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Introducing the Chokepoint Economy, When Shortages Start to Matter

A satellite image of the Ever Given container ship blocking the Suez Canal in Egypt in March 2021.

In 1930, John-Maynard Keynes imagined an economic future where technological advancement would lead to a plethora of goods, elevated living standards and vastly reduced working times.  “This means that the economic problem is not...the permanent problem of the human race,” he wrote. 

Keynes’s assertion — one that jarred with the realities of the Great Depression at the time — was heavily caveated: “I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years.”

Clearly there have been both wars and a population boom in the decades since Keynes penned his vision of economic abundance. Perhaps more importantly, there’s been a global pandemic that has brought new shortcomings in national economies sharply into view.

Everywhere you look, there are shortages and bottlenecks. Containers for shipping are in short supply and ports are struggling to keep up with demand. Semiconductors — a crucial component in everything from cars to iPhones — have been so scant that they’re impacting production of cars and GDP. There are shortages of lumber and pallets. Vaccines themselves have been unequally distributed throughout the world; as some countries plead for supplies, others consider throwing their spares away. 

There’s still a decade to go before Keynes’ prediction might come into fruition, but the experience of the past year seems to suggest that governments are more focused than ever on addressing scarcity in their economies rather than abundance. The dramatic experience of 2020 has taught policymakers that the relative flow of goods and capital can matter more than the absolute levels. 

That means ‘chokepoints’ rather than ampleness may be a more useful framing for the future direction of the world’s biggest economies. While some shortages (such as certain flavors of Gatorade in the U.S.) might be overlooked as minor inconveniences, others will be deemed strategically or socially important enough to merit intervention from the state. The sooner investors understand that framework the better.

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China is arguably furthest along the ‘chokepoint economy’ path, hardly a surprise given the long history of the People’s Republic intervening in the economy and, more recently, President Xi Jinping’s exhortations to build up ‘chokepoint technology.’ But that drive to build up capacity in key sectors has arguably intensified in recent years as China responds to perceived attacks and threats from the West. 

China’s most pressing chokepoint has come about not as a result of the sweeping changes to the flow of goods wrought by the global pandemic (though that hasn’t helped), but because of trade policies that intensified under the Trump administration and set off alarm bells amongst Chinese policymakers. Suddenly, China’s ability to source crucial technology components like semiconductors was hampered in such a way as to impact the whole of the country’s tech sector.

“China’s true Sputnik moment has been its realization that it cannot count on the United States to supply its technology—and that it must cultivate domestic alternatives,” wrote Dan Wang, technology analyst at Gavekal Dragonomics, in Foreign Affairs. China manufactures a dominant chunk of the world’s manufactured goods and yet it has struggled to supply crucial cogs in in its own supply chain.

Since the end of last year, China’s attempts to reduce chokepoints in its economy have arguably expanded with various crackdowns on large consumer tech companies, private education firms and delivery services which employ thousands of gig workers. While much of the commentary on this development understandably focused on the crackdowns themselves, it fails to see the flipside: the freeing-up of capital for industries and businesses deemed most mission-critical or socially beneficial by the Communist Party.

Key in China’s thinking appear to be repeated mentions of the “disorderly expansion” of capital, which suggests a misdirection of money. China's politburo, the top decision-making body of the Communist Party, vowed at its meeting late last year to rein-in “disorderly capital expansion” and Xi described the market for after-school training as a “social problem” in a speech earlier this year. The idea of unruly growth reappeared when Xi criticized the industry’s “ disorderly development” in May. 

In the aftermath of the crackdown on education firms, for instance, shares of Chinese companies involved in the semiconductor industry soared. Meanwhile, shares of sporting firms surged this week as China reiterated a goal of boosting the sector to to 5 trillion yuan ($774 billion) by 2025 in an effort to promote a healthier population.

One way of thinking about this is that there’s plenty of capital sloshing around China’s currency-controlled capitalist system, but Xi wants it directed to industries that will be of strategic and social value for the country. Once again the relative flows matter. The chokepoint economy is one where authorities are alert to the prospect of strategic bottlenecks or misdirected money and willing to do something about it.