Geoeconomics Bi-Weekly: Steel and Social Media

Yesterday Switzerland became the first advanced economy to cut interest rates since the post-pandemic surge in global inflation. While encouraging, not all advanced economies are at the same stage in their efforts to stem inflation.

State of the Global Economy 

In the United States, the Federal Reserve held interest rates steady on Wednesday, after inflation ticked up slightly in February. The Consumer Price Index (CPI) increased from an annualized rate of 3.1% in January to 3.2% in February, though Core CPI, which strips out the more volatile food and energy prices, decreased from 3.9% to 3.8%. Despite strong growth and stickier-than-expected inflation, the Fed continues to project three rate cuts this year. 

In Europe, although February inflation continued to fall, central banks remain hesitant to lower interest rates. February inflation in the United Kingdom fell to an annualized rate of 3.4%, a notable drop from the 4% recorded in January and December and the lowest rate since 2021. Still, the Bank of England held interest rates steady in its Thursday meeting as inflation remains above its 2% target. And in the Eurozone, annualized inflation in February fell to 2.6% from 2.8% in January. While encouraging, European Central Bank (ECB) commissioner Christine Lagarde tempered analyst expectations as wage growth and productivity continue to drive services inflation. The ECB meets next on April 11th. 

On the other side of the world, China received some positive news last week amid a period of deflationary pressure, low consumer confidence, and a real estate crisis. Both exports and industrial production jumped 7% in January compared to the year before, while retail sales grew 5.5% year over year in February. Though encouraging, there remain reasons to be skeptical China will hit its ambitious 5% growth target for 2024. Beijing is ordering indebted local governments to scrap a series of infrastructure projects, while the real estate sector remains under pressure. Property investment dropped 9% compared to the year before in both January and February, though this is an improvement from December’s drop of 24%. Meanwhile, youth unemployment rose to 15.3% in February, up from 14.6% in January. 

Around the World 

Biden Administration announces opposition to acquisition of U.S. Steel by Japanese firm: In today’s geopolitical climate, the ownership of companies that produce essential goods is often perceived as an issue of economic security. Nations are increasingly likely to oppose acquisitions of their domestic companies by foreign entities. Continuing this trend, last week President Biden announced his administration's opposition to the purchase of U.S. Steel by Nippon Steel, Japan’s largest steelmaker. China produces 54% of the world’s steel while the United States produces about 4%. Still, the move comes with risks. Opponents of Biden’s statement claim blocking the acquisition will have a chilling effect on investment, particularly given the closeness of the U.S.-Japan relationship. Japan is one of the United States most important trade and investment partners, with Japanese investments supporting close to 1 million U.S. jobs. 

Hong Kong passes broad national security law further undermining city’s position as a global financial hub: Hong Kong’s status as a special administrative region of China has helped make the city a major economic success. Businesses in Hong Kong have easy access to the massive Chinese market while also benefiting from its relatively open and transparent institutions, giving the city a distinct comparative advantage. But that advantage diminishes as mainland China asserts more control over Hong Kong, particularly as China’s economy struggles and tensions with the United States escalate. Last week, Hong Kong’s legislature quickly passed a broad national security law establishing penalties for vaguely defined political crimes, “external interference,” and theft of state secrets. Analysts fear the law will further depress the already shrinking foreign business presence, on top of Hong Kong’s ailing stock market and home values. The legislation takes effect on March 23rd.  

U.S. House of Representatives passes bill forcing sale Chinese-owned social media giant TikTok: There have been attempts in the United States to ban TikTok for at least four years, and last week the United States took a major step towards making it happen. The U.S. House of Representatives passed a bill forcing Chinese company ByteDance to sell the U.S. operations of its social media platform TikTok, else face a ban. As Chinese companies are beholden to the Chinese Community Party, TikTok’s immense popularity may make it an irresistible tool for collecting data on U.S. citizens or spreading misinformation. And U.S. social media companies are not permitted to operate in China. China’s government has ruled out a sale, however, and opponents of a ban cite several reasons why the app should remain active. So far, the bill has stalled in the U.S. Senate.  

Western aid pours into Egypt as geopolitical shocks continue to rock the Arab world’s most populous nation: Foreign aid and international financial institutions are critical tools in today’s era of great power competition. If democratic powers and the institutions they created cannot meet the hopes and aspirations of developing countries, then these countries will turn elsewhere. This dynamic was in the spotlight over the last several weeks as Egypt received pledges of over $50 billion in economic aid, including $8 billion from the European Union, $8 billion from the IMF, and $6 billion from the World Bank. In the last few years, Egypt’s already-sluggish economy has been battered in turn by the pandemic, the War in Ukraine, and violence in the Middle East. Observers are concerned these geopolitical shocks could destabilize Egypt and exacerbate issues such as migration. 

EU passes the AI Act, the world’ first comprehensive AI law, as nations grapple with the implications of the transformative new technology: Technological leadership in AI is a critical geopolitical issue given its profound military, economic, and social implications. Nations around the world are attempting to promote innovation in AI while also limiting the risks associated with it. Indeed, the number of AI-related laws in the world grew from just 1 in 2016 to 37 in 2022. And that number grew again this week, as the EU passed the AI Act to ensure responsible use of AI in the EU. The global implications of the law, however, should not be underestimated. The EU leverages the attractiveness of its massive internal market—the 2nd largest in the world—to propagate its regulations throughout the world, a phenomenon, known as the “Brussels Effect.” Given the broad uses of AI, the AI Act could prove influential to the technology's development around the world. 

What We’re Watching 

  • March 23 – New national security law takes effect in Hong Kong 

  • March 28 – Sam Bankman-Friend, founder and former CEO of crypto-exchange FTX, will be sentenced following his conviction for stealing $8 billion from FTX’s customers. Federal prosecutors are recommending a sentence of 40 to 50 years. 
  • April 11 – The European Central Bank meets to decide on interest rates. 
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Kirti Gupta
Senior Adviser (Non-resident), Renewing American Innovation Project
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Chris Borges
Program Manager and Associate Fellow, Geoeconomics Center