dealing with, the US have also gained, with pounds stretching further abroad.

Yet the downsides are significant, particularly for UK-based companies with substantial US exposure. British-based exporters to the US have found their goods more expensive in dollar terms, undermining competitiveness and demand – especially amid US tariffs that add further barriers.

Overall, while a weaker dollar has flattered the value of sterling, and helped keep a lid on UK inflation, it has also exposed many of the UK’s structural weaknesses – a trend that looks set to continue.

Standard