Transcription
You've been writing that from around 2019, if, if you like, the sort of high point of Western civilization, if you like, the liberal global order, that globalization will wind down. You are now of the view that it will be accelerated quite a bit by the things we're seeing. Trump's trade war, Iran still very uncertain but having a major impact on supply chains, particularly oil globally, the Ukrainian conflict and the way it's changed wars. Is globalization now going to fold away quite quickly in your view?
I agree that we're down to single-digit number of years left, probably no more than three or four. Uh, we were always going to get here. We were always going to see the Americans move away from maintaining the system. We were always going to see global demographics flip. We were always going to see a breakdown in global trade, whether it was for energy, agriculture, manufactured goods. Uh, but until Trump too, it looked like we were on a bit of a glide path, and we were actively preparing for that scenario on a global basis. Uh, that has now stopped, and now we're going to have a shorter transition, a rockier inter, and it's going to be quite a bit more time before we emerge on the other side.
Now, it's not the end of the world as we know it, uh, in your view, because you don't think this is going to be a process where a triumphant China or a triumphant China, Russia, along with Iran, come to be the great winners. That's not your thesis at all. You think very absolutely China, in particular, is in for a very rough time. I'm particularly intrigued. You make this link between population growth, having children, and prosperity, uh, and your belief that China is not only overstating its current population but, as we all know, is in unbelievably rapid decline population-wise. So although you're saying we're in for a rough period, it's not going to be some new world where we're all living, if you like, under the heels of Beijing or Moscow. Have I got that right?
Yeah. I've never been worried about Moscow or Beijing emerging triumphant. Uh, the short version is that when globalization kicked in in the 40s and 50s, for the first time, anyone could take a services or manufacturing job. We could specialize. Uh, but all of those jobs were in the city. When you live on the farm, kids are free labor. You have a bunch of them. When you live in the city, kids are an expense, so you have fewer. And you play that forward for 80 years, and we've seen the average number of children that a woman has in her lifetime drop from something like six to ten to less than two, and in many countries now less than one. Uh, the countries that industrialized more recently, China being at the top of that list, have seen this process compress. And so we now are in a situation where the Chinese are struggling to figure out just how many hundred million people they have been counting that don't really exist. And they admit now internally that it's at least 100 million. And in the last six months, they've started debating whether the real number is somewhere between 300 and 500 million with all of these missing people under age 45. So when you see the Chinese come out with data that, you know, retail sales didn't rise to expectations, it's because there aren't enough people under age 40 to do the purchasing in the first place. And that means the only way that the Chinese can have economic growth is to export. And we're now in a position where this aging process has been going on so deeply for so long that the Chinese won't even have a workforce that we can identify in as little as 10 years from now. So for me, it's not a question of does China expand or become a greater power. The question is what happens with the process of Chinese disintegration, because we're going to see that in the not too distant future.
That's a pretty interesting prospect. Two issues rise to the surface straight away for me. A third of Australia's prosperity or trade derives from trade with is to China. Uh, it's very, very important to our economy. I think, in my view, it it crimps the honesty and the willingness of our leaders to be upfront about China, frankly. Um, uh, that's one problem, but if it's going to decline like that, that has major economic implications. But beyond that, they are building this massive military presence, and uh, history tells us that a massive military capability ends up being used. Two issues. What's it mean for the trade globally and the wealth that that creates? What do we conclude about China as it looks ahead? What's it going to do with that massive military?
I would say that history does not prove that. There are certainly plenty of examples of it being true, but there's plenty of examples of it not being true. And the question here is that for the military that the Chinese are building, what can they actually use it for? The core problem the Chinese have, well, there's two core problems. Number one, demographics. Number two, all of their markets and all their source materials are an ocean away. The Chinese do not have a blue-water navy. The military that they're building is for coastal defense and projection of power up to and maybe, if they get lucky, past the first island chain. That's all they're capable of. So their military cannot address the two challenges that they have. And if you're talking about an army, what are they going to do? March into Siberia? The Russians have made it very clear they'll just nuke them. So I see it as a tool for internal control, much like the Iranian military. And that doesn't make it insignificant, but it means that when the Chinese state dies, it's probably not going to be like the death of the Russian state where an expansionary war actually serves some purpose. For the Chinese, there's no place that they can go, no place that they can reach, no place that they can conquer that will buy them time. If anything, it'll trigger a counterforce. And there are many countries in the world now that without any help from anyone else can crush the Chinese because they can interrupt the supply chains. So we're well past the point where it's just the United States. Japan could do it. Vietnam could do it. Singapore could do it. Indonesia and Malaysia could do it. Australia can do it with its new mid-range missiles. Uh, this is the most vulnerable of the major countries in the modern world. And we're all probably going to live long enough to see it end.
The Iranian war has shown us just how vulnerable we are to supply chain disruptions. Supply chain arrangements have really arisen since World War II under the protective umbrella of the rules-based system, if you like, put in place and policed essentially by the Americans. If it's breaking down, there will be real problems. I would have thought we forget that countries, many countries didn't have oil before World War II. They didn't have supply chains to secure, and they were locked into very awkward economic situations. The free flowing of energy in particular has been critical to the lifting of prosperity in many, many countries, especially in Asia. We now know how vulnerable we are. Iran's shown us that. But you're actually saying if globalization breaks down, this will become the norm. There'll be many countries that face very difficult economic and political circumstances.
