Kopi Time E155 - Capital Wars with Dr. David Skilling

Um, so the way we will structure the discussion is get a sense of, you know, what is David up to on a day to day basis, and then we will talk about a paper that he recently wrote which caught a lot of my attention. So with that in mind, David Skilling, welcome to COI time.

Trump too, which wasn't me, but for some, you kind of thought that you could calibrate against what we saw several years ago. I think they have been taken by surprise. You know, Mr. Trump in a second term, a much more disruptive, much more consequential, uh, agenda, you know, tariffs to the start. But I think there's a sense that actually this is going much further than um than tariffs to capital flows, exchange rates, geopolitics. I think, you know,

one is just sort of surprise. Uh, the second, I think, is, you know, as you mentioned, I, I Work with clients around the world. I think in Europe there is a sense of, you know, real pessimism, uh, you know, a sense that the sky is falling in, or the ground is moving, uh, beneath their feet in terms of both on geopolitics or on economics. The US is not what they thought that it was, uh, in a real sense that the rules of the game are being fundamentally rewritten in a way that's not, uh, that's

not positive, that carries real risk. But when I talk to folk in the Middle East, in Asia, I mean, yes, that's all true, Singapore. Southeast Asia, for example, are exposed to tariffs and the trade wars, and so on. But there's also a sense of the world is tilting in their direction, right? There, there are clouds to be sure, but there are some

silver linings, there are some opportunities as well. So I think, yeah, there is a mixed view, depending on geography, you know, uh, Europe quite depressed, uh, quite concerned, uh, Asia, the Middle East, I think, a bit less so.

This is not going to go away. It's not simply a matter of waiting this out for 4 years and hoping for a better outcome in the next election. And obviously just the speed at which Mr. Trump is moving to kind of rewrite the rules, be it the trade rules, uh, be it the geopolitical or security guarantees, be it Ukraine, um, uh, East Asia, and the like. You know, I think there is a sense that actually there's a lot that is changing, and Mr. Trump can actually do quite a lot. You know, but.

and relatedly, there was, you can draw a fairly coherent line in US policy between Trump one, the Biden administration, and now Trump too. Different in character, to be sure, in rhetoric. Mr. Biden didn't undo very much of what Mr. Trump did in terms of tariffs. He became more hawkish on China, technology, investment, and other restrictions. And so there is a sense that, you know, Mr. Trump is reflecting, uh, underlying shift in US sentiment as much as he is kind of the cause, if

you like. This is not simply about Mr. Trump. This is about different US attitudes to the world. That's why he's been elected now, twice. And I think, you know, there is a realization that actually, whoever wins in a few years' time, the next presidential election, the US is just quite a different proposition.

Uh, and I think you know it's just a reminder that that Europe, Asia, the rest of the world need to accommodate themselves to a structurally different US approach to the world, both in economics and in terms of geopolitics.

product boycott going on in Denmark. I mean, there's of course the Iceland issue, uh, the Greenland issue is certainly catching people's imagination, but again, it doesn't feel like a fad, it seems.

Seems like, uh, in some ways, uh, Trump may have done it in an aggressive manner, but the uh events of this year seem to be more of a symptom than an underlying uh uh cause itself, underlying causes that the US is stretched and it is looking inward and uh we will have to sort of deal with that independent of the political cycle. OK, so let's not wallow in the despondency, um, your

job certainly is to look for opportunities for your clients. So, um, you're based in Europe, but you've spent a lot of your, uh, life in Asia. Is Donald Trump inadvertently bringing these two regions together?

So for Europe's part, you know, they are more aggressively looking for free trade agreements, uh, both in Asia, with India, notably developing relationships with Vietnam and other Southeast Asian countries, also with Latin America, uh, doing an FTA with, with the Mercosur group, Mr. Macron. Uh, was at the Shangri-La Dialogue recently in Singapore talking up, you know, Europe-Asia relationships, uh, in, in its case, uh, in the security and geopolitical realm. But I think more broadly,

you know, Europe is looking for options. Uh, it wants to reduce its exposure to the US both economically and on other dimensions, uh, and developing relations with Japan, with South Korea, with Southeast Asia, with Australasia, with India, you know, I, I think is very much top of the agenda. There are lots of shared interests between. Between the two. But I think the elephant in the room on this is China. I mean, China is a big part of Asia. Europe's relationships with China remain tense.

They are not what they were 56 years ago. You know, there are an accumulating series of trade tensions, um, you know, tariffs being imposed on Chinese electric vehicles, uh, rare earth restrictions being imposed in the other directions, uh, recently restrictions on things like medical technology. So there's a raft of kind of trade disputes and frictions. That will constrain the extent of, uh, you know, the European pivot, if you like, uh, towards China. It's not

going to move away from the US towards China. We'll be pragmatic, to be sure, but it's not going to pivot markedly. And I think on a geopolitical realm, there's a sense that China is a rival, is a competitor. It is supporting Russia, which is a direct threat to Europe. So I think there are going to be limits, if you like, to how far Europe can maintain.

cordial relations with China. But for Asia, China, I think certainly there is going to be increased European interest, investment, both at a government level and at a firm level in developing relations with like-minded countries in Asia.

on improving its productivity performance. Do you think that there is a sense that the fact that China is going through a bit of a techs search, uh, all sorts of new technologies of the future are coming out of China, that there is a degree of symbiosis that could happen in an amiable world without the US meddling too much into the China-Europe relationship where Europe can both provide as well as benefit from Chinese technology.

is complementarity between what China offers, what Europe needs. The challenge from a European perspective is that China has progressively eroded the market share, uh, the competitive edge of lots of European industries. Obviously, the auto industry, Europe 1015 years back had a very strong solar industry that's pretty much been decimated by China. So yes, you can, at one level see strong sort of complementarities between the two economies in

both directions. Europe has a lot, but China still wants also. Uh, but there's also a real competitive tension. There's concern in Europe about dumping, uh, around Chinese subsidies, around Chinese mercantilism, uh, and the like, which is why Europe has been imposing various tariffs, and I think there is more to come, you know, in concern about, uh, sort of goods that can't go into the US because of tariffs being diverted into into Europe. We're already seeing that in terms of steel.

So I mean, I think yes, there is an answer, and that's certainly been the European. view over the last 1015 years. China's a big export market, China's an important source of cheap manufactured goods. But I think there is a sense that Europe's strategic autonomy, uh, the ability for it to control its supply chains to maintain a critical mass in core strategic industries, be they energy, be they defense, be it tech, is being undermined by China.

So I think Europe is going to be pragmatic. It understands the importance of China. Uh, it's not going to do a US in terms of trying to cut itself off from China, but I think there's also growing awareness, certainly post Ukraine, but you don't want to become overly exposed in terms of energy, uh, in terms of tech, in terms of auto to a particular market, particularly one with whom you're not fully values aligned. So there are going to be, there are going to be limits.

But third is that they felt that in the life sciences area where they sort of stand at the frontier, some of the real big breakthroughs are coming from China and therefore they need to be in China to watch that develop and seize that technology from a very close proximity as opposed to being in Europe and just saying, well, you know, that's a different world. I felt that that

conversation I would have not heard 57 years ago. It's a new development, uh, that some of these breakthroughs coming from China and then It behooves on enlightened companies to be in China just for that proximity. Um, so I I I've come back from Europe with a new appreciation of China to some extent. Now, David, we were talking about, you know, Asia and Europe. Uh, one thing that Asia and Europe have in common is that both are capital surplus economies, uh, both have been more prudent.

Their American counterparts in terms of savings and have racked up large surpluses and they've exported quite happily a large part of the capital to the US over the years and decades, allowing the US current account deficit to be financed. Things are changing and you have been thinking about this. You recently wrote an article telling the entitled Capital Wars, and one of your arguments in that paper is that a structural change to cross-border capital inflows is in the making.

Let's expand on that.

Consistent current account deficits for a long period of time. The UK also, but the US is the, uh, is the large game in town. So you've had a, you know, a picture where you've got persistent current account surpluses, exporting capital into uh, into the US. But if you look at the surplus countries, you know, there are dynamics that suggest that the extent of those surpluses is going to reduce over the next 5, 10 years. In Europe, Germany is the major moving part here, the

new government and change German attitudes. It's going to be more fiscal spending, more investment, be it military, be it energy, other forms of infrastructure. The same is going to be true to a lesser extent across most European countries. There is an understanding that defense expenditure has to increase, and so we are going to see reduced government. saving. I think also reduced household saving as well, but government saving is going to be the big thing that shifts.

And so I think we can expect reasonably for the size of the European current account surplus to reduce as savings comes down as investment in Europe comes up. Similarly, in the Gulf, oil prices down, increased investment at home.

So again, Gulf surpluses are going to constrain, Japan. Interest rates are normalizing during the rise, like they have repatriation of capital for various reasons, I think also Japanese surpluses reduced and over time, possibly China as well as China moves to a more an economic model where domestic demand is a more important component of final demand. So on all of the big current account surplus countries for various reasons, uh, you see. dynamics that I think are going to shrink the size

of capital, the capital pool that is exported. And then you've got the US on the other side. The US has said run very large deficits, largely due to its large and expanding fiscal deficit, and as we know from the last few weeks, that seems to be moving up. The budget working its way through the House at the moment, or the House and Senate at the moment, looks to be expanding that deficit.

Uh, but that's going to become tricky. Uh, you know, if the pool of capital from overseas is shrinking, the US is going to have to work harder, if you like, or find it more difficult to attract that capital at a minimum, we're gonna, we're seeing interest rates move up to make the US more attractive, which we are already seeing. Um, the dollar will probably come off, which again is what we're seeing. But this is happening as we know, at a time where people are questioning the risk profile of

the US. Is the US an unambiguous safe haven? You know, what sort of risk premium do we need to attach to the US? Uh, and so, you know, the US is in a much more intense competition for capital because the pool of available global capital is shrinking. Now at the same time as we're seeing, uh, some question marks. So capital wars, it's partly a sense of, you know, there are, there's just

going to be an intense competition for capital. We're also going to see, I think, more capital nationalism, you know, countries wanting to kind of hold on to their national savings, uh, to finance, uh, strategic investment, be it defense or energy or infrastructure, and the like.

Uh, and so trade wars, I think, are very much, uh, kind of a precursor to some of the, the international cross-border conflict we'll see in terms of, uh, attracting, uh, and retaining capital, and these, I think, will be at least as consequential, uh, as the, uh, as the trade wars that we're beginning to see.

rates to be higher. Do you also expect the US to do some of the things that Stephen Moran wants to do, which is force the world to buy US Treasuries in return for getting US security protection.

You know, uh, uh, just given the politics in the US, I'm not sure that is going to be, uh, enough. And so, you know, I, I think we are going to see a sort of unorthodox measures being, uh, investigated, at least, so you mentioned Stephen Moran's paper.

You know, I would be very surprised if in the context of the current tariff or trade negotiations that the US are underway with countries like Japan and South Korea and others, that as part of those negotiations, there weren't some sense of, look, if you want to, you know, have lower tariffs, if you want to continue to benefit from the US kind of security guarantee.

Uh, be it East Asia or elsewhere, uh, then we are expecting you to buy, you know, $100 billion of US Treasury, perhaps on the market, but we expect you not to be selling these down, um, and probably to, to buying more. So in a sense you're trying to expand the pool of demand, uh, for US Treasuries, you know, not by, and it's essentially a kind of a coerced or kind of. The duress, uh, purchase, you know, we'll tariff you, we'll

remove US troops if you don't do this. So I would be very surprised if we didn't see some pressure in that regard. for countries like China, it's more problematic, but for allies like Japan, like South Korea and others, I'd be very surprised if we didn't see that. And then one step further than that, beyond this kind of international government to government negotiation.

You know, if that's not sufficient to do the trick in terms of raising demand for US Treasuries, you know, I, I think that, you know, issues around financial repression, requiring commercial banks, uh, or households, or the Fed, uh, to buy more government debt issuance, the type of thing we haven't really seen at scale for, for many decades, you know, I think. on the table. So this is, you know, just the fiscal math is very difficult to resolve unless you begin

to contemplate some of these other measures. I mean, ideally, markets and fiscal discipline in the Congress would be enough. I'm not sure what it is. Uh, and so I think bracing ourselves for some more unorthodox measures, you know, those sort of things are not, are not off the table.

to the US to increase their manufacturing. All of that happened. I really didn't see any, at least I don't see in the data was there a market improvement in the US fiscal balances uh till uh Clinton came in uh years later and, and went for a fiscal consolidation. So, and and and the upshot of all that was that Japan entered a massive bubble and which had a ruminous impact on its economy for the subsequent decades. So yes, the Japanese are allies of the US and yes, they

do rely a lot on US security umbrella. Would they sing the same song in response to US? this time as they did in the 1980s?

Whatever it is, uh, if that's the price that needs to be paid for maintaining some kind of baseline level of relationship with the US, but there comes a point at which the ask just becomes too much. Uh, and obviously the ask is more difficult again with China. Um, but for allies, there will be some things I'll go along with, but in terms of anything approaching kind of plaza accord style. Kind of recalibration, I find that very difficult to see.

You know, that said, I think there is a reasonable case for, you know, if you like, a, a fairly broad appreciation of many East Asian currencies. I mean current account surpluses are persistently large. There is a reasonable argument that there are some grounds for appreciation of those currencies. The issue is how you do that. Uh, do you do it at the, at gunpoint? Uh, so to speak, you know, how does that process, uh,

how does that process happen? So I think, you know, there, there are going to be some moving parts in terms of, you know, sort of ownership of treasury's, um, uh, exchange rates, but I think there is going to be real nervousness about going too far, too fast, uh, and also an awareness again from the Plaza experience, uh, that, you know, any time these things start to move, you are likely to get overshooting. It's likely to go much further than

you want it to. So I think there's gonna be, you know, a good deal of, um, of caution.

authorities would be very keen on preventing that. I think they can probably agree to not intervening on the exchange rate if there's a lot of inflows, but for them to sort of actively sell dollars to weaken the dollar and appreciate the currency, I would think that that would be a bridge too far, um, but you know, um, countries like Korea, Japan have shown a proclivity to really, really want to be in the US. Umbrella, maybe they'll do more things than I think they would.

Uh look, even in Southeast Asia, look at the example of Vietnam, once the reciprocal tariffs were announced, there was no question of Vietnam being part of the ASEAN bloc. They ran to Washington to do a trade deal. They were disappointed, it didn't work out, but uh but I can see that a lot of countries are basically looking after themselves. Now, in the case of Europe, David, there's the European Union. The region should be speaking in one voice against or vis a vis the US. Is that the case?

negotiate as one. So yes, different parts of Europe will have different interests, and some, like Italy, for example, have communicated, look, we'd like to do a deal with the US, we would like to kind of avoid tariffs, whereas you've got some other more hawkish countries that say like France, for example, let's say, no, no. But I think, you know, attempts to play divide and conquer uh in Europe and kind of try and engineer cleavages in negotiating position with the US have not been

successful so far, nor do I think they will be successful. I think Europeans know that if they start getting kind of peeled off from each other, then they will get run over. Uh, by Washington. The same has been true for China. I mean, China has been trying to play divide and conquer across Europe, with a measure of success, but not really. Europe has really hung together reasonably well. I think that will, uh, that will continue. But that said, that, that creates tension

and conflict because Mr. Trump wants easy wins. You know, he wants to do deals like he did with the UK, which is, you know, literally a few sheets of paper, some kind of provisional deals. That's not going to happen with the EU because, you know, it's very rules-based, you've got Get clearance among all 27 members. It's just by design, a much slower process. And so I think Mr. Trump is going to find Europe quite difficult to negotiate with. He's not going to get easy deals. Uh, he can't

just declare victory and walk away. So I think there are going to be ongoing trade frictions between the US and the EU for the duration of the Trump term, at least, at least 10% tariffs, which is a floor, but possibly higher. Uh, for some goods, uh, he's threatened 50%, obviously, which I think is unlikely, but this is not going to be, uh, an easy fix. Um, and that's, as I said, by design, Europe is holding together, and I think that will persist.

Uh, and so what do you say? No, but there's no real, there's no enforceability. There's a lot of vagueness. They're still trying to hammer out the details. Now that's going to take them months, if not longer, to, to do that. The UK has already been negatively surprised in terms of the steel and aluminum tariffs. You know, actually

didn't provide much protection. So I don't, as with many of Mr. Trump's deals, you know, they look good as a press release, but once you kind of get into the detail, there's actually not. there, and I think that's the case for the UK as well. So for a time, you know, the UK

could say, look, we're doing better than the EU. We've got better access to the US because, you know, we're kind of we're outside the EU machinery in our kind of post-Brexit incarnation, but I actually don't think that it's brought the UK, um, it hasn't actually bought the UK very much. I don't think the UK is in a much better position, to be honest. Uh, than is the case, uh, with the EU. The

one thing that the UK does have is a royal family. Mr. Trump likes the royal family, that does sound silly, but it does buy them, uh, it does buy them something, and I think US UK relations will remain more cordial, uh, on the surface. Mr. Stan will get a better hearing in the, in the Oval Office than Mr. von der Leyen, for example, but concretely, I'm not sure that it buys the UK that much.

clearly a lot of, you know, remorse on many parts of UK society from that, uh, expectation is the Labour government would normalize some of these, uh, damage done through the Brexit process with vis a Europe. What's your sense?

fairly kind of on the margin. Yeah, it's not nothing, and it's good to see things being, uh, normalized in a more constructive professional tone being taken. But there's no kind of at scale or material kind of improvement in relationships, uh, and so you see in the trade numbers between the UK and the EU, you know, the, the growth in trade is not what you'd expect. Uh, so it's, it's, it's still a drag on the

UK economy. There's going to be some improvement, but it's not going to go anywhere close to kind of unwinding Brexit, at least not for the next decade or so. It's just, uh, despite the regret, it's not a political issue. No one wants to expend political capital on it because you think that you'll just get hammered. And the EU for its most part regrets it, to be sure, but it's got.

Any other issues to worry about, be it Ukraine, be it Mr. Trump, be it China, the UK, sure, it's on the list, but it's not a high priority issue. So I think we'll see kind of ongoing marginal improvements in relationship. Defense is one issue, obviously, with the UK and not the EU per se, but kind of Europe more broadly, are going to cooperate because the Europeans need the UK.

So there there are openings, it is more constructive, but from an economic perspective, I wouldn't imagine there's going to be, you know, enormous upside, uh, in terms of improving the relationship.

the same extent. So the UK is between a rock and a hard place, you know, structurally low growth rates. You know, the, the government was hoping that it could grow its way out of the fiscal constraint, uh, but there's no evident sign of that at the moment. It's got all sorts of investment needs, uh, energy, infrastructure, transport, defense, that it needs to fund.

Uh, but the borrowing space for the UK is very, very limited, you know, so you know, if you were in the, uh, in the eurozone, you've got the ECB as a kind of a, as a backstop. There is an extent to which you can kind of, uh, uh, you can borrow to invest because the ECB is kind of there as a, as a bit of a backstop, as an independent country. Uh, the UK does not, uh, does not have that. And so, you know, Ms. Reeves, the Chancellor is very constrained in terms of what she can do, uh, public

spending wise. Markets are watching her like a hawk, uh, and they are attaching a risk premium. So the UK is in a very difficult position. It's not growing. It's got limited fiscal space. It's got huge investment needs. You need to attract private capital, um, but there are many other parts, including continental Europe, but also have, you know, massive demands of that private capital. It is a more competitive world. The UK needs to be much, much better, I think,

at providing a very strong value proposition. Yeah, come to the UK, in addition to the rule of law, we've got higher returning opportunities, and they haven't done that as much as you would, um, as much as you would like. So the UK, I think, is still in fairly significant structural difficulty, uh, both economic and also in terms of attracting capital.

OK, so speaking of Asia, uh, let's let's bring this conversation back to Asia and its need for capital and where it manages China on one side and US on the other side, and somewhere in there, there is also Europe.

That we are going to see as a consequence of the second Trump administration policies and the frictions on accessing the US market, is a more pronounced rotation towards kind of intra-Asia trade, investment and the life that it's not new, but I think it's going to be accelerated. And so I think we can reasonably expect increased investment opportunities across ASEAN.

Um, also India as well. And so I think it's going to be capital within Asia is going to be a lot stickier, a lot more of that is going to stay within Asia. It's going to be less likely to be exported to the US and other advanced economies. And so I think we could reasonably expect, fairly robust growth in investment as that savings is if you like redirected.

you know, some points of attraction. There is also kind of the de-risking play, which is, you know, as Apple and others have done, but also you see European firms, you know, we want to be less exposed to China. We're going to bring some of our. manufacturing capacity and located in India. There is some of that happening, but the numbers are not not fantastic in terms of magnitudes of investment. The returns have not been

often what has been desired. And you see that even in government to government relationships, India is seen as a great prize, kind of non-aligned, if you like, within Asia, a counterweight to Asia, be it in terms of trade agreements or security relationships, there's a desire to do more, but it's all always pretty hard going. I mean, free trades take decades to, to, to, to sign in the UK has made some progress, but in general, it's just, it's, it's hard yards. So people

will continue to invest. India is a big prize, so to speak. It is a very large economy. It matters for many reasons. So people are not going to give up on India, but I think there's just an awareness that it is a, at best, a long-term play requiring of long-term horizons.

Uh, you know, there's a bit of understanding of Indonesia's role in the green transition. But outside of that, Indonesia, I'd say punches below its weight in terms of investor interest, and the new administration, in my judgment at least, hasn't done very much to to shift that. There's no kind of uptick, if you like, uh, in investor interest. Um, yeah, so Asia in general is is really increasing in kind of mindshare, but I'd say Indonesia plays a pretty small, um, a pretty small part of that.

all of which is, you know, obviously, uh, true. Um, but I'd also say that Singapore has seen this movie before. Uh, you know, there's been many kind of Shocks to the system from the Asian financial crisis, the GFC of a pandemic, where there's a sense that kind of Singapore as a very small, very open economy is kind of deeply challenged either because foreign demand is reducing

or kind of various areas of fragmentation of the global economy. Yeah, but Singapore is able to re-engineer itself to accommodate itself to new realities and often to be the first cab off the rank, if you like, in terms of redesigning its value propositions. So as I said earlier, You know, I think that one implication of the uh of the Trump administration policies is going to be, you know, a greater focus on Asia, uh, as an Asian economy.

Uh, it's going to be, uh, growing perhaps in different ways, you know, uh, domestic final demand is going to be a more important component. And so, you know, Singapore's been, you know, pivoting, if you like, towards the greater ASEAN focus over the last, you know, maybe decade, several years, you know, I think we're going to see that supercharged, you know, Singapore has strengths in AI, uh, in tech, uh, that are, you know, increasingly, um, uh.

increasingly important and dominant. So I think that Singapore shouldn't look around the world and saying fragmentation, friction, inward looking and replicate that playbook. And I think the Singapore playbook, which is, yes, open, but intelligently open, positioning itself for new growth opportunities, new growth markets, figuring out where those opportunities are in overseas markets will serve it well. And so my money.

Remains very much on on Singapore. I think it's going to be one of the better performing ASEAN economies, um, you know, into the indefinite future because it is able to re-engineer itself. So yes, frictions and risks, to be sure, but Singapore has proved repeatedly over time, you know, that it can adjust in a fairly flexible, agile way, and I expect it will do the same again.

big naval ships come to Singapore as well. So militarily, Singapore seem to be very well aligned with the West, but at the same time, economic ties with China is substantial. I haven't really detected even with Defense Secretary Heet who was a very hawkish gentleman, didn't really come to Singapore and give a lecture like you are.

With us or you're not with a sort of Thing, so yeah, my fingers are crossed and I do think that Singapore is probably doing a pretty job of balancing both, not forsaking one for the other, but at the same time not being captured by one either. Um, David, uh, very illuminating conversation, I can't thank you enough. Thanks so much for your time and insights.