Let's start with where we're likely to be by the end of the year. Uh, the Iran war is not over, and we still don't know how long it's going to take to bring the fields that were mothballed back online. If history is any guide, it won't be this year or next year. Uh, it took the Iraqis 20 years to recover from the Saddam era and the American occupation to get to the output level that they had back in February. Most of these fields are not designed to be shut down. We haven't even gotten the beginnings of damage assessments yet. So, we're we're not done with that yet. Uh, number two, the Ukrainians are using a new type of drone that the terminal guidance can't be jammed, and they're basically wrecking the entire petrochemical complex across the Russian Federation. That's another four million barrels a day that's likely to disappear. And now, in the aftermath of the earthquake, Venezuela is going to take at least another year just to dig out. We're looking at losing Persian Gulf crude, Russian crude, Venezuelan crude, and quite possibly American crude for domestic political reasons, all at the same time. So the energy shock that you're referencing here is probably going to hit a lot sooner and be a lot worse than you might be thinking. Uh, obviously, the East Asian countries are at the tail end of receiving all of that. They're in the worst spot. But I would encourage you to not just limit your concern to energy. It's not just that energy fuels everything else, but we're nearing a point where the concentration of manufacturing in Asia is a real problem because if they can't get the energy, then the manufacturing just doesn't happen. And that's half of global manufacturing supply chain steps. So we're entering a world where we need to build regional networks, whether that's in North America, Southeast Asia, whatever, uh, that can supply most of what they need within region, and then you'll probably have relatively limited trade among those regions. Luckily for Australia, everything that you have done in survi in supplying raw commodities to the Chinese can be repeated with Southeast Asia, countries that are much more demographically sustainable, much closer to having an energy balance, much better relations with the United States, which is now an energy exporter. So, in many ways, you can recreate that miracle. Although I would argue that the more value-add you put into your commodity sector, the better off you're going to be overall so that you don't get caught out like this again.
I understand all of that. They, and it's a good precursor into the next thing. You've done a bit of research on just how fragile and complex, or complex and therefore fragile, I might put it that way, many of these supply chains are. Now, we're all wondering what AI means. One thing we do know about it, of course, is that it'll mean a lot of high-end chips. And I think your research suggests that there are something like 100,000 steps in the manufacturing of a high-end chip, involving some 9,000 companies across 50 countries. One of the critical ones being, and I had no idea about this, being Holland. We all just think it's Taiwan, but it's much more than that. And if you stop and think about all of those people being involved and all of those processes across the oceans, you can see that the most minor of disruptions has the potential to massively damage what we do with high-end chips now, but also presumably to impact on the digital age that we think is going to lift us into the new age of prosperity. Not that we're all completely relaxed about AI. It's very fragile.
Let me give you let me give you another number. 4,500. That's the number of companies that produce that are in that supply chain that produce one product for one end user and have no competition on a global basis. So it doesn't take much of a disruption for this entire thing to cascade into failure. So if you like artificial intelligence, great. Gorge on it now, but it's not going to last more than a couple more years. And then we will have to rebuild that supply chain in a system that is demographically compromised and geopolitically complex. That will take us a minimum of 20 years.
These are huge issues. Peter, I'm going to let this sit as a teaser. You're on holidays. You've been kind enough to make a break. Uh, we'll put this out. Encourage people to look at your material because I think it's so valuable for everyone, including policymakers, to have their gloomy thinking challenged. Yours, in some ways, is more gloomy than anybody's, but also more exciting than anybody's because it suggests that if countries get serious about their futures, many of us can still secure those futures. The whole question is what do you have within arms reach and what does your ally list look like where you can reinforce one another? Australia's very fortunate to be one of those places that is going to be next to one of the next, it's going to be next to one of the big booming zones. Southeast Asia is very well positioned to pick up a lot of the manufacturing that the Chinese are going to drop. And since you're up against the Pacific, it's a long distance to the United States, but there's really nothing in the way. So the integration that we have seen, especially between among Europe, the Middle East, and Northeast Asia, that's going to break completely. That's not your world.
Understood. Well, we are a trading nation, but you're saying there will be options. We just need to be alert. Uh, one final question. Taiwan is of course known as the producer of those high-end chips. Do the Chinese really want them so much that they'd risk everything to either blockade the place into submission or launch something militarily against them, even though they do face the challenges that you're talking about?
Let me give you the no and then the yes. First, the no. Taiwan doesn't make the chips. China or Taiwan has the fabrication facilities that bring a number of steps together in one place. That is not the high value-added part of the process. That's done somewhere else, primarily the United States and Japan, but not exclusively. So if the Chinese were to take over Taiwan, they wouldn't be able to operate the facilities because, among other things, the designs and the photo masks come from somewhere else. The EUV machines come from somewhere else. The Chinese can't operate most of their own semiconductor manufacturing, much less the most advanced ones in the world. And they know that if there was a war, we would see China's supply lines crash. Uh, remember, this is a country that imports 80% of their energy and 80% of the components that allow them to grow their own food. So they know, or they knew years ago, that if there was a real war, they'd be facing a post-industrial collapse complete with a famine that killed half the population in under two years. But that was eight years ago. Eight years ago was when Chairman Xi got rid of his last real advisors. And since then, he's just been generating and regurgitating propaganda that messes with your mind after a while. And so if you know that if you launch a war, half your population dies, but it allows you to write the story of China for the next iteration of whatever China is, then maybe, just maybe, that's worth it to you. But that's a pretty dark if.
It certainly is. It's a chilling prospect, and it's one I think that worries a lot of people. Peter, again, as I've said, you've been kind enough to come indoors when you're on a break. Thanks for the teaser, and I encourage listeners and viewers to hop on to your material. Go looking for it. Uh, it's really interesting and needs to be taken into account. And Peter, hopefully, uh, you and I can regroup for a longer conversation sometime when you're active.
That'd be great. Uh, in the workplace again. In the meantime, enjoy your break and do lots of thinking.
Yes, sir